The little rascals at my local café recently enjoyed zooming hither and thither as their parents chased them on an unusually sunny afternoon.
When it comes to the market, I follow a clutch of monster portfolios that behave like overactive children as they rocket forward and fall on their faces from time to time. All of them are variants of my Dividend Monster portfolio, which focuses on stocks with generous yields and exciting recent returns.
The original Dividend Monster portfolio begins with the largest 300 common stocks on the Toronto Stock Exchange. It then focuses in on the half of dividend payers with the highest indicated dividend yields, which reduced the list of 300 stocks to 107 this week. It finally picks the 10 stocks with the highest total returns over the prior 12 months from the group of high-yield stocks.
The Dividend Monster portfolio gained an average of 14.8 per cent annually over the 25 years to the end of January, 2024. By way of comparison, the S&P/TSX Composite Index gained an average of 7.4 per cent annually over the same period. (The returns herein reflect monthly data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading costs. The portfolios are all equally weighted and rebalanced monthly.)
The Dividend Monster portfolio outperformed over the long term and so did four of its variants, which picked stocks based on different look-back periods. The first picks its 10 stocks based on three months’ worth of prior returns, the second uses six months’ worth of returns, and so on in three-month jumps, to the last one which uses the prior 15 months of returns.
The different Dividend Monster portfolios enjoyed average annual returns of 11.0, 13.6, 14.6, 14.8, and 13.5 per cent over the 25-year period for the three-month, six-month, nine-month, 12-month and 15-month portfolios, respectively. The 12-month version performed the best while the three- and 15-month versions lagged.
The accompanying graph highlights the returns of the top three Dividend Monster portfolios along with those of the market index. Much like children, their movements were a little erratic but they grew up nicely over the years.
The long-term returns were grand but the monster portfolios occasionally fell on hard times. Down periods for the top three portfolios are displayed in the second graph, which shows how far they fell from their prior highs along with similar results for the market index.
All of the monster portfolios (including the two not shown on the graphs) managed to dodge the market’s decline after the internet bubble burst in the summer of 2000, which is common for many Canadian dividend portfolios.
On the other hand, they generally fared worse than the market in the financial crisis of 2008-09 when the market index gave up 43 per cent. While the three-month monster portfolio fared a bit better than the index in the period with a downturn of 35 per cent, the others suffered from declines of between 45 and 55 per cent.
The six-month monster portfolio performed particularly poorly when the oil patch plunged in 2015 and, after hitting a high in 2014, it found itself underwater through to the early 2021. Gulp! Only the most stubborn of investors would have been able to tread water for such a long time.
While the six-month monster portfolio fell 30 per cent from its 2014 high to its 2020 low, it proceeded to more than double by May, 2022, before it sagged again.
The other monster portfolios avoided similarly long downturns in the late 2010s but the experience of the six-month version provides investors a warning of what might happen because momentum-based portfolios are notorious for both their good long-term returns and their sudden – and sometimes catastrophic – downturns.
Be warned, much like little humans, the Dividend Monster portfolios might be irksome before they finally grow up.
You can find the stocks in the original Dividend Monster portfolio through this link, which also provides updates to many of the other portfolios I track for The Globe.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
Norman Rothery