The TSX Is In Freefall: Time to Buy!

Oh, boy, Santa came early this December! Based largely on fear and possibly on eggnog overdose, the TSX is diving for the deeps today. And, lucky me!, I have new money to invest! But what to buy? Enbridge just raised its dividend to within 2 cents of TD and ENB has dropped more than $2.50 today to bring it back down from the artificial high the announcement created. TD itself is still smarting from the effect of investors who weren’t happy they increased their profits because they didn’t increase their profits enough. But perhaps the best bargain of all is the entire TSX is down to bringing things like the index-fund ETF XIC down more than 65 cents to $22.20 (so far.) So what should I buy now the market is falling?

Should I Buy More Dividend Paying Stock?

I have some of our money invested into individual dividend paying stocks. The ones I’ve picked in the past are not expected to make any significant capital gains. Instead, they are expected to withstand market drops without losing huge amounts of capital and to keep their dividend payments steadily rolling out even during the lean years.

By accident, since all stocks took a hammering in the 2008/9 zone, all our dividend stocks have actually made substantial capital gains on paper in the few years we’ve owned them. But we only track whether their value has stayed above their purchased cost plus inflation. We don’t count on ever realizing that capital gain because we don’t expect to ever sell them unless the companies themselves become a bad risk. And if that happens, we’d expect to lose not only the capital gain but probably the initial purchase price.

Instead, what we watch with curiousity is the growth in the dividends. So far, it has been growing at a rate much greater than inflation. That’s necessary if we are to find them a good long-term investment. If the dividends lose ground to inflation we would have to sell part of our position to generate income in retirement, something we are hoping to avoid.

We are looking on these stocks as surrogates for long-term bonds or GICs. They are much MUCH riskier! However given the low rates offered for fixed income investments for the past few years we felt we had to start putting some money into equities.

So what about today with this pullback? Should I put my new investment money into more of these defensive dividend stocks? Or ….

Should I Buy More Units of a TSX Index-Mirroring ETF?

I like XIC. It’s the iShares S&P/TSX Capped Composite Index ETF.  It tries to replicate the performance of a lot of the TSX. It has almost 2 billion dollars invested in it and it has a MER of 0.27%. It pays a distribution of about $0.45-0.55 a year depending on what goes on with the underlying companies. Morningstar predicts that means it has a 2.25% yield. (TD and ENB, by the way, currently have a yield of over 3%.)

There are other index funds that track the TSX. Some have lower MERs. Some are not capped. VCN from Vanguard, for example, has a MER of 0.05%. I’m not recommending XIC I’m just saying I happen to own some of it. In fact, my current position in XIC is suffering from a non-realized capital loss. It’s the only thing I own that’s in the red.

What are some of the benefits of buying an index fund with my new money during this slump? Well, it ensures I’m buying a portion of whatever is down in value that shouldn’t be. (because I do believe that the market doesn’t deserve to be down and that it will rebound.) It does pay that tidy annual distribution so I won’t be left with buyer’s remorse if I buy just before the market really goes down and stays down for a few years. (Getting a distribution or dividend makes it easier to hang tough and wait out dips.) It decreases the risk that I am putting all my money on a lame horse. And it will not upset MjonM. (Although he might question why XIC.)

All excellent points to consider.

And the Winner Is–

Well, fortunately I’m expecting to have some more money to put in later this month. And I still have some free trades in our non-registered account. So for now I pick: XIC.

But if ENB goes back down to where it should be, I might just wander by and buy some more with my next infusion of cash. That dividend increase is very attractive to an income investor. Or I might want some more TD. Or…..

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How Are My “Defensive” Stocks Weathering the Recent Market Dip?

Most people invest in the stock market to make money. I invest in it very reluctantly because I am afraid to lose money. However with fixed income investments returning very low returns recently, I have put some money into individual stocks most of which I purchased in 2011 and 2012. I picked stocks based on some professional advice which are considered “defensive.” They don’t have much potential to grow but they are expected to not drop as much during a correction as the overall market. Now in fall 2014 we’re experiencing our first real market correction since my purchases so I thought it was time to check how my defensive stocks are doing during this down turn.

