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portfolio strategy

A simple stock-picking strategy that takes about two minutes to follow had a respectable 2022, even though it lost 3.2 per cent.

The Two-Minute Portfolio is a continuing experiment to see if you can invest successfully in the Canadian market simply by spreading your money equally into the two largest dividend-paying stocks in each of the 11 sectors of the S&P/TSX Composite Index. The results of 2022 provide further evidence of the 2MP’s relevance for a certain kind of investor.

The Two-Minute Portfolio in 2022 and 2023

2022: Sector2022: Company2022: Ticker2022: Total Return (%)2023: Company2023: Ticker
Consumer discretionaryMagna Int'l Inc.MG-T-23.4Dollarama*DOL-T
Restaurant Brands Int'lQSR-T17.9Restaurant Brands Int'lQSR-T
Consumer staplesAliment'n Couche-TardATD-T13.2Aliment'n Couche-TardATD-T
Loblaw Cos. Ltd.L-T17Loblaw Cos. Ltd.L-T
EnergyCanadian Natural ResourcesCNQ-T49.3Canadian Natural ResourcesCNQ-T
Enbridge Inc. ENB-T14.1Enbridge Inc. ENB-T
FinancialsRoyal Bank of CanadaRY-T-1.5Royal Bank of CanadaRY-T
Toronto-Dominion BankTD-T-5.9Toronto-Dominion BankTD-T
Health careChartwell RetirementCSH-UN-T-23.4Chartwell RetirementCSH-UN-T
Sienna Senior LivingSIA-T-21.3Sienna Senior LivingSIA-T
IndustrialsCdn National RailwayCNR-T5.4Cdn National RailwayCNR-T
Cdn Pacific RailwayCP-T11.8Cdn Pacific RailwayCP-T
Information technologyConstellation SoftwareCSU-T-9.7Constellation SoftwareCSU-T
Open Text Corp.OTEX-T-31.2Open Text Corp.OTEX-T
MaterialsNewmont Corp.NGT-T-15Barrick Gold Corp.*ABX-T
Nutrien Ltd.NTR-T6.6Nutrien Ltd.NTR-T
TelecomBCE Inc.BCE-T-4BCE Inc.BCE-T
Telus Corp.T-T-7.7Telus Corp.T-T
Real estateCdn Apartment Properties REITCAR-UN-T-25.8Cdn Apartment Properties REITCAR-UN-T
FirstService Corp.FSV-T-32.9FirstService Corp.FSV-T
UtilitiesBrookfield Infrastracture PartnersBIP-UN-T-14.6Brookfield Infrastracture PartnersBIP-UN-T
Fortis Inc.FTS-T-7.7Fortis Inc.FTS-T
2MP total return-3.23
S&P/TSX total return-5.84

Source: Ian Tam, Morningstar

* Dollarama and Barrick Gold Corp. are new for 2023

First, someone who is interested in buying individual stocks, rather than low-cost exchange-traded funds or mutual funds. Second, someone open to the idea of lagging the index in great years in return for outperforming in bad years.

The past year was one of those bad years – the S&P/TSX Composite fell 5.8 per cent on a total return basis, which means share price changes plus dividends. The 2MP fared comparatively better, continuing a long-standing trend.

Back in 2008, the index dropped 33 per cent, while the 2MP lost 19.8 per cent. In 2011, the index lost 8.7 per cent and the 2MP fell 2.8 per cent; in 2015, the index fell 8.3 per cent and the 2MP gained 0.3 per cent; and in 2018, the index fell 8.9 per cent and the 2MP fell 1.7 per cent. All these numbers come from Morningstar Research Inc., which has kept score on the 2MP for years.

It’s strange to say, given all that’s happened in the world recently, but stocks had a great three-year run before 2022. This was a decidedly non-ideal climate for the 2MP – its three-year average annual return of 6.1 per cent to the end of 2022 trails the index’s 7.5 per cent.

But over longer time frames, the 2MP starts to pull ahead. The 2MP’s five-year return of 6.99 per is incrementally ahead of the index, its 10-year return of 9.8 per cent outpaces the index by 2.1 percentage points and the 15-year return of 7.4 per cent has beaten the index by 2.1 points. Since inception in 1985, the 2MP has outperformed by an average of 1.7 points a year.

The foundation of the 2MP is an equal-weight distribution through all TSX sectors, including small ones such as health care and real estate. You have exposure to the top-performing sectors of the year, though it’s limited. Likewise, you’re never overweighted to the year’s worst sectors.

The diversification of the 2MP ensured you had a taste of the energy sector in 2022 through Canadian Natural Resources Ltd. CNR-T, which jumped 49 per cent on a total return basis. Likewise, as tech tanked, your exposure was limited to positions in Open Text Corp. OTEX-T, down 31.2 per cent, and Constellation Software Inc. CSU-T, down 9.7 per cent.

Each stock in the portfolio is a leader in its sector as measured by market capitalization, or the number of shares outstanding multiplied by share price. Each pays a dividend, which is a help in building total returns.

The dividend yield leaders in the portfolio at the end of last year included the two stocks in the health care sector, Chartwell Retirement Residences CSH-UN-T and Sienna Senior Living Inc. SIA-T, at 7.3 per cent and 8.6 per cent, respectively. Other high-yielding stocks in the portfolio include Enbridge Inc. ENB-T at 6.7 per cent and BCE Inc. BCE-T at 6.2 per cent.

The work of following the 2MP strategy is mainly consists of rebalancing the portfolio at the beginning of every year to swap out fallen market-cap leaders with new ones, and get the other stocks in the portfolio back to equal weighting. This year’s list of changes for the roster of 2MP stocks is typically brief: Sell Magna International Inc. MG-T in the consumer discretionary sector and buy Dollarama Inc. DOL-T, and swap out Newmont Corp. NGT-T in materials for Barrick Gold Corp. ABX-T.

Cost-wise, maintaining the 2MP is best done at a digital broker with no trading commissions, which can otherwise run you roughly $5 to $10 per trade. A quick inventory of zero-cost brokers: Desjardins Online Brokerage, National Bank Direct Brokerage, TD Easy Trade (50 free stock trades per year) and Wealthsimple Trade.

If you use a broker that charges commissions, total up your estimated trading cost for a year and figure out what percentage of your total investments it represents. This number is comparable to the management expense ratio for an ETF. For investing in the Canadian stock market, there are ETFs with MERs of 0.06 per cent.

The 2MP’s behaviour in a hot market was on display in 2021, when the portfolio gained 19.4 per cent and the index made 25.1 per cent. In the reversal of fortune in the down market of 2022, the 2MP was back to its old tricks: building strong long-term results by losing less in tough times.

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