Three Strategies To Pick the Right Stocks For Your RRSP, With a Nod to Warren Buffett
Look long term, but don’t forget to check in on progress. And, mitigate any losses with dividend-paying companies
Warren Buffett has for years championed a strategy of buying shares of companies that are made to last, a strategy he put to work in some of his most famous investments, such as See’s Candies and Coca Cola.
Traditionally, Canadian investors have been told to do the same when deciding which stocks to put in their RRSPs, with the hope being that similar blue-chip names will continue to grow, allowing Canadians to cash out substantial gains for retirement.
It’s important to remember, however, that buy and hold is never a sure thing.
Allan Small, senior investment advisor at Allan Small Financial Group with HollisWealth, noted the recent decline of Apple Inc.’s stock, which is down 33 per cent from the 52-week high it reached in October, as an example of how even blue-chip names don’t always “go up forever.”
That means investors need to be vigilant about monitoring whatever they buy, setting targets prices and re-evaluating a holding if those prices are reached.
With that in mind, the Financial Post asked Small and two other portfolio managers about what kinds of companies Canadians should consider when buying shares for their RRSPs.
Growth plus dividends a winning combination
For Canadians with a 20- to 30-year investing horizon, growth stocks that can deliver outsize returns are one way of really taking advantage of the tax-free status of an RRSP, Small said.
While pure growth stocks offer investors the potential for double- or triple-digit percentage gains, that opportunity comes hand-in-hand with the risk of volatility. To offset possible losses, Small said, investors should look for companies that pay dividends as well.
Small suggests a company such as the Canadian Imperial Bank of Commerce would be one way to implement this strategy.
Though banks are often considered conservative investments, CIBC has plenty of growth opportunities, including in the United States.
In 2018, however, the stock lost more than 16 per cent of its value, falling to $101.68 in December. But because it paid out 4.4 per cent in dividends during the year, investors only lost 12.5 per cent.
“By buying a dividend and growth investment, you’re getting a dividend while you wait for growth,” Small said.
On Tuesday, CIBC closed at $109.74, but Small thinks there’s still room for it to grow. The stock’s yield now sits at 4.9 per cent.
Diversified companies can mitigate risk
Investing in companies that aren’t diversified in their revenue streams or product lines leaves investors susceptible to risk, said Greg Placidi, chief investment officer at Equiton, a Burlington, Ont.-based investment firm that specializes in private equity.
If a company earns most of its revenue in one country — even if it’s the U.S. — RRSPs are likely to suffer when that country naturally reaches the end of a business cycle. Placidi buys into the same logic for the products they sell, given that an investment in a company that’s only known for selling one item, especially if it’s considered non-essential, could disappear if the product loses popularity in the long-term, he said.
“I want geographical diversification, I want product diversification and I want them in sectors that consumers will continue to need regardless of what happens out there,” Placidi said.
A company that is little-known to mainstream investors but that Placidi recommends is CCL Industries Inc.
The Toronto-based company, which describes itself as the world’s largest label maker, receives approximately 40 per cent of its revenue from the Americas. The company’s scope gives it exposure to several emerging markets, which is significant for an RRSP because that is where the most growth is expected to occur in the next decades.
In 2016, CCL Industries also diversified its product line by acquiring polymer banknote maker Innovia Group, making it the world leader in that sector as well, Placidi said. Last year, the stock lost more than 12 per cent, falling to $50.06 at the end of the year from $57.34 at the beginning of January. On Tuesday, it closed at $54.53
Avoid shakeouts with low-volatility names
Investors never want to see their stock selections take on massive losses and that sentiment is amplified when investing for an RRSP, according to Portfolio Management Corporation managing director Anish Chopra.
“What you’re after in your RRSP is strong risk-adjusted returns because if you invest in something that’s outside your RRSP, and you lose money on it, you get the capital loss offset,” Chopra said. “You don’t get that in your RRSP.”
Low-volatility names such as Buffett’s own Berkshire Hathaway Inc. may not offer investors the staggering returns of flashier names, but its “consistent cash flow, strong balance balance sheet and strong management team” make it a steady producer, according to Chopra.
“That does not mean that it doesn’t go down though,” he warned.
In 2018, Berkshire’s B Class shares were up a modest 3.5 per cent, but did not suffer the same degree of volatility that gripped major U.S. Indices, two of which, the S&P500 and the Nasdaq Composite Index, plunged 20 per cent from their peaks to briefly enter bear market territory.
Last Tuesday, Berkshire Hathaway’s B Class shares closed at US$200.72