I recently enjoyed a friend’s homemade maple syrup, which induced cravings for more. But imbibing Canadian liquid gold can be a pricey habit thanks to demand from our American friends, who imported almost 45 million kilograms of the stuff in 2022.
Importing a stock strategy into the United States isn’t as easy as selling syrup, but that didn’t stop me from moving the Stable Dividend portfolio to Wall Street to test its adaptability.
I’m happy to report that the U.S. Stable Dividend portfolio provided sweet returns with average annual gains of 10.9 per cent from the end of 1999 through to the end of March, 2024. In comparison, the S&P 500 Index gained an average of 7.4 per cent annually over the same period. You can examine the return history of both in the accompanying graph.
The Stable Dividend strategy aims to pick large dividend stocks with stable price patterns. In the U.S., it starts with the roughly 500 large stocks in the S&P 500 and sticks with the 400 or so that pay dividends. The stable part of the portfolio is achieved by selecting 20 dividend stocks with the lowest volatilities over the prior 260 days. The portfolio then holds an equal dollar amount of each of the 20 stocks and is rebalanced, or refreshed, monthly. (All of the returns herein are based on monthly data from Bloomberg and are presented in U.S. dollar terms. The returns include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)
The portfolio itself tends to be fairly stable in that it doesn’t swap stocks frequently. For instance, it had an average turnover of about 13 per cent each month since the end of 1999.
But many of those trades were probably unnecessary because dividend stocks with slightly higher volatilities also performed well. For instance, a similar portfolio that follows 50 stocks that are the lowest-volatility dividend payers in the S&P 500 gained an average of 10.8 per cent annually from the end of 1999 through March, 2024. As a result, investors would likely have fared well by holding onto stocks that became slightly more volatile than strictly allowed by the regular 20-stock portfolio.
The solid long-term returns are grand, but it is also important to consider down periods before becoming too enthusiastic and rushing off with a sugar high to invest in the stock market.
The second graph highlights the performance of the U.S. Stable Dividend portfolio, and market index, in bad times by tracking how far they fell from their prior highs. (Keep in mind that the graph is based on monthly data and the downturns would be more dramatic when using daily or intraday data.)
Two big downturns stand out on the graph. The first is the market index’s plunge of 45 per cent after the internet bubble burst in 2000. It was followed by the 51 per cent decline during the financial crisis of 2008-2009. The U.S. Stable Dividend portfolio fared relatively well during the two market crashes. It sailed through the first crisis with a modest 11 per cent decline and fared better than the market in the financial crisis, when it dropped 28 per cent.
The portfolio’s strong long-term results were helped along by its good performance during the two big crashes, but it didn’t hold up as well in some recent downturns.
For instance, the market quickly tumbled 20 per cent in the COVID-19 crash of 2020, while the portfolio produced a similarly diseased decline of 17 per cent. Inflation and war prompted the market to drop 24 per cent in 2022, while the portfolio fell 17 per cent to hit a low in 2023 and it has yet to fully recover.
While the U.S. Stable Dividend portfolio’s performance was a little disappointing in recent years, I have high hopes it’ll return to form and continue to generate sweet returns over the long term.
You can find the stocks in the U.S. 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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