Woof! That pretty much sums up how the Dogs of the TSX performed last year. This simple stock-picking strategy delivers impressive returns most years, but 2014 wasn’t one of them. Last year’s picks dropped 10%, while the S&P/TSX 60 gained about 13% over the same period.
Our dogs screen is modelled on the popular “Dogs of the Dow” strategy, where investors buy the 10 companies with the highest dividend yields on the Dow Jones Industrial Average and sell them a year later. Normally, inordinately high yields act as red flags for investors. They signal a greater chance that these companies will have to cut their dividends. But by focusing on the blue-chip companies on this august benchmark, it’s more likely that the high yield indicates the stock has hit a rough patch and will rebound. For our screen, we simply replace the Dow with Canada’s equivalent, the S&P/TSX 60.
As disappointing as last year’s picks were, it’s worth pointing out that this is only the second time in seven years that this strategy has lost money. In hindsight, it’s easy to see why the approach struggled. Four of the stocks located by this screen last year were energy companies, which took a beating last fall when crude oil prices, after years of stability, were cut in half.
Four energy companies appear on this list again, including returnee Crescent Point Energy. Whether that bodes well for the group depends on your position on energy prices and whether you think they have bottomed out.
Crescent Point stands out for another reason: its shockingly high 8.8% yield. Investors have reason to be cautious. Even after you factor in the rich dividend, shareholders lost 19% on the company last year, and its shares remain on a downward trajectory. A dividend cut would exacerbate the situation, but Chris Cox at Raymond James doesn’t think that’s a concern. Crescent Point’s recent acquisition of the struggling Legacy Oil + Gas could even help in that regard. He argues that the higher level of production Crescent Point achieves through the deal will allow it to fully support its current dividend payout, as long as oil prices hit the median forecast range of US$70 to US$75 a barrel in 2016.
Crescent Point isn’t the only returning company on this screen. BCE, CIBC and Potash Corp. are all back with similar yields to those that landed them on this list last year. All three ended the past 13 months (the I-500 came out a month earlier in 2014) in positive territory, led by BCE with a 17% total return. If you’re concerned that this year’s pack of dogs might nip you again, you might find some comfort in knowing that CIBC and Potash Corp. also turned up on our list of defensive stocks (opposite page), which suggests they should hold their ground better than most if and when equity markets sour.
|ARC Resources Ltd.||ARX||4.8||176||2.2||4.9|
|Canadian Imperial Bank of Commerce||CM||4.4||11.4||2.1||2.2|
|Cenovus Energy Inc.||CVE||4.6||–||1.7||1|
|Crescent Point Energy Corp.||CPG||8.8||61.4||1.4||4.1|
|Husky Energy Inc.||HSE||4.5||14.8||1.3||1.1|
|Inter Pipeline Ltd.||IPL||4.7||31.1||4||6.5|
|Potash Corp. of Saskatchewan Inc.||POT||4.8||17.3||3||3.8|
|Rogers Communications Inc.||RCI.B||4.5||15.7||4.1||1.7|