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The stock market alternated between despair and relief over the past few months as higher interest rates started to work their way through the economy.

The uncertainty prompted me to reach for the Stable Dividend Portfolio for succour.

The portfolio focuses on large Canadian dividend stocks that have been steady performers. They’re the sort of blue-chip stocks that appeal to more cautious investors. But, despite its stodgy nature, the portfolio beat the market by a wide margin over the past 23 years.

The Stable Dividend portfolio starts with the largest 300 common stocks on the TSX (as measured by market capitalization) and narrows in on the roughly 200 companies that pay dividends. It puts an equal amount of money in the 20 stocks that were the least volatile over the prior 260 days. That is, their prices varied the least compared to the other dividend stocks in recent months, with the hope being they’ll continue to offer a relatively smooth ride.

The accompanying graph shows the Stable Dividend portfolio gained an average of 14.1 per cent annually from the end of 1999 through January, when rebalanced monthly. By way of comparison, the S&P/TSX Composite Index gained an average of 6.7 per cent annually over the same period. (The returns herein are based on data from Bloomberg and include dividend reinvestment, but not fund fees, commissions, or other trading frictions.)

In the 2010s, the portfolio gained an average of 11.3 per cent annually from the end of 2009 through to the end of 2019, while the S&P/TSX Composite climbed an average of 6.9 per cent annually over the same period.

The race between the portfolio and the market has been a close one during the first three years of the current decade. The portfolio gained an average of 9.5 per cent annually from the end of 2019 through January while the market index fared a touch better with an average annual gain of 9.8 per cent.

While the portfolio performed well over the long term, it wasn’t immune from downturns and hard times. I highlighted this in last September’s update.

Today I want to take a closer look at the downside by pointing out it’s rare to see all of the portfolio’s stocks climb in any year. The portfolio almost always contains a few individual losers and nearly all of its stocks fall during big crashes, like the one in 2008. Investors have to mentally prepare themselves for such misfortunes.

To more easily describe the situation, I switched from rebalancing the portfolio monthly to annually, which resulted in a lower average annual return of 11.9 per cent from the end of 1999 to the end of 2022. (The market index climbed by an average of 6.4 per cent annually over the same period.)

The second graph shows the fraction of the portfolio’s stocks with positive returns in each annual period.

More than half of the portfolio’s stocks gained ground in 18 of the 23 annual periods, they lost ground in four periods, and there was an equal balance between winners and losers on one occasion. The portfolio experienced only one year when all of its stocks advanced and it owned at least one loser in the other 22 years. (A handful of stocks that no longer exist are not included in this analysis, but they are included in the portfolio’s return calculations.)

Overall, the Stable Dividend portfolio suffered from relatively few bad downturns over the past 23 years and usually only a few of its stocks proved to be disappointments each year.

I also appreciate the relatively placid nature of the Stable Dividend portfolio, which doesn’t change stocks frequently in normal times. It swaps an average of roughly two stocks each month (when rebalanced monthly) or roughly 10 each year (when rebalanced annually.)

For instance, the portfolio swapped four stocks since last September’s update. It gave the boot to Algonquin Power AQN-T, Capital Power CPX-T, Extendicare EXE-T and Great-West Lifeco GWO-T. They were replaced by Bank of Nova Scotia BNS-T, National Bank NA-T, Toronto-Dominion Bank TD-T and Thomson Reuters TRI-T. (I own many of the stocks in the current portfolio.)

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/04/24 11:08am EDT.

SymbolName% changeLast
Algonquin Power and Utilities Corp
Capital Power Corp
Extendicare Inc
Bank of Nova Scotia
Great-West Lifeco Inc
National Bank of Canada
Toronto-Dominion Bank
Thomson Reuters Corp

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