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The idea of earning dividends while relaxing on the beach prompted me to return to the Stable Dividend portfolio, which has generated market-beating returns by investing in low-volatility dividend stocks. Even better, its strong results persist even when using different measurements of volatility.

First, the gains: The portfolio generated average annual returns of 13.7 per cent from the end of 1999 to the end of July, 2023, while the market (as represented by the S&P/TSX Composite Index) climbed by an average of 6.6 per cent annually.

The method behind the gains is straightforward. The Stable Dividend portfolio begins with the largest 300 common stocks on the Toronto Stock Exchange (TSX) by market capitalization. It then focuses exclusively on dividend payers and invests an equal-dollar amount in the 20 stocks with the lowest volatilities over the prior 260 days. (The returns herein are based on data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading frictions.)

The accompanying graph shows the growth of the Stable Dividend portfolio along with that of the market index. The returns displayed in the graph, and those mentioned earlier, assume the portfolio was rebalanced monthly.

Investors who prefer to trade less frequently would also have fared well. The portfolio gained an average of 11.9 per cent annually from the end of 1999 to the end of 2022 when rebalanced once a year. The market index climbed by an average of 6.4 per cent annually over the same period.

A reader recently asked me about the efficacy of using different measures of volatility when forming the portfolio. It turns out that calculating volatility over different periods rather than just over the prior 260 days also worked well.

As it happens, volatility tends to persist for low-volatility stocks because they usually track stable businesses that aren’t prone to the wild gyrations of more speculative concerns. Think large utilities, financials, food companies and the like.

Mind you, low-volatility stocks aren’t immune from the market’s slings and arrows. Some become more volatile and they can suffer from unexpected declines when they disappoint investors.

To explore the situation, I created five versions of the Stable Dividend portfolio, including the original. They all start with the largest 300 stocks on the TSX, narrow in on the dividend payers, and select the 20 stocks with the lowest volatility. But, depending on the portfolio, volatility is measured over the prior 30, 60, 90, 180, or 260 days.

I’m happy to report that all five portfolios produced excellent returns with average annual gains (from the end of 1999 to the end of 2022) ranging from 11.9 per cent to 12.9 per cent when the portfolios were rebalanced annually. The portfolios generally fared better when rebalanced monthly, with average annual returns of between 12.8 per cent and 14.4 per cent from the end of 1999 to the end of July, 2023.

But there were big differences in the turnover of the different portfolios. Those created using shorter-term volatility traded stocks relatively rapidly while those using longer-term volatility swapped stocks less frequently.

The 30-, 60-, and 90-day volatility portfolios had monthly turnovers of 50 per cent, 29 per cent, and 21 per cent respectively. The 180-day and 260-day volatility portfolios had more modest monthly turnovers of 12 per cent and 10 per cent respectively.

I tend to prefer low-turnover strategies that help to minimize trading costs, which is a big reason I gravitate to the regular Stable Dividend portfolio, which uses 260-day volatility. But the approach has worked well using shorter periods. With a bit of luck, all five portfolios will continue to prosper over the long term.

You can find the stocks in the Stable Dividend portfolio via 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

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