Summer is here and tourists have flocked to downtown Toronto to enjoy the sights while others hightail it to cottages far from the city’s endless construction.
Some people also take a break from the stock market by selling in May, moving to bonds, and going away until they return from their summer vacay. I’ve previously touched on the history of the seasonal timing method and its recent record in Canada. Today, I am going to apply it to the Stable Dividend portfolio to see how it fares.
The Stable Dividend portfolio seeks low-volatility dividend stocks, and in Canada, it gained an average of 12.8 per cent annually over the 25 years through to the end of May, 2024. In comparison, the Canadian stock market, as represented by the S&P/TSX Composite Index, climbed by an average of 7.6 per cent annually over the same period.
The portfolio is composed of an equal dollar amount of the 20 dividend-paying stocks with the lowest volatilities (over the prior 260 days) from the largest 300 stocks on the Toronto Stock Exchange. It is refreshed, or rebalanced, monthly. (All of the returns herein are based on monthly data from Bloomberg. The returns include reinvested dividends and distributions but not fund fees, taxes, commissions or other trading costs.)
When it comes to seasonal timing, the idea is to spend the six “summer” months from May through October in the relative safety of bonds and the six “winter” months from November through April in the stock market.
In Canada, it can be used to flip between stock and bond market indexes. That is, a seasonally timed index portfolio opts for the S&P Canada Aggregate Bond Index in the six summer months and the S&P/TSX Composite Index in the six winter months.
The seasonally timed portfolio produced average annual gains of 8.6 per cent over the 25 years through to the end of May, 2024. In comparison, the stock index gained an average of 7.6 per cent annually over the same period while the bond index climbed by an average of 3.9 per cent annually.
The portfolio’s good returns were powered, in part, by its resilience in down periods. For instance, the stock market index fell 43 per cent in the early 2000s when the internet bubble burst and, as it happens, it fell 43 per cent again in the financial crisis of 2008-09. In comparison, the seasonally timed index portfolio declined 21 per cent in the early 2000s crash and 19 per cent in the 2008 downturn.
The results suggest that investors might want to hold off on buying stocks in the summer. But doing so doesn’t work all of the time – or for all strategies.
A case in point: The Stable Dividend portfolio wasn’t helped by hiding out in the Canadian bond index in the summer months. You can see the race between the Stable Dividend portfolio and its seasonally timed variant in the accompanying graph, which also highlights the returns of the market indexes.
The seasonably timed Stable Dividend portfolio only climbed by an average 9.3 per cent annually over the 25 years to the end of May, 2024. It dramatically trailed the 12.8-per-cent annual gains generated by sticking with the Stable Dividend portfolio all year round.
The seasonal version of the portfolio also didn’t help much on the downside. The only notable exception was seen in the financial crisis of 2008-09 when the Stable Dividend portfolio dipped 22 per cent while the seasonally timed version fared a bit better with a slip of 14 per cent. But the difference seems modest in comparison with the hassle, expense and lower returns produced by selling in May and buying back in November.
The counterintuitive result is likely, at least in part, due to a timing mechanism that’s already embedded in the Stable Dividend portfolio, which sticks to low-volatility stocks. When the market crashes, the portfolio tends to move away from stocks that have fallen the most, which have higher volatilities. Mind you, it offers relatively little protection against sudden downturns such as the one seen in 2020.
It’ll be interesting to see how the Stable Dividend portfolio holds up in the future. But, with a little luck, it’ll continue to provide sunny returns both in the summer and winter.
You can find more information on the stocks in the Stable 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