The decline of former dividend-darling BCE (BCE-T) has shaken the faith of many Canadian investors in blue-chip stocks. The market sniffed out trouble at the telecom, causing its shares to fall since hitting a high in 2022 before its dividend was recently slashed to less than half of its former size.
While investors shouldn’t expect perfection from blue-chip stocks, the episode leaves many to wonder how companies qualify for blue chip status in the first place. The criteria are admittedly a bit nebulous, but blue-chip stocks tend to be large, relatively stable and have quality businesses.
Size is the easiest to deal with and today’s focus begins with the largest 100 stocks on the Toronto Stock Exchange (TSX) by market capitalization (share price times the number of shares outstanding.) The very largest of the 100 candidates is currently Royal Bank (RY-T) with a market capitalization near $240-billion and the smallest is OR Royalties (OR-T) with a still sizable market capitalization near $6-billion.
Simply buying an equal-dollar amount of the largest 100 stocks on the TSX provided a nice lift to investors because the 100-stock portfolio gained an average of 9.26 per cent annually over the 25 years to the end of April, 2025, when rebalanced monthly. In comparison, the S&P/TSX Composite Index gained an annual average of 6.80 per cent over the same period. (The returns herein are based on backtests using monthly data from Bloomberg. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly.)
The 100-stock portfolio climbed more than the market index over the 25-year period due to differences in how they are constructed. The portfolio looks to hold an equal-dollar amount of each stock, while the index aims to be size-weighted. As a result, the 100-stock portfolio had 1 per cent of its assets invested in Royal Bank at the end of April while the market index had about a 7 per cent weighting in the bank. Similarly, the 100-stock portfolio had 10 per cent of its money in the largest 10 stocks and the index had about 35 per cent in the same stocks.
While the 100-stock portfolio benefited by spreading its money evenly, an equally weighted approach doesn’t always beat a size-weighted one. For instance, Nortel’s stock climbed dramatically in the late 1990s and boosted the performance of the market index on the way up as it grew to represent more than 30 per cent of the index. Alas, the company collapsed in the early 2000s and dragged the index down – at least temporarily. Nortel provides a cautionary example of a blue-chip stock that disappointed investors and ultimately failed to recover.
In addition to size, variants of the 100-stock portfolio provide insight into the impact of different stability and quality factors on the returns of large stocks. Each variant removes a minority of companies that are suspected to have poor characteristics. More specifically, each variant starts with the 100 stocks in the original portfolio and then cuts out 20 unwanted stocks (based on one factor) with the money spread equally between the remaining 80 stocks.
The accompanying table highlights the 25-year average annual growth rates of the variant portfolios, sorted from high to low.
Stability was the winner because the 80-stock variant that focused on stocks with the lowest volatilities over the prior 260 days gained an average of 10.46 per cent annually over the 25-year period. The high dividend-yield variant was close behind with average annual gains of 10.39 per cent despite owning a few high-yield stocks, such as BCE, that cut their dividends over the years.
In addition, excluding the 20 stocks with poor relative performance over the prior year helped to push the high-return variant to average annual gains of 10.25 per cent.
Mind you, seeking out stocks with low leverage ratios (low debt to equity), high returns on equity (ROE), or high returns on assets (ROA) only provided marginally better gains than the original 100-stock portfolio.
I hope to explore other measures of stability and quality while searching for good blue-chip stocks in the future. But I’ve previously found that many measures investors favour have an unfortunate tendency of yielding middling, or disappointing, results.
I hasten to add that, despite some disappointments, dividend cutters can go on to produce good long-term results. For instance, TC Energy (TRP-T) cut its dividend many years ago and bounced back nicely. I hope it will continue to do well, and that BCE recovers in the fullness of time, because I own modest stakes in both companies.
Details on the 100-stock portfolio, and the other portfolios I follow for The Globe and Mail, can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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