Summer brings with it the joys of gardening and growing vegetables until you have more zucchinis than you know what to do with.
Investors naturally appreciate growth and like to buy smaller stocks that have more room to grow than their larger counterparts. With a bit of luck they’ll grow more than the zucchinis.
The Smaller Stable Dividend portfolio illustrates some of the benefits of starting small. It grew by an average of 15.2 per cent annually over the 25 years through to the close of June 23, 2025. In comparison, the S&P/TSX Composite Index (a reasonable proxy for the Canadian stock market) gained an average of 6.8 per cent annually over the same period. (The returns herein are based on backtests using data from Bloomberg taken from the 23rd of each month. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)
The portfolio looks for smaller stocks by starting with the 400 largest stocks on the Toronto Stock Exchange by market capitalization. It then narrows in on the smallest 100 of that group.
In practice, the portfolio picks from stocks with market capitalizations starting from a low of about $237-million to a high near $625-million these days. While the stocks aren’t supertiny, investors should still be cautious when trading them because they tend to be harder to deal with than larger stocks owing to their lower trading volumes and higher bid-ask spreads. (Novice investors should hold off on small stocks and gravitate to larger names instead.)
With the smaller 100 stocks in hand, the portfolio narrows in on dividend-paying stocks because they tend to outperform the market over the long term. The imaginatively named Smaller Dividend portfolio tracks them and posted average annual returns of 14.3 per cent over the 25 years to the close of June 23, 2025.
As a final step, the Smaller Stable Dividend portfolio picks the 20 stocks from the Smaller Dividend portfolio with the lowest volatilities over the prior 260 days. That is, it sticks to stocks that provided a relatively smooth ride in recent months.
As a bonus, the High-Yield portfolio tracks the half of stocks in the Smaller Dividend portfolio with the highest dividend yields. The idea being to investigate whether picking small stocks by yield, rather than by volatility, might be beneficial.
You can examine the return history of the three portfolios in the accompanying graph along with those of the market index.
Unfortunately, the High-Yield portfolio trailed the other dividend portfolios with average annual gains of 13.6 per cent over the 25 years to the end of June 23, 2025. Even worse, the High-Yield portfolio was also about 19 per cent more volatile than the Smaller Dividend portfolio and 33 per cent more volatile than the Smaller Stable Dividend portfolio.
In addition to volatility, it’s useful to examine the performance of the portfolios in the big downturns of the past 25 years. One of the biggest crashes occurred in the early 2000s when the dot-com bubble burst. The market index fell 43 per cent from its prior high during the downturn but all of the dividend portfolios managed to escape the carnage without falling by more than 10 per cent along the way.
The market, and dividend portfolios, were walloped in the financial crisis of 2008-09 when the index plunged 47 per cent from its former highs. The dividend portfolios fared a little better, with the Smaller Dividend portfolio falling 45 per cent and the High-Yield portfolio down 42 per cent. The Smaller Stable Dividend portfolio held up the best with a still sizable decline of 40 per cent.
The COVID-19 pandemic prompted a sudden crash in 2020 that saw the market fall 37 per cent while the Smaller Stable Dividend portfolio tumbled 40 per cent. The Smaller Dividend and High-Yield portfolios both plunged 51 per cent. Gulp! Mind you, all of the portfolios recovered and hit new highs before the market index did.
While the Smaller Stable Dividend portfolio tends to offer a relatively smooth ride to investors for much of the time, it didn’t really live up to the stable part of its name in two of the three big downturns of the past 25 years. Alas, small stocks generally fare poorly when investors panic and stampede for the exits.
But, with a little luck, the Smaller Stable Dividend portfolio will continue to perform well over the long-term. I hope to check in on it from time to time to see how its growing.
Details on the stocks in the Smaller Stable Divided portfolio and the others I follow for The Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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