Shovelling away the pile of ice and salt that city workers left next to an endangered tree distracted me from the chaos emanating from the United States.
It’s no surprise that Canadian investors have been shaken by the goings on south of the border. Those of them looking to flee the U.S. stock market might seek relative safety in Canadian utilities, which have been lining the pockets of investors with dividends for decades.
I applied the method used by the Stable Dividend portfolio to find good utilities (more technically utilities, telecommunication services and pipelines – or oil and gas storage and transportation companies) from within the largest 300 stocks on the Toronto Stock Exchange by market capitalization.
The utilities (29 this week) form the benchmark portfolio that, when rebalanced monthly, gained an average of 8.7 per cent annually over the 25 years to the end of February, 2025. In comparison, the S&P/TSX Composite Index – a reasonable proxy for the Canadian stock market – climbed by an average of 7.0 per cent annually over the same period. (The returns herein are based on backtests using monthly data from Bloomberg with monthly or annual rebalancing and equally-weighted portfolios. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs.)
If the benchmark portfolio is further refined to only include dividend-paying utility stocks, the results are better, with average annual returns of 11.9 per cent over the same 25 years.
The final step in the Stable Dividend method is to pick the 20 stocks with the lowest volatilities over the prior 260 days. But that is a little problematic in this case because there are relatively few stocks to choose from. Instead, the low-volatility utility portfolio picks the 10 stocks with the lowest volatilities from the dividend-paying utility stocks.
The low-volatility portfolio gained an average of 12.7 per cent annually over the 25 years to the end of February, 2025, when rebalanced monthly, or 12.9 per cent annually when rebalanced once a year.
Curiosity led to the formation of two additional portfolios that swapped out the 10-stock low-volatility requirement for 10 stocks with a low price-to-earnings ratio (P/E), or 10 with a high dividend yield. As it happens, both provided better long-term returns than the low-volatility portfolio while being slightly more volatile when rebalanced monthly.
The low-P/E portfolio gained an average of 14.9 per cent annually over the 25 years when rebalanced monthly, or 12.6 per cent annually when rebalanced once a year.
The high-yield portfolio gained an average of 15.5 per cent annually over the 25 years when rebalanced monthly or 13.6 per cent annually when rebalanced once a year.
Strong long-term returns are one thing, but investors also have to consider the downside. The accompanying graph shows how far the portfolios fell from their prior highs in downturns.
The worst crash over the 25 years occurred during the COVID-19 pandemic in 2020, when the market index declined 22 per cent. The high-yield portfolio fell the most, with a decline of 32 per cent, while the low-P/E portfolio dropped 27 per cent. The low-volatility portfolio performed the best with a decline of 15 per cent.
The financial crisis of 2008-2009 usually tops the downside hit parade because the market index plunged 43 per cent from its prior highs. But the high-yield portfolio dropped 31 per cent in the downturn, while the low-P/E portfolio fell 24 per cent and the low-volatility portfolio slipped 16 per cent.
The third-worst period for the portfolios occurred in the inflation-fuelled dip of 2022. The low-volatility portfolio was the hardest hit with a drop of 20 per cent, while the high-yield portfolio fell 18 per cent and the low-P/E portfolio slid 15 per cent. The market index declined 14 per cent.
The lesson is that while the portfolios held up relatively well in the big downturns of the past 25 years, they do decline from time to time. Alas, they might do worse in the future. After all, the belligerent politicians stateside might cause the market all sorts of rarely-seen trouble.
But I hope a sense of normality will eventually return to politics and the markets, which might allow Canadian utilities to generate dividends for years to come.
You can find details on Canadian utility stocks, sorted by yield, 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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