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Investors face some big choices when squirrelling away their cash in the stock market. They might put it into blue-chip dividend stocks to earn reasonable returns in exchange for a modicum of stability, or they might opt for riskier fare in the hopes of giant gains.

Today, I’m going to take a look at three strategies using price-to-cash-flow ratios (P/CF) because they offer a range of potential returns with different risk characteristics.

To see the ratio in action, I start with the largest 300 common stocks on the Toronto Stock Exchange and make a basic low-P/CF portfolio containing an equal-dollar amount of the 10 with the lowest positive ratios. (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 basic low-P/CF portfolio worked like a charm over the 25 years through to the end of 2023, posting an average gain of 16.6 per cent annually while encountering big ups and downs along the way. The S&P/TSX Composite Index, by contrast, trailed with average annual gains of 7.5 per cent over the same period.

The accompanying graph highlights those returns, along with the returns from two other portfolios that weren’t nearly as volatile as the original one.

The second portfolio starts with the 300 largest stocks on the TSX, looking solely at dividend payers, and specifically the 10 with the lowest positive P/CFs.

The resulting low-P/CF dividend portfolio gained an average of 15 per cent annually over the 25 years through to the end of 2023. It was also 15 per cent less volatile than the first portfolio, and its swings up and down were less pronounced.

The third portfolio seeks relative safety by sticking with low-volatility stocks. I’ll call it the Stable Cash portfolio. It also begins with the largest 300 stocks on the TSX and focuses on dividend payers. It then narrows in on the 50 with the lowest volatilities over the prior 260 days, and picks the 10 with the lowest positive P/CFs.

The Stable Cash portfolio gained an average of 11.6 per cent annually over the 25 years to the end of 2023, which is a little disappointing return-wise, but it got there with a modest amount of volatility and fewer downside excursions than the first two portfolios. For instance, it was 53 per cent less volatile than the basic low-P/CF portfolio.

The difference in portfolio volatility can be seen in the second graph which shows how far the portfolios fell, compared with their prior highs, in hard times. (The market index is left out of the graph in an effort to simplify the picture.)

Draw your eye to the three worst periods for the basic low-P/CF portfolio. It plunged 60 per cent in the financial crisis of 2008-09. It dropped 49 per cent when the energy patch stalled in 2015 and it gave up 62 per cent in the pandemic year of 2020. Few people would be willing to lose half their stash so often without calling it quits.

The low-P/CF dividend portfolio fared a little better but it was still pretty scary in the three downturns. It tumbled 48 per cent to hit a low in 2009. It gave up 41 per cent in 2015 before recovering and keeling over 53 per cent in 2020.

The Stable Cash portfolio held up better in hard times. It dropped 30 per cent in 2009 and beat the market index, which fell 43 per cent. The portfolio was basically unscathed in the 2015 downturn with a modest decline of 7 per cent, which was half the market’s slip of 14 per cent. The market crashed 22 per cent in early 2020, while the portfolio dipped 19 per cent.

The three portfolios help to highlight the dilemma faced by investors. They can try to reach for big returns but run the risk of encountering calamities along the way. Alternately, they can take a more moderate course in the hopes of earning reasonable returns with much less volatility. In my view, those who take the later approach are more likely to succeed over the long term.

You can find the stocks in the Stable Cash portfolio 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

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