The kids are back at school and looking forward to a successful year.
The excitement – and trepidation – of returning to school is similar to that experienced by investors when their portfolios approach new highs. There’s the anticipation of good things to come, along with the worry that the market might disappoint.
Speaking of new highs, the Frugal Dividend portfolio brought cheer to thrifty dividend investors when it climbed out of a downturn that started in early 2022 to hit a new high by the end of July, 2024. The good times continued into August when it grew again.
The bullish move helped the portfolio’s average annual growth rate climb to 14.4 per cent over the 25 years through to the end of August, 2024. In comparison, the S&P/TSX Composite Index advanced by an average of 7.7 per cent annually over the same period. (The returns herein are based on monthly, or annual, data from Bloomberg. The returns include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)
The Frugal Dividend portfolio seeks out relatively stable Canadian dividend stocks trading at bargain prices. It starts with the largest 300 common stocks on the Toronto Stock Exchange by market capitalization and sticks to the dividend payers (208 at the moment.) It then narrows in on the 50 stocks with the lowest volatilities over the prior 260 days and picks the 10 with the lowest, positive, price-to-earnings ratio. The portfolio is formed by buying an equal-dollar amount of the 10 low-P/E stocks and rebalancing monthly or annually.
You can examine the track record of the monthly-rebalanced Frugal Dividend portfolio, and S&P/TSX Composite Index, in the accompanying graph.
Despite the big gains, some investors hesitate at the thought of rebalancing a portfolio each month but, thankfully, the Frugal Dividend portfolio also fares well when adjusted less frequently. For instance, when rebalanced at the end of each year, the portfolio gained an average of 13.9 per cent annually over the 25 years to the end of 2023. The S&P/TSX Composite Index climbed by an average of 7.5 per cent annually over the same period.
The annual figures also allow for an exploration of how frequently individual Frugal Dividend stocks gained ground. It turns out that roughly 72 per cent of the stocks that made it into the Frugal Dividend portfolio over the years sported positive total returns 12 months after being purchased, which is pretty good.
The second graph shows the fraction of the portfolio’s stocks with positive returns in each annual period and the gainers predominated most of the time.
More than half of the portfolio’s stocks climbed in 18 of the 25 annual periods. On the other hand, more than half fell in five periods and there was an equal balance between winners and losers two times. The portfolio experienced a joyful seven years when all of its stocks advanced and one sorrowful year when all of its holdings fell. (Three stocks that no longer exist are excluded from this analysis, but they are included in the portfolio’s return calculations.)
It is important for investors to recognize that the portfolio’s big long-term returns came with disappointments along the way and many of its individual stock purchases didn’t work out.
Moving back to the monthly figures, the portfolio found itself below its former highs in roughly 56 per cent of the months over the 25 years to the end of August, 2024. On the other hand, it hit new highs the other 44 per cent of the time, which is pretty fine, all things considered.
While I don’t know how the portfolio will fare during the current school year, I’ve high hopes it’ll continue to 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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