August ended on a cool note in the big smoke, but I couldn’t resist taking a dip into the Stable Dividend portfolio again before the summer ends. I was lured back to address a few questions from readers and to highlight some of the portfolio’s features along the way.
Long-time readers know that the Stable Dividend portfolio tracks dividends paying Canadian stocks with low volatilities: That is, their share prices didn’t vary much in recent times, with the hope being they’ll continue to provide investors with a relatively smooth ride in the future.
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The portfolio is formed by starting with the largest 300 common stocks on the Toronto Stock Exchange (TSX) by market capitalization (or size). It then focuses exclusively on dividend payers and invests an equal-dollar amount in the 20 stocks with the lowest volatilities over the prior 260 days. (The returns here are based on data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading costs.)
The portfolio performed well in backtests with average annual returns of 13.7 per cent from the end of 1999 to the end of July, 2023, using monthly rebalancing. The market (as represented by the S&P/TSX Composite Index) climbed by an average of 6.6 per cent annually over the same period.
One of the nice features of the approach is that it also worked well when rebalanced less frequently. For instance, it gained an average of 11.9 per cent annually from the end of 1999 to the end of 2022 when rebalanced once a year, while the market index climbed by an average of 6.4 per cent annually.
Some wondered about quarterly rebalancing. They’ll be pleased to learn that the portfolio gained an average of 13.6 per cent annually from the end of 1999 to the end of June, 2023, when it was rebalanced at the end of each quarter. The market index gained an average of 6.5 per cent annually over the same period.
Similarly, others were curious about how it performed using different rebalancing frequencies over the same time period. It turns out the average annual gains from the end of 1999 to the end of 2022 were 14 per cent, 13.7 per cent and 11.9 per cent using monthly, quarterly and annual rebalancing. The market index gained an average of 6.4 per cent annually over the period.
A more complicated question arose from the desire to stick to stocks with generous yields. I explored the situation by cutting the Stable Dividend portfolio in half. That is, I put the 10 stocks with the highest dividend yields in a high-yield portfolio and the other 10 stocks with the lowest yields in a low-yield portfolio.
The high-yield half of the Stable Dividend portfolio gained an average of 13.6 per cent annually from the end of 1999 to the end of July, 2023, when it was rebalanced monthly. The low-yield half had average annual gains that rounded to, ahem, 13.6 per cent annually over the same period.
The nearly identical returns are something of a coincidence because the high-yield portfolio was ahead of the low-yield portfolio about 94 per cent of the time since the end of 1999. The low-yield portfolio lagged in the early years, but it caught up near the bottom of the 2008 crash. It went on to enjoy similar returns to its high-yield sibling through 2014. Afterward, the low-yield portfolio lagged the high-yield portfolio badly until it quickly caught up again last fall.
Nonetheless, given their similar long-term returns, I tend to prefer the broader diversification of the 20-stock portfolio to either 10-stock portfolio. But dividends can be highly tax-efficient for some investors (and not so tax-efficient for others). As a result, an investor might pick one half, or the other, depending on the likely tax consequences.
I expect to update the Stable Dividend portfolio (and other portfolios I regularly follow for The Globe and Mail) in a separate series of online articles every month or so. I hasten to add that they only appear at The Globe. So stay tuned for the next update, which should surface as the summer fades into fall.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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