Core-Satellite Investing

Blog Post: A Core-Satellite Portfolio

I wanted to write a piece on a portfolio that I would feel comfortable investing other people’s money into. This core-satellite portfolio combines 3 ETFs for exposure outside of Canada, and only 8 domestic names which makes following them a lot easier. I used the closing prices on May 11, 2018 as the price for calculating dividend yields and the entry point.

Here are the 8 Canadian businesses:

  1. Constellation Software (TSE: CSU)
  2. TD Bank (TSE: TD)
  3. Magna International (TSE: MG)
  4. Brookfield Asset Management (TSE: BAM.a)
  5. BCE Inc. (TSE: BCE)
  6. Canadian National Railway (TSE: CNR)
  7. Sun Life Financial (TSE: SLF)
  8. Shopify (TSE: SHOP)

I would surround those 8 businesses with the following ETFs:

  1. Vanguard S&P 500 Index Fund (TSE: VSP)
  2. iShares NASDAQ 100 Index ETF (TSE: XQQ)
  3. iShares Core MSCI All Country World ex Canada Index ETF (TSE: XAW)

And here are the weights I would apply to the portfolio:

  • VSP: 30%
  • XQQ: 15%
  • XAW: 10%
  • All Canadian names except Shopify: 5%
  • Shopify: 3%
  • Cash: 7%

Why those Canadian names?

  • TD Bank and Sun Life Financial are businesses that will benefit from rising interest rates. I chose TD for their exposure to the US and to rising treasury yields. Sun Life can invest their premiums at higher rates which help propel their earnings and dividend.
  • BCE is a telecommunications business, an oligopoly in Canada with Rogers and Telus. This business is the highest yield in the portofolio and provides the highest current income.
  • Constellation Software and Shopify two of the most exciting and best run businesses on the TSX. Constellation Software hasn’t diluted shareholders in over a decade and has increased their earnings per share at an astonishing rate. Shopify can be more volatile, hence the 3% weighting, but they continue to innovate. Shopify has no debt and $1.58 billion in cash.
  • Magna International consistently posts growth in revenue and earnings per share, they also continue to buy back stock – $103 million in the first quarter. Their investment in Lyft is promising and they continue to invest in the future of transportation.
  • Brookfield Asset Management specializes in purchasing distressed assets, and turning them around for a profit. The infrastructure they own and operate provides a predictable streams of cash flows which can be used in a variety of ways.
  • Canadian National Railway may have one the best moats that investors can buy – a railway that spans North America. CNR is truly a business that investor’s can hold for decades.

Total Return = Dividend Yield + Capital Gains

The most stable and predictable input of total return are dividends. Even though they aren’t legally binding, companies that can consistently grow their dividends make them extremely attractive long-term investments. Here are the 5-year average dividend growth rates for the Canadian names that do pay a dividend:

  • TD Bank: 10.40%
  • Magna International: 21.30%
  • Brookfield Asset Management: 15.00%
  • BCE Inc.: 5.70%
  • Canadian National Railway: 17.30%
  • Sun Life Financial: 9.0%

In summary, these names represent some of the best businesses investors can have in their portfolio. Investing in dividend stocks will provide both current and future income, while not ignoring the capital gains side of the total return equation. Having exposure to other markets, in the case of the S&P 500 and NASDAQ 100, provide instant diversification and access to proven long-term winners. Please feel free to critique this portfolio in the comments section or on twitter, my account isĀ @ReportEarnings.

I found a great brochure from Vanguard on Core-Satellite Investing, which you can read here.

The Core-Satellite Portfolio

Disclosure

I hold a position in TD, MG, BAM, BCE, CNR, SLF, SHOP, VSP, XQQ and XAW.

Please consult a financial advisor before making investment decisions.

This report represents my views, not actionable advice.