Halloween is fast approaching and the wee ghosts and goblins are dreaming of scouring their neighbourhoods for treats.
But their parents seek goodies from the markets in the form of dividends and capital gains.
For the latter, the season brings with it the return of the Dividend Monster portfolio. It favours Canadian dividend stocks, with generous yields, on the upswing. In a fun twist, the original portfolio will be chopped in half this week to unleash two new monsters on the market.
The original Dividend Monster portfolio generated average annual returns of 16.2 per cent over the 27 years through to the end of September. In comparison, the Canadian stock market climbed by an average of 9 per cent annually over the same period as tracked by the S&P/TSX Composite Index.
(The returns herein are based on backtests using monthly data from Bloomberg. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly, unless stated otherwise.)
The Dividend Monster starts its search for stocks with the largest 300 on the Toronto Stock Exchange. It then narrows in on the 50 per cent of dividend-payers with the highest yields, which cut the list from 300 to 98 this week. The portfolio is then formed by buying the 10 stocks with the best returns over the prior 12 months and held until the portfolio is rebalanced when the stock-picking procedure starts all over again.
In the lab, the original Dividend Monster is cleaved in half by size to create large-stock and small-stock portfolios. The new portfolios start with the largest 300 stocks on the TSX and then narrow in on the half of dividend-payers with the highest yields. The list is then sliced in half with the largest 50 per cent of stocks (by market capitalization) separated from the smallest stocks. The large- and small-stock portfolios buy the 10 stocks with the highest prior 12-month returns from the large- and small-stock halves of the group of dividend payers with generous yields.
Alas, the lab fizzled this time around because it produced portfolios with fulsome but relatively disappointing returns. The large-stock portfolio gained an average of 13.6 per cent annually over the 27 years to the end of September while the small-stock portfolio gained an average of 15.4 per cent annually. Both failed to beat the original, but the small-stock portfolio offered the best performance of the three for most of the 27-year period.
You can examine the return history of the portfolios and market index in the accompanying graph.
The small-stock portfolio raced ahead of the original starting in 2000 and it held the lead until 2018 when disaster struck. It fell a whopping 50 per cent into the crash of 2020. In comparison, the stock market index dipped 22 per cent in the 2020 decline while the original portfolio tumbled 25 per cent from its prior high.
The small-stock portfolio’s 2020 collapse was its worst showing over the 27 years but it was closely followed by its plunge of 49 per cent in the financial crisis of 2008-09. The original portfolio fell 52 per cent from its prior peak in the financial crisis and the market index fared better than both with a decline of only 43 per cent.
Despite the small-stock portfolio’s mauling in 2020, there’s chance it’ll regain its lustre in the future. Mind you, sticking with the original strategy is likely the sensible move at this point.
It’s worth pointing out that the Dividend Monster’s 16.2 per cent average annual gains over the 27 years assume it was rebalanced each month. But investors didn’t have to be quite so active because it climbed at an average annual rate of 15 per cent when it was rebalanced at the end of September each year.
While the markets frequently serve up tricks to investors, they’ll hopefully provide pleasant returns to the Dividend Monster portfolio over the long term. Best wishes also go to the children of Canada when they gorge themselves on treats this Halloween.
Details on the stocks in the Dividend Monster portfolio and the others regularly followed at the Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.