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Report On Business Ten TSX stocks with a stellar track record of crushing index returns

Canadian bank headquarters stand on Bay Street in Toronto.

Brent Lewin/Bloomberg

We get it: Investors can't beat the index. So why do we keep picking individual stocks?

The latest reading on the number of equity mutual funds that have outperformed Canada's benchmark index makes for sober reading for do-it-yourself investors. If most professionals can't succeed, retail investors must struggle even more.

According to S&P Dow Jones Indices' SPIVA Canada scorecard for 2016, which was released on Wednesday, just 17.3 per cent of active managers investing in domestic equity outperformed the S&P/TSX composite index last year. That's less than one in five.

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The percentage of outperformers rises to 19.4 per cent over three years and 30 per cent over five years, but then declines sharply to less than 9 per cent over 10 years. The situation is even worse for U.S. equity managers.

In other words, the index is hard to beat, raising the question of why any retail investor would own individual stocks.

Yet, we do. Perhaps it's because stock ownership provides a closer connection to capital markets. Stock ownership is interesting and educational. It's free, after the initial purchasing cost. And it gives us the opportunity of tailoring our portfolios to, say, higher dividends or lower risk.

Mostly though, we refuse to accept the facts. If you're in this camp (I hold some individual stocks in a portfolio that is heavily tilted toward index-tracking funds), is there at least a way to raise your odds of success?

We crunched some numbers to find Canadian stocks that stand up to the same criteria used in the SPIVA scorecard. That is, we looked for stocks that have outperformed the index (after factoring in dividends) over one-, three-, five- and 10-year periods.

This rigorous test ensures stocks have done well over short- and longer-term horizons – and stand a reasonable chance of ongoing success.

To make matters simpler, we substituted the S&P/TSX 60 index for the broader 251-member composite index. As you might expect, the list of outperformers was small: Just 10 names made the grade.

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But this group shines: On average, 10 stocks beat the index by 11 percentage points over one year, 24 percentage points over three years, 62 percentage points over five years and a dazzling 109 percentage points over 10 years.

The Big Six banks dominated. Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada comprised six of the 10 winners.

Different banks tended to dominate over different periods. Scotiabank was the top performer in 2016, beating the index by nearly 18 percentage points. BMO was the best bank over three years, beating the index by more than 30 percentage points.

RBC and BMO were essentially tied over five years. Each bank beat the index by more than 62 percentage points. And TD was the 10-year champion, cruising past the index by more than 116 percentage points.

To be clear, even the worst-performing bank stock during each of these four periods crushed the index.

Four other stocks have also proven themselves as consistent outperformers.

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Saputo Inc., the Montreal-based cheese maker and dairy processor, has risen more than 400 per cent over the past decade – doubling, quadrupling, tripling and sextupling the index's performance over the past one- three-, five- and 10-year periods, respectively.

Enbridge Inc., the Calgary-based energy-distribution company, rose nearly 40 per cent last year and has delivered a return of more than 290 per cent over the past decade.

TransCanada Corp., the Calgary-based pipeline owner, has a more modest 10-year return of 123 per cent, or about double the index. It, too, has beaten the index consistently over the four periods we looked at.

Sun Life Financial Inc.'s 10-year return of 64 per cent only narrowly outperformed the index (the stock's long-term performance was hit during the financial crisis, during which the share price fell more than 70 per cent). But it has powered ahead over the past three- and five-year periods.

Will these stocks continue to outperform? Let's put it this way: If they were mutual-fund managers, they would be celebrated stars and well worth a closer look.

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