My local farmers’ market returns to life at the start of June to serve up a fresh crop of asparagus. The vegetable sports an envious growth rate and, at the height of the season, its stalks have to be picked daily.
When it comes to picking stocks rather than stalks, daily is a little too active for me. But I enjoy the long-term growth offered by the Canadian Frugal Dividend portfolio.
The portfolio grew by an average of 13.8 per cent annually over the 25 years through to the end of April, 2024. In comparison, the S&P/TSX Composite Index advanced by an average of 7.4 per cent annually over the same period. (All of the returns herein are based on monthly data from Bloomberg. The returns include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are rebalanced monthly.)
The Frugal Dividend portfolio combines two investment factors by trying to acquire relatively stable stocks at bargain prices. It starts with the 300 largest common stocks on the Toronto Stock Exchange (TSX) by market capitalization. It keeps the stocks that pay dividends (205 at the moment) and then picks the 50 with the lowest volatilities over the prior 260 days. The 50 stocks are sorted by price-to-earnings ratio (P/E) and an equal-dollar amount is invested in the 10 stocks with the lowest positive ratios.
But my main focus today is on modifying the portfolio’s stability requirement to see how it impacts its long-term growth and its behaviour in downturns.
I begin by creating three variants of the Frugal Dividend portfolio. They all start with the dividend payers from the largest 300 stocks on the TSX. But the volatility test is changed for each variant.
Instead of picking the 50 lowest-volatility stocks from the dividend payers, the 25, 75, or 100 lowest-volatility stocks are selected. The procedure for finding bargains remains the same for the variants, which is to buy the 10 stocks with the lowest P/Es from the 25, 75 or 100 low-volatility stocks.
Keep in mind that the 25-stock variant, for example, will almost always hold some stocks with higher P/Es than the 100-stock variant because the latter has access to four times as many stocks to choose from
The 25-stock variant fared the worst of the bunch with average annual gains of 11.6 per cent over the 25 years to the end of April, 2024. The Frugal Dividend portfolio (based on the 50-stock standard) gained an average of 13.8 per cent annually over the period, while the 75- and 100-stock variants had average annual returns of 13.2 per cent and 13.8 per cent, respectively.
Broadly speaking, the returns were fairly similar for all of the portfolios with the exception of 25-stock variant, which lagged a bit.
On the risk side of the equation, the portfolios that admitted stocks with higher prior volatilities were themselves more volatile and usually fell more in downturns.
The Frugal Dividend portfolio held up better than the 100-stock variant in nearly every substantial downturn over the 25-year period. For instance, the Frugal dividend Portfolio fell 31 per cent in the financial crisis of 2008-09 while the market index gave up 43 per cent. But the 100-stock variant plunged 51 per cent. Gulp!
Over all, I think the Frugal Dividend portfolio offers a reasonable trade-off between sticking to stable stocks or focusing on bargains, but time will tell.
The crop of stocks that currently pass the Frugal Dividend test are: ATCO (ACO.X-T), the Bank of Nova Scotia (BNS-T), CIBC (CM-T), IGM Financial (IGM-T), Morguard (MRC-T), Power Corp. (POW-T), Rogers Sugar (RSI-T), Sun Life Financial (SLF-T), TC Energy Corp. (TRP-T), and TD Bank (TD-T). Overall, the portfolio has an average dividend yield of 5.2 per cent and an average earnings yield of 9.6 per cent. With a little luck, it’ll grow nicely over the long term.
You can find more information on the stocks in the Frugal Dividend portfolio via this link, which also provides updates to many of the other portfolios I track for The Globe and Mail.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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Norman Rothery