“You mothers,” was the exclamation used by Simon Pegg’s character in the action-comedy movie Hot Fuzz when a pack of moms blocked his pursuit of a ne’er-do-well. It also came to mind recently when I entered a local cafe only to be impeded by a pack of new moms laden with their cute progeny.
As it happens, the encounter occurred just after I collected a clutch of data on the Stable Dividend portfolio’s three children. I previously introduced the first as the imaginatively named Smaller Stable Dividend portfolio, which follows 20 stocks. Today I’ll take another look at the first born along with its two smaller siblings, which track 15 and 10 stocks, respectively.
But before getting to the new kids on the block, it’s worth reviewing the method behind the Smaller Stable Dividend portfolio. It begins with the largest 400 stocks on the Toronto Stock Exchange and proceeds to focus on the smallest 100 of them. (The 100 stocks are smaller than the 300 largest stocks used by the original Stable Dividend portfolio.) The stock selection process then opts for dividend payers and picks the 20 stocks with the lowest volatilities over the prior 260 days.
The Globe's Dividend All-Stars 2024: Meet the Top 20
The Smaller Stable Dividend portfolio grew well, with average annual returns of 14.0 per cent from the end of 1999 through to the end of January, 2024. By way of comparison, the S&P/TSX Composite Index gained an average of 6.6 per cent over the same period. (The returns herein reflect monthly data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading costs. The portfolios are all equally weighted and rebalanced monthly.)
The portfolio’s two siblings are different only in that they hold fewer stocks. The 15-stock version follows the same process but picks the 15 stocks with the lowest prior 260-day volatilities, while the other sibling picks 10 stocks.
The 15-stock portfolio gained an average of 14.0 per cent annually from the end of 1999 through to the end of January, 2024, while the 10-stock portfolio gained an average of 13.3 per cent annually.
You can see the growth of the three Smaller Stable Dividend portfolios in the accompanying graph, along with those of the market index.
Overall, the results for the 15- and 20-stock portfolios were pretty similar, with the 15-stock version outperforming by a tiny amount while also being a smidgen less volatile. The 10-stock portfolio trailed the others and was more volatile, but it still fared pretty well.
I would normally be interested in exploring portfolios that contain more stocks, which might mean 30-, 40- or 50-stock variants. But it’s hard to do so in this case because there was a paucity of small dividend payers in the early part of this century.
There was an average of 36 stocks that paid dividends out of the 100 smaller stocks from the end of 1999 to the end of January, 2024. But the market often provided fewer than 30 dividend payers until the summer of 2005, and there were four months from 2001 through to 2002 when there were just 18 or 19 to be had.
The 20-stock portfolio included all the available dividend payers in 11 months during its run, including when it shrank from 20 to 18 or 19 stocks four times. As a result, the low-volatility requirement didn’t make an impact on the portfolio during those 11 months.
On the other hand, doing away with the low-volatility requirement entirely led to worse results over the long term. A dividend portfolio containing all of the dividend payers from the smallest 100 stocks (selected from the largest 400 on the TSX) gained an average of 12.5 per cent annually from the end of 1999 through to the end of January, 2024. The dividend portfolio was also 12 per cent more volatile than the 20-stock portfolio.
Alternately, one can focus on more recent times, because small dividend stocks have been more plentiful since the end of 2006, with an average of 41 candidates, and more than 50 on occasion.
The 10-, 15- and 20-stock versions of the Smaller Stable Dividend portfolio posted average annual gains of 11.1, 12.4 and 11.8 per cent respectively from the end of 2006 to the end of January, 2024, while the market index gained an average of 6.0 per cent annually.
With a little luck, the Smaller Stable Dividend portfolios will continue to grow and thrive in the years to come. But, much like toddlers, investors should expect them to stumble from time to time.
You can find the stocks in the Smaller Stable Dividend portfolio here, 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