TSX 60 filtered for value

Is there a “lazy investor” type strategy that might work with the TSX 60? This index is made up of some of the largest companies of the TSX, while trying to represent each sector. One could buy an ETF to match the return of the TSX 60 (less the MER), but there are a couple problems with that. The first is that you are guaranteed to lag the index (by the MER). Second, with a certain amount of assets, you could own all 60 companies in the TSX 60 for cheaper than an ETF by buying the shares in a discount brokerage account. This works because the shares are very liquid. Third, some of the companies in the TSX 60 are speculative, while others seem to provide better opportunities.

I looked up the following information for each of the 60 companies: P/E ratio, dividend yield, payout ratio and debt to equity ratio. Some companies have negative earnings and cannot be compared. My goal is to produce a portfolio with some income, some growth potential and the least possible risk of bankruptcy of any company. I chose the companies with the lowest P/E and lowest debt to equity ratios. I then weighted them based on current yield.

Company Symbol Sector Weight
ARC Energy Trust AET-U Oil & Gas 10.00%
EnCana Corp ECA Oil & Gas 4.00%
Enbridge Inc ENB Oil & Gas 5.00%
Husky Energy Inc HSE Oil & Gas 10.00%
Cameco Corp CCO Mining 4.00%
First Quantum Minerals Ltd FM Mining 4.00%
Teck Resources Limited Subvtg B TCK/B Mining 4.00%
BCE Inc BCE Telecom 10.00%
Bank of Montreal BMO Bank 10.00%
Royal Bank of Canada RY Bank 6.00%
Biovail Corp BVF Healthcare 4.00%
Manulife Financial Corp MFC Financial 7.00%
Canadian National Railways CNR Transportation 4.00%
Canadian Tire Corp Ltd A Nvtg CTC/A Retail 4.00%
Shoppers Drug Mart Inc SC Retail 4.00%
TransCanada Corp TRP Utilities 10.00%

Sixteen positions offer adequate diversification for a core portfolio for the average investor. There is a good opportunity to add a few unrelated ideas, for a “core and explore” approach. The weighted yield is 3.62% (as of June 19, 2010). That may not seem very tempting compared to long bonds, but many of these companies have a history of increasing their dividends over time. Further, this portfolio has a weighted P/E of 13.5 (as of June 19, 2010), which implies good potential for at least 10% market value increase (a target P/E of 15). If this portfolio is assembled paying $10 per trade, it will cost $160 (one time). This compares to investing $100,000 in an ETF with an MER of 0.4% for five months, after which the portfolio of individual stocks costs less.

I think that, at this time, the above portfolio presents a good opportunity for investment with little effort. The risk of bankruptcy for any of these companies seems remote and the current purchase price offers some expectation of increase. The current yield provides some dependability as it will probably remain consistent over time.

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