this aint bad to sleep nights If the stock market is hot, the Two-Minute Portfolio is not.
That’s a basic rule of the 2MP, a continuing experiment in simple Canadian market stock picking where you invest equal amounts in the two largest dividend-paying stocks in each of the 11 sectors in the S&P/TSX composite index. The 2MP has outperformed over the long term mainly by losing less in down years. When stocks surge, the 2MP generally lags somewhat.
In 2023, when equities had a good year, the 2MP flipped the script with a 15.8-per-cent total return of dividends and share price gains that compares with a gain of 11.8 per cent for the index. To see what an anomaly this is, check out returns from the bull market year of 2021. The index made 25.1 per cent back then, the 2MP 19.4 per cent.
The 2MP did well in 2023 for the very same reason it often underperforms in bull markets – it owns a little bit of everything. When one particular sector is flying, the 2MP gets only a taste because its exposure is limited to 9.1 per cent per sector. This diversification rule also contains the damage when a sector is annihilated.
Last year was an odd one in that most sectors had at least a little something to offer, performance-wise. With exposure to each sector, the 2MP racked up wins all over the place.
Let’s start with information technology, a smallish sector in the Canadian market that can be easily overlooked by investors. Both 2MP tech stocks, Constellation Software (CSU-T) and Open Text Corp. (OTEX-T), delivered returns greater than 40 per cent.
Other top-performing sectors were real estate, health care and consumer discretionary, which also have a small footprint in the S&P/TSX composite index. In health care, Chartwell Retirement Residences (CSH-UN-T) produced a return of just over 46 per cent.
The only sector that was deadweight for the 2MP last year was telecom, where BCE Inc. (BCE-T) and Telus Corp. (T-T) lost 5.8 and 4.2 per cent, respectively.
The 2MP is maintained by Morningstar Research Inc., with an inception date of Dec. 1, 1985. Since then, the 2MP has produced an average annual total return of 9.98 per cent while the S&P/TSX composite made 8.2 per cent.
Real-life returns from the 2MP would be reduced by the cost of the stock trading commissions needed to maintain the portfolio. Each year, some buying and selling is needed to ensure the 22 holdings are in more or less equal balance and include the two largest dividend stocks in each sector as measured by market capitalization. Market cap is the number of shares a company has outstanding multiplied by the share price.
For 2024, there is just one substitution. In the materials sector, Newmont Corp. (NGT-T) replaces Nutrien Inc. (NTR-T).
While the 2MP has outperformed over the near and long term, its five-year gain of 10.5 per cent trails the S&P/TSX composite index’s 11.3 per cent. The 2MP underperformed the index in three of the past five years, a reminder that following this strategy will mean periods of disappointing results.
The 2MP typically redeems itself in down years for the market. In fact, the 2MP has outperformed in each of the last five calendar years in which the index posted a decline, including the market crash year of 2008.
In no way is the 2MP the solution to anyone’s investing needs. It’s best thought of as a way to cover the Canadian market in a diversified portfolio that would also include U.S. and international stocks, plus bonds or guaranteed investment certificates. A test run for the 2MP strategy in the U.S. market did not beat the S&P 500 index, and thus was abandoned.
In addition to diversification, the attributes of the 2MP include a strong flow of dividend income. The average yield for the stocks in the portfolio at year end was 3.5 per cent, which reflects a mix of growing companies paying modest dividends and more established companies with a more generous dividend policy.