Why Would I Invest in Defensive Stocks Instead of a Broad Market Index?

I actually do have money invested in some “buy the entire stock market” index ETFs. Most of that money is invested through corporate defined contribution pension plans.

I have savings, too, though, which are not necessarily intended for my retirement or even for the long term. With luck, they will stay invested for more than 7 years but if our lives take any unexpected turns they may be needed before then.

This portfolio is NOT intended to produce the same gains as, say, the TSX S&P ETF XIC. By trying to reduce losses I have agreed that I will NOT get the huge positive capital gains that an index like XIC can achieve. My goal is to get a slightly better return than GICs from dividends while not expecting to get much, if any, capital gain but hopefully to also experience little if any capital loss. (Obviously, I’ll experience a large capital loss if there is a major market collapse and I sell my stocks.)

This is NOT a portfolio for someone looking to end up with the most toys before they die. It is my personal choice because I am extremely risk averse but I’m also finding GIC returns unacceptably low at this time.

Yes, I know dividend stocks capital values may plummet as interest rates rise. I will have to accept whatever yield I chose when I bought the stock as potentially my maximum lifetime yield (unless there are dividend increases.) I may not ever be able to sell my dividend stocks to recover my capital. It’s like a type of annuity, though, where I might be able to retrieve some of my capital if I give up the income stream.

Anyway, as I said at the outset, I’m just curious whether they are behaving “defensively” during this market slump or not.

A Review of Some Defensive Stocks Performance During a Market Slump

This is a partial list of some of the defensive stocks I have invested in. For those who are interested, no, it does not actually only show the ones that are faring well: the others are faring the same or better. I’m just not sure whether I would be breaking any rules if I shared the entire portfolio online, so I’m not.

This chart compares prices at the close on October 14, 2014 versus on September 3 2014 when TSX was in the 15 600 range.

Company and Symbol Price at the close on 2014 10 14 Price at the close on 2014 09 03 Percentage change
Bell BCE 47.74 45.27 up 5.5%
Bank of Nova Scotia BNS 67.22 66.30 up 1.4%
Canadian Utilities CU 38.75 39.59 down 2.1%
Enbridge ENB 48.63 55.20 down 11.9% (more than the market)
Fortis FTS 34.57 33.95 up 1.8%
KBro Linen KBL 39.76 39.55 up 0.5%

Those changes don’t mean much, though without a comparison to how the TSX is doing. So I took a look at both the TSX composite and an ETF, XIC.

Company and Symbol Price at the close
on 2014 10 14
Price at the close
on 2014 09 03
Percentage change
TSX 14 036.68 15 657.60 down 10.4%

If I had invested $1000 in each stock on September 3 2014, the portfolio would now be worth $5951, which is about a 0.8 % loss. (Not including dividends and distributions)

If I had invested $6000 in XIC on September 3 2014, the portfolio would now be worth $5365 which is about a 10.6% loss. (not including dividends and distributions)

The Outcome of the Defensive Portfolio

So the portfolio is doing its job of making me happy by not losing as quickly as the TSX.

And the steady stream of dividend income has been significantly higher than what I could get from investing in GICs. (Please note that I have not replaced my GIC investing with this portfolio: I have a portion in these stocks and a larger portion in GICs for security.)

Do I Recommend Defensive Stock Picking for Others?

No.

I’m not a financial planner, a financial analyst, or a financial advisor.

I’m just a taxpayer who is writing about what we do with our money. For us, this is a reasonable way to invest. For others, it may be the worst thing they could do short of trying to skydive without a parachute.

You must find your own best investing plan. You may want to talk to a real professional for ideas: Internet websites like this one are only supposed to give you glimpses into other people’s money matters from which you can glean ideas to analyze and (usually) discard as inapplicable.

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Do you have any money invested defensively? How has it withstood this mild market correction? Please share a glimpse of your strategy with a comment.