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I recently enjoyed the products of positive medical momentum in the form of seasonal vaccinations. But, in the process, I learned my local pharmacies are locking their doors during the day and buzzing customers in, which demonstrates negative neighbourhood momentum.

When it comes to the markets, positive and negative momentum can be found nearly everywhere. In its positive aspect, momentum has helped the Dividend Monster portfolio achieve market-beating returns over the past 25 years. On the other hand, negative momentum has torpedoed its evil twin, the Monstrous Dividend portfolio.

The Dividend Monster portfolio starts with the largest 300 stocks on the Toronto Stock Exchange and then focuses in on the half of dividend payers with the highest yields. It picks the 10 with the best returns over the prior 12 months and invests an equal amount of money in each one.

The Monstrous Dividend portfolio is formed just like its sibling, but instead of picking the 10 stocks with the best returns over the prior 12 months, it picks the 10 stocks with the worst prior returns. That is, it focuses on stocks with negative momentum instead of positive momentum.

On the positive side, the Dividend Monster portfolio gained an average of 14.8 per cent annually over the 25 years from the end of October, 1998, to the end of October, 2023. The Canadian stock market, as represented by the S&P/TSX Composite Index, climbed by an average of 7.3 per cent annually over the same period.

On the negative side, the Monstrous Dividend portfolio gained an average of just 4.6 per cent annually over the same 25 years. (The returns herein are based on monthly data from Bloomberg and include dividend reinvestment, but not fund fees, commissions and other trading costs. Both portfolios are rebalanced monthly.)

In practice, the portfolios required a fair amount of trading. Both swapped an average of about three old stocks for new ones each month over the past 25 years as the leaders (and laggards) changed.

Investors should treat stocks with negative momentum with caution because they’ve often provided poor returns and suffered from sharp downturns. The second graph shows periods when the portfolios and the market index declined from their prior highs over the last 25 years.

Cast your eye to the left side of the graph, which includes the lead-up to, and then the denouement from, the internet bubble of the late 1990s. The early part of the period saw a mania in internet-related stocks and many telecom companies, including Nortel Networks. At the same time, the market neglected less-exciting dividend-paying stocks, which subsequently posted solid returns in the early 2000s when the market was dragged down by Nortel and its ilk.

The market index dropped 43 per cent from its high in August, 2000, to its low in September, 2002, based on monthly data. On the other hand, the Dividend Monster portfolio hit a series of new highs in the early 2000s, as did stocks with high yields more generally. The negative-momentum Monstrous Dividend portfolio suffered a decline of 37 per cent.

The financial crisis of 2008-09 hit the market and both dividend portfolios hard. But the Monstrous Dividend portfolio fared the worst, with a loss of 62 per cent from its high to low.

Mind you, the worst-performing stocks in big bear markets tend to bounce strongly after hitting their lows. But timing a market bottom is notoriously difficult and likely amounts to a practical impossibility.

The Monstrous Dividend portfolio was felled by the 2015 crisis in the oil patch and it plummeted 68 per cent from its high at the end of August, 2014, to a temporary low at the end of 2015. It then failed to fully recover before the COVID-19 crash of 2020, and declined again to lose a total of 78 per cent by the end of March, 2020.

Buying past losers has proved to be a losing strategy over the past 25 years. It’s something to keep in mind when looking through the market’s castoffs for bargains. On the other hand, positive momentum has a history of providing a nice lift over the long term.

You can find the stocks in the Dividend Monster portfolio in this article, 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

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