Thanksgiving is fast approaching and I’m looking forward to a feast followed by a nap. Alas, dishwashing usually squeezes itself in between the two.
Investors who like to feast on good returns might turn to the Frugal Dividend portfolio. It fared well over the years by bargain hunting among low-volatility dividend stocks of the sort that rarely interrupt naps.
The portfolio starts by looking at the largest 300 stocks on the Toronto Stock Exchange by market capitalization. It then narrows in on the 50 dividend stocks with the lowest volatilities over the prior 260 days. It finishes up by picking the 10 stocks with the lowest positive price-to-earnings ratios.
The Frugal Dividend portfolio gained an average of 14.6 per cent annually from the end of 1999 through to the end of August, 2023. By way of comparison, the S&P/TSX Composite Index (a reasonable proxy for the market) gained an average of 6.5 per cent annually over the same period. (The returns herein are based on monthly data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading costs.)
The portfolio generated the big gains when it was rebalanced monthly. In the process, it replaced an average of about two stocks each month since the turn of the century.
But investors can slow down and rebalance the portfolio quarterly rather than monthly. Doing so would have generated average annual gains of 13.6 per cent over the 23.5 years from the end of 1999 to the end of June, 2023. The market index gained an average of 6.5 per cent annually over the same period.
In this case, the portfolio replaced about three stocks each quarter, which represents a nice reduction from the roughly six replacements each quarter when rebalancing monthly.
Investors can also rebalance quarterly at other times of the year. For instance, they might start at the end of January, or the end of February, instead of the end of December.
It turns out, the quarterly-rebalanced portfolio gained an average of 14.0 per cent annually from the end of January, 2000 to the end of July, 2023. It gained an average of 13.5 per cent annually from the end of February, 2000 to the end of August, 2023.
Shifting the quarterly rebalancing date by a month offered broadly similar results.
Slow down to annual rebalancing, and the Frugal Dividend portfolio gained an average of 12.4 per cent annually over the 23 years from the end of August, 2000 to the end of August, 2023. The market index gained an average of 5.4 per cent annually over the same period.
The accompanying table shows the returns of 12 Frugal Dividend portfolios that are annually rebalanced over time periods that are shifted by a month from each other. The first is highlighted above and starts at the end of August, 2000. The next starts a month earlier, in July, 2000, and so on, back to the one starting at the end of September, 1999, which covers the 23 years through the end of September, 2022.
The best results were obtained by the annually rebalanced portfolio that stated in January, with a 14.7 per cent average annual gain, while the worst was the one that started in May, with an 11.8 per cent average annual return. The best and worst growth rates were separated by 2.9 percentage points, and the average rate for the 12 portfolios was a healthy 13.5 per cent. Investors might spread their bets out across the year to aim for close to average gains.
Rebalancing annually required an average of about six stock replacements each year. That’s lower than the roughly 24 changes needed yearly when rebalancing monthly, or the 12 when rebalancing quarterly.
Generally speaking, taking a more relaxed approach to rebalancing offered slightly lower returns than a more active approach, but it saved on commissions and elbow grease. I suspect the trade-off would appeal to many investors. After all, most of us would like to step away from trading to feast and nap our way through the holiday season.
You can find the stocks in the Frugal Dividend portfolio via this link Rothery: Portfolios to ponder for dividend and value investors, 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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