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portfolio strategy

To build your retirement fund, invest for long-term growth without exposing your savings to unnecessary risks.

To achieve this fine balance in the stock market, consider the Portfolio Strategy column's list of Rock Steady Stocks for Retirement Investing. Fifteen stocks made the cut based on factors chosen by Craig McGee, senior consultant at investment analysis firm Morningstar Canada.

Rock Steady stocks aren't necessarily a "buy," nor are they a diversified portfolio unto themselves. Think of them as a selection of stocks that are worth researching for inclusion in a retirement savings portfolio. "This is a group of large companies that should fare well in any market cycle, with an emphasis on lower volatility in both price and earnings to help stay the course when the things get a little rough," Mr. McGee said.

Here are the selection criteria for the Rock Steady Retirement Stocks:

  • Market capitalization: A company’s size, as measured by shares outstanding multiplied by share price; larger companies were favoured here for their stability.
  • Dividend growth: A consistent five-year record of dividend growth was a must for making this list.
  • Dividend yield: At least 1 per cent.
  • Payout ratio: A measure of the proportion of earnings paid to shareholders as dividends; an upper limit of 80 per cent was set for this exercise.
  • Price volatility: The measure used here was beta, which measures a stock’s volatility against its benchmark index; the index always has a beta of 1.0 and the stocks on this list are all substantially lower than that.
  • Long-term earnings stability: Based on Morningstar proprietary data; stocks here rank in the top half of the Morningstar database.

The phrase "rock steady" is used here to describe how these stocks behave in comparison to the broader stock market. Don't make the mistake of thinking they're "safe" stocks because no such things exist. Rock Steady stocks can fall hard in price, as you'll see from the data we've provided on losses in market crash year of 2008. A few of the stocks on the list made money that year, but double-digit declines were not unusual.

What these stocks offer is a track record of achieving strong, even market-beating returns, while providing fewer moments of high drama than the broader market. Let's look at returns first. Except for Jean Coutu Group, all had a better total return of share price gains and dividends (10-year, annualized) than the S&P/TSX composite total return index.

At the same time, all have been substantially less volatile than the index over the past five years. CCL Industries and Canadian National Railway are the most volatile stocks here, and their price swings are only half as intense as the broader market.

Past results are no guarantee of future results. But at least the Rock Steady stocks offer a basic level of financial health. Earnings stability was assessed by looking at how much earnings have varied on a quarterly basis. The higher the letter grade, the steadier earnings have been.

Dividend growth is another indicator of financial health, particularly in the difficult years following the 2008-09 global financial crisis. Only financially strong companies were able to annually increase the cash payout to shareholders in such difficult conditions.

Observant investors will notice that none of the Big Six banks made the Rock Steady list. That's because they had to take a temporary dividend growth break during the past five years. Laurentian Bank, the only financial stock on the list, managed an annual dividend hike through that period.

The 2008 results for these stocks suggest they would be vulnerable in the stock market correction that will arrive at some point after the solid gains of the past few years. Another risk, particularly for the utility stocks on the list, is rising interest rates. When rates pushed higher last spring and summer, shares of Emera fell roughly 20 per cent before retracing much of that decline. Mr. McGee said the 15 stocks are well diversified by sector, but investors should still prepare for some pain if and when rates rise.

The fact that all these Rock Steady stocks are dividend payers suggest you'd do well to keep them in a taxable account, where the dividend tax credit would give you an advantageous tax rate on your quarterly dividends. Tax-free savings accounts would work nicely because they shield all gains (and withdrawals) from tax.

But that doesn't mean you can't use an RRSP. The prime reason to own these stocks is to generate a solid long-term total return (dividends plus share price gains) that will grow your savings. You'll pay tax at your regular rate on withdrawals from your RRSP, but you'll ideally have clocked in many years of growth from your Rock Steady stocks.

Wherever you put these stocks, figure on holding them for at least five to 10 years. If we get the stock market correction that some people think is coming, don't flinch. When you compare the 2008 results for the 15 stocks with their 10-year annualized total returns, you see clearly that even big losses can be healed with time.

Take BCE, for example. It fell almost 35 per cent in 2008, in large part because of investor disappointment over the collapse of a deal that would have taken the company private. BCE turned itself into a dividend growth stock after that and has done well enough since to have generated a 10-year average annual gain of close to 10 year cent.

CCL Industries, which earns a higher earnings stability grade from Morningstar than BCE, was hit almost as hard in 2008. Yet the 10-year average annual gain for this packaging company still clocks in at an impressive 18.7 per cent.

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Stocks for building your retirement savings

These TSX-listed stocks were selected for attributes that make them suitable for retirement saving using screens run by Morningstar Canada.