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When life gives you lemons, make lemonade. It’s a maxim I’ll use to turn sour stocks that lack dividends into a portfolio with sweet returns.

I normally focus on dividend stocks because they tend to outperform the Canadian market. But doing so ignores some good stocks in an otherwise sour batch.

To set the table, I start with a market portfolio containing the 300 largest common stocks on the TSX, which gained an average of 8.4 per cent annually from the end of 1999 to the end of 2022 with annual rebalancing. (The returns herein are based on monthly data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading frictions. All of the portfolios are equally weighted.)

If you put the dividend payers into a separate portfolio, you’ll find it gained an average of 10.6 per cent annually over the past 23 years with annual rebalancing. Huzzah for dividend stocks!

The dividend payers currently represent 203 of the 300 largest stocks on the TSX. Roughly a third of stocks – 97 at the moment – don’t pay dividends.

The portfolio of non-dividend payers fared poorly over the years. It gained an average of 4.6 per cent annually since the end of 1999 with annual rebalancing. The group provided sour returns and many investors will be inclined to give them all the heave-ho.

But investors fared better with non-dividend stocks that posted at least some earnings over the prior four quarters. A portfolio of profitable non-dividend stocks gained an average of 8.2 per cent annually from the end of 1999 through 2022 with annual rebalancing, which is close to the return of the market portfolio.

Investors enjoyed much sweeter returns by adding a twist of value and momentum to make the Lemonade portfolio. The idea is to look for bargains by picking 20 stocks from the non-dividend payers with the lowest price-to-earnings ratios (P/E) and then pick the 10 with the highest returns over the previous six months.

The 10-stock Lemonade portfolio served up superb average gains of 16.9 per cent annually from the end of 1999 through 2022, with monthly rebalancing. By way of comparison, it beat the S&P/TSX Composite Index, which advanced by an average of 6.4 per cent annually over the same period.

You can examine the portfolio’s return history, along with that of the S&P/TSX Composite, in the accompanying graph.

While the Lemonade portfolio delivered delicious long-term returns, it produced some super sour declines along the way. The second graph highlights the poor periods for the portfolio and market index.

While the Lemonade portfolio neatly dodged the demise of the internet bubble in the early 2000s, it was squashed in the financial crisis of 2008, and eventually shrank 62 per cent by early 2009, while the market gave up 43 per cent (based on monthly data.)

The Lemonade portfolio also fared poorly in the short-lived crash of 2020, when 45 per cent of its prior high evaporated, whereas the market slipped only 22 per cent.

The portfolio’s heavy exposure to resource stocks is one reason for the wild swings. That’s something that hurt it when energy prices tumbled in 2014, and the portfolio gave up 39 per cent by the time it bottomed in early 2016. The market index was relatively unscathed during the period and only corrected by 14 per cent from its earlier highs.

While the Lemonade portfolio provided sweet long-term returns, it suffered sour declines, which makes it hard to stick with. It also requires regular attention with monthly maintenance. It’s not something that can be left untouched for a long time. As a result, it should probably be used by seasoned investors in limited quantities as an aperitif to a more broadly-based brew of investments.

Click here to discover the stocks in the Lemonade portfolio, along with the other popular portfolios I’m tracking.

Norman Rothery, PhD, CFA, is the founder of

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