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Mixing a gin and tonic yields a satisfying summer drink. Combining investment ingredients can provide sunny returns. In that spirit, I’d like to introduce the Frugal Dividend portfolio. It adds a value investing twist to the Stable Dividend portfolio. The idea is to seek out low-volatility dividend stocks that trade at reasonable prices because the combination has worked well over the past 25 years.

Before getting to the twist, it’s useful to briefly review the building blocks of the Stable Dividend portfolio. It all begins with the largest 300 common stocks that have their primary listings on the TSX.

The group is quite similar to the stocks in the S&P/TSX Composite Index and its predecessor the TSE 300 index.

A portfolio that invested an equal amount of money in each of the 300 stocks, rebalanced each year, grew by an average of 8.8 per cent annually over the 25 years through to the end of 2018. The S&P/TSX Composite Index gained 7.4 per cent annually over the same period. (All of the return figures herein include dividend reinvestment.)

A dividend portfolio with an equal amount of the dividend payers in the 300-stock portfolio (206 of the 300 stocks at the moment) fared better, with average annual gains of 11 per cent over the same period.

The Stable Dividend portfolio begins with the dividend payers from the 300-stock portfolio and buys an equal amount of the 20 stocks with the lowest volatility (over the prior 260 days) each year. It generated average annual returns of 13.7 per cent over the 25-year period.

Here’s where the Frugal Dividend portfolio differs. It starts with the dividend payers from the 300-stock portfolio, discards all but the 50 stocks with the lowest volatility (over the prior 260 days) and then picks an equal amount of the 10 stocks with the lowest, but positive, price-to-earnings ratios. It gained an average of 16.7 per cent annually when rebalanced annually over the 25 years and an average of 18.2 per cent annually when rebalanced monthly.

The first accompanying graph shows the performance of the Frugal Dividend portfolio versus the S&P/TSX Composite from the end of 1993 to the end of May, 2019, based on the monthly rebalanced data.

The second graph highlights the portfolio’s performance during down periods. It shows how far the portfolio fell, as a fraction of its prior peak, and includes similar data for the index.

The S&P/TSX Composite fell to less than 60 per cent of its prior highs in both 2002 and 2009. That is, it declined by more than 40 per cent based on monthly data. The Frugal Dividend portfolio (much like the Stable Dividend portfolio) was basically unperturbed by the 2002 market decline and fared better than the index in the 2008 crash with a peak-to-trough decline of 27 per cent. While the Frugal Dividend portfolio was a touch worse than the Stable Dividend portfolio on the downside, it still offered a fair deal of protection.

The current list of Frugal Dividend stocks is shown in the accompanying table and, for what it’s worth, I own six of them. The portfolio is currently dominated by banks and other financials. (Note that Power Corp. of Canada, Power Financial Corp. and Great-West Lifeco Inc. are all related to one another.) The portfolio sports an average dividend yield of 4.4 per cent and an average earnings yield of 10.3 per cent.

Frugal Dividend Portfolio

CompanyTickerPrice ($)P/EYield (%)
Power Financial PWF-T30.539.935.97
Power Corp.POW-T28.4211.005.70
Great-West LifecoGWO-T31.006.845.33
Bank of Nova Scotia BNS-T70.7210.044.92
National BankNA-T62.0710.174.38
Bank of Montreal BMO-T99.3310.874.15
TD Bank TD-T75.3911.673.93
Tricon Capital GroupTCN-T10.609.252.64
Brookfield Asset Management BAM-A-T63.0210.391.37

Source: Bloomberg (as of June 10, 2019)

Some cautionary notes are in order. While the Frugal Dividend portfolio generated strong returns with a moderate level of downside risk in the past, it might not continue to do so in the future. Individual stock returns are also much more volatile than overall portfolio returns.

Holding stocks can be harder than one might expect.

I hope to pit the Frugal Dividend and the Stable Dividend portfolios against each other over the next few years to see how they fare.

Norman Rothery, PhD, CFA, is the founder of

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