Buying lottery tickets is a popular pastime for those who enjoy fleeting dreams of wealth. But nearly all of them wind up poorer, and only a tiny minority get exactly what they thought they wanted.
When it comes to stocks, the market is also full of speculatively minded souls who buy long shots that produce similarly poor results. On the other hand, conservative investors have enjoyed generous returns over the years with more reliable dividend stocks.
For instance, the Stable Dividend portfolio favours low-volatility dividend payers and has outperformed with an average annual return of 13.5 per cent over the 25 years through to the end of last month. By way of comparison, the S&P/TSX Composite Index trailed with average annual gains of 7.9 per cent over the same period. (The returns herein are based on monthly or annual data from Bloomberg and include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)
The Stable Dividend 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 common stocks on the Toronto Stock Exchange. It is refreshed, or rebalanced, monthly.
As it happens, the portfolio hit new all-time highs this year and climbed 29 per cent over the 12 months through to the end of September. It’s been a good year to be a dividend investor.
The portfolio also enjoyed a relatively smooth ride over the years due to its preference for low-volatility stocks, which often continue in their steady ways. But the opposite also tends to be true: High-volatility stocks persist in their wild ways, much to the detriment of many investors.
To demonstrate the potential dangers of high-volatility stocks, I sorted the 300 largest stocks on the Toronto Stock Exchange by volatility (over the prior 260 days) and put them into 10 portfolios (or deciles), with each portfolio containing 30 stocks. The first one holds the 30 stocks with the lowest prior volatilities, while the tenth portfolio contains the 30 stocks with the highest prior volatilities. The 10 portfolios were rebalanced at the end of each year and tracked over 25 years to the end of 2023.
The highest-volatility portfolio produced the worst returns over the 25-year period with a very small loss that rounded to an average annual return of 0 per cent. It fell well behind the market index’s average annual gains of 7.5 per cent over the same period. Indeed, the top three high-volatility portfolios failed to beat the market index. Moving down in volatility a notch, portfolio seven managed to eke out a slight win against the index with an average annual gain of 7.6 per cent.
On the other hand, the low-volatility portfolios fared quite well, with the top three enjoying average annual returns north of 11.5 per cent. The portfolios also happen to be dominated by dividend-paying stocks of the sort seen in the Stable Dividend portfolio.
The success of low-volatility approaches like the one embodied by the Stable Dividend portfolio is one reason why I tend to avoid highly volatile stocks. After all, low-volatility dividend payers have provided big returns while allowing investors to sleep better at night.
Mind you, relative stability does not mean that dividend stocks are risk-free. They can and do suffer from weak periods, downturns and even crashes from time to time. But they’ve fared quite well over the past 25 years while weathering two big market crashes, and smaller declines, along the way.
I have high hopes the Stable Dividend portfolio, and low-volatility stocks generally, will continue to fare well over the long term.
You can find a list of 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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