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Investment Ideas Why investors shouldn’t shy away from something simple, BMO’s second-half market outlook, and the frugal dividend portfolio

Concerned that the popular new class of balanced ETFs are too simple to be effective in your portfolio?

If you answered yes, congratulations on your successful brainwashing by Bay Street. Simple is a virtue in investing, not a sign of weakness or laziness. The investing universe is well populated by people destroying value by over-thinking things. And yet, suspicion of simplicity is common.

A reader recently emailed to ask about using balanced exchange-traded funds like the Vanguard Balanced ETF Portfolio (VBAL) and the iShares Core Balanced ETF Portfolio (XBAL). He wondered if he was being too lazy in using a balanced fund only and wanted some comment on the idea of adding additional conservative stocks to generate dividends.

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All the stocks he was thinking of adding are built into VBAL and XBAL. Buying some extra shares of these stocks to complement the balanced portfolio could ramp up dividend income, but it would also result in extra risk. Adding extra stocks to a balanced ETF means you’re tinkering with the stocks/bonds mix. If the stock market crashes, your loss could be sharper than you expected. In a bull market, those conservative dividend stocks might underperform. There’s also the danger of buying the shares of a seemingly safe company that runs into trouble.

Index investing as practised by balanced ETF is a proven formula for investing success over the long term. You make what the indexes in your fund make, minus a small a small fee and the cost of brokerage commissions. The experience of actively managed mutual funds over past decades is that it’s exceedingly difficult to beat the indexes consistently.

It’s worth noting that balanced ETFs aren’t for everyone. They especially suit investors who want long-term growth and are less concerned with generating high levels of income. Globeinvestor.com shows VBAL with a yield of 2.1 per cent and XBAL at 2.8 per cent. If tax-advantaged dividend income is your primary goal, you might be better off with a dividend ETF.

If a balanced ETF does meet your needs, embrace the simplicity of putting your money into a single fund that rebalances itself and requires zero maintenance. You’ve done a smart thing by putting your money in something so basic.

–Rob Carrick

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Stocks to ponder

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WSP Global Inc. (WSP-T). This stock is less than 4 per cent away from appearing on the positive breakouts list (stocks with positive price momentum). The stock price has remained relatively stable in recent months despite lower global economic growth expectations and escalating trade tensions. The growth stock has been a strong long-term performer for investors while also providing its shareholders with a stable dividend. Montréal-based WSP is a leading engineering, design and consulting firm with operations worldwide. Jennifer Dowty reports (for subscribers).

The Rundown

Why investors aren’t celebrating Bombardier’s latest asset sale

If investors are concerned about Bombardier Inc.’s high level of debt, they won’t take much comfort from the company’s deal to sell its money-losing regional jet program: Bombardier’s balance sheet will improve only by a smidgen, and at a time when economic clouds are gathering. David Berman reports (for subscribers).

Introducing the Frugal Dividend portfolio

Mixing a gin and tonic yields a satisfying summer drink. Combining investment ingredients can provide sunny returns. In that spirit, I’d like to introduce the Frugal Dividend portfolio. It adds a value investing twist to the Stable Dividend portfolio. The idea is to seek out low-volatility dividend stocks that trade at reasonable prices because the combination has worked well over the past 25 years. Norman Rothery outlines his strategy for the Frugal Dividend portfolio (for subscribers).

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What BMO’s chief strategist is expecting for U.S. and Canadian markets in the second half of this year

Amid the ongoing trade turmoil, Fed policy concerns, slowing global growth, and incessant recession prognostications, the resiliency of U.S. stocks was on full display during the first half of the year as the S&P 500 climbed to new all-time highs. Despite the ebbs and flow of the market and spikes in volatility, Brian Belski of BMO Capital Markets remains confident in his 2019 S&P 500 price target of 3,000. The same also goes for his TSX’s targets. Brian Belski explains his view (for subscribers).

The week’s most oversold and overbought stocks on the TSX

The S&P/TSX Composite endured a difficult week to Thursday’s close, falling 1.5 per cent. Despite the weakness, the benchmark remains in technically neutral territory according to Relative Strength Index (RSI). The current reading of 48 is close to the halfway point between the oversold buy signal of 30 and the overbought RSI sell signal of 70. Scott Barlow takes a look at the winners and losers on the TSX this past week (for subscribers).

Others (for subscribers)

Three reasons oil prices are heading higher

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U.S. bank shares jump as capital plans pass Fed stress tests

Citi is bullish on Canadian bank stocks, one in particular

How the dividend investor can play the fake meat craze

Ten dividend-growth stocks in the U.S. consumer defensive sector

Friday’s Insider Report: Chairman is a buyer of this stock yielding 5.5%

Friday’s analyst upgrades and downgrades

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Friday’s small-cap stocks to watch

Thursday’s Insider Report: CEO invests over US$228,000 in this depressed stock

Thursday’s analyst upgrades and downgrades

Others (for everyone)

Ask Globe Investor

Question: Could you please shed some light on the A&W Revenue Income Fund agreement to the share offering led by CIBC Capital Markets that sold units below the market price. The press release states that the fund will get no proceeds from the offering, but the money will go to “long standing shareholders.” What does this mean to the common shareholder of this fund as the share price has dropped since the press release?

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Answer: I reviewed the press releases associated with this announcement and they made little sense to me. So, I contacted the company and asked for clarification.

I received the following e-mail from Don Leslie, the chief financial officer. “Sorry for the confusion. There are two entities – the A&W Revenue Royalties Income Fund of which the public can own units. It trades on the TSX. The other entity is the privately-owned entity A&W Food Services of Canada Inc. It is the licensee of the A&W trademarks owned by the Fund and is the franchisor of the A&W business."

“The private company is the largest holder of the Fund (28.6 per cent) and is simply selling some of that ownership to the public by way of a bought deal with a group led by CIBC. There are no additional units being issued – simply a transfer of ownership from Food Services to the public. They were sold at a slight discount to the market which is customary with a transaction of this size. Securities rules do not allow the company to simply sell into the market due to the size of its ownership. I hope that helps clarify matters.”

Thanks to Mr. Leslie for the prompt reply. However, the units are still down from the $47 level where they were trading at the time this arrangement was announced. A total of 1.46 million units were sold at a price at $44.55. The fact that they are trading below that price as of the time of writing suggests that there is a market overhang that is taking time to clear. This may last for some time as trading volume is low – often less than 50,000 units per day – and investors tend to hold for the long term.

Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

This weekend, we’ll take stock of where markets may be heading in the second half of this year.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Gillian Livingston

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