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Canadian summers are fleeting, which encourages vacationers to enjoy sunny days while they last.
Alas, some investors have a hard time relaxing as the market races hither and thither. They might seek succour by gravitating to low-volatility Canadian dividend stocks of the sort tracked by the Stable High-Yield and Frugal Dividend portfolios.
The Stable High-Yield portfolio generated average annual returns of 16.3 per cent over the 26 years through to the end of May, 2026, while the Frugal Dividend portfolio fared almost as well with a growth rate of 15.9 per cent. They both beat the Canadian stock market, as represented by the S&P/TSX Composite Index, which climbed by an average of 8.1 per cent annually over the same period.
(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.)
Both portfolios start their search of good stocks with the 300 largest on the Toronto Stock Exchange. They then narrow in on dividend payers before focusing on the 50 with the lowest volatilities over the prior 260 days.
The portfolios conclude their search by using different measures of value to pick their favourites from the 50 candidates. The Frugal Dividend portfolio selects the 10 with the lowest price-to-earnings ratios (P/Es) while the Stable High-Yield portfolio opts for the 10 with the highest dividend yields.
The 10 stocks in the Stable High-Yield portfolio have a median (half higher, half lower) dividend yield of 5.7 per cent, a median P/E of 16.6, and a median trailing 260-day volatility of 19.1 per cent as of this week’s update.
The 10 stocks in the Frugal Dividend portfolio have a median dividend yield of 3.8 per cent, a median P/E of 13.0, and a median volatility of 18.3 per cent.
One of the potential advantages of owning low-volatility stocks is that they usually don’t change much in the short term. Both of the portfolios swapped fewer than two stocks each month over the 26-year period when rebalanced monthly and they changed about six stocks each year when rebalanced annually. As a result, they don’t require much upkeep, which helps reduce trading costs and allows for the possibility of long and relaxing summer holidays.
The compound annual growth rate of the portfolios over the 26-year period when rebalanced monthly, quarterly, semi-annually and annually are shown in the accompanying chart along the with gains of the market index.
The performance of the portfolios slipped as the rebalancing period stretched from monthly to annually, but they all beat the market handily. Overall, rebalancing every six months, or more frequently, appears to be a good idea.
The portfolios’ focus on low-volatility stocks doesn’t mean they’re risk-free. While the portfolios basically side-stepped the aftermath of the internet bubble, the Frugal Dividend portfolio lost 34 per cent and the Stable High-Yield portfolio gave up 32 per cent in the financial crisis of 2008-09 when the market index swooned 43 per cent.
The worst one-month return for market index was a loss of 17 per cent in March, 2020, owing to the COVID-19 pandemic. It was also the worst month for the Stable High-Yield and Frugal Dividend portfolios, which gave up 26 and 20 per cent respectively.
The Stable High-Yield portfolio and market index lost more than 10 per cent in four months over the 26-year period while the Fugal Dividend portfolio did so on three occasions. Both the Stable High-Yield and Frugal Dividend portfolios lost more than 5 per cent in 14 of the 312 months over the period while the market index did so in 23.
More positively, the Frugal Dividend and Stable High-Yield portfolios climbed in 70 and 72 per cent of the months over the 26-year period, respectively, and the market index advanced 63 per cent of the time.
While there are no guarantees, I have high hopes the portfolios will continue to generate reasonable and relatively steady returns over the long-term. They might even help pay for a few relaxing summer vacations along the way.
Details on the stocks in the Frugal Dividend and Stable High-Yield portfolios along with others regularly followed at The Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.