Monsters have taken over Toronto. You can spot them shambling out of the subways and staggering along the sidewalks. But, despite their swelling numbers, cellphone zombies are more nuisance than menace.
In the markets, more sprightly monsters are running higher rather than just shambling along. The Dividend Monster portfolio is a case in point. It earns its keep by focusing on stocks with generous dividend yields and strong gains.
Combining dividends with momentum boosted the portfolio’s average annual returns to 15.8 per cent over the 25 years through to the end of July. In comparison, the Canadian stock market (as represented by the S&P/TSX Composite Index) advanced by an average of 6.7 per cent annually over the same period. (The returns herein are based on backtests using data from Bloomberg taken at the end of each month. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly.)
The Dividend Monster method starts with the largest 300 common stocks on the Toronto Stock Exchange (TSX) based on market capitalization (share price times shares outstanding.) It proceeds to narrow in on the half of dividend payers that sport the highest dividend yields. As a final step, it buys an equal dollar amount of the 10 remaining stocks with the highest total returns over the prior 12 months with the expectation they’ll continue to perform well in the short term. The portfolio is held for a month and then refreshed with a new batch of stocks that have high yields and strong past performance.
In recent times, the portfolio produced pleasing gains of 31.9 per cent over the 12 months through to the end of July. It beat the market index’s still healthy returns of 21.4 per cent over the same period.
The original Dividend Monster is also joined today, after a little tinkering in the monster lab, by its sibling the All-Dividend Monster portfolio. It differs from the original by being willing to invest in any stock that pays dividends – including those with modest dividend yields. That is, the new portfolio starts with the largest 300 stocks on the TSX, narrows in on the dividend payers, and then picks the 10 with the highest total returns over the prior 12 months.
You can examine the long-term track record of the two Monster portfolios, and the market index, in the accompanying graph.
While the All-Dividend Monster portfolio outperformed the market index with average annual returns of 13.2 per cent over the 25 years to the end of July, it failed to beat the original Dividend Monster. Similarly, while both portfolios were more volatile than the market index over the period, the original was less volatile than the All-Dividend Monster.
Turning from upside gains to the downside disasters, the two biggest downturns suffered by the market index over the 25-year period occurred when the internet bubble burst in the summer of 2000 and during the financial crisis of 2008-2009. As it happens, the market index fell 43 per cent from its prior highs on both occasions, based on month-end data.
The monster portfolios managed to basically sidestep the market’s decline in the early 2000s but they suffered their largest plunges over the past 25 years in the financial crisis of 2008-2009 when the All-Dividend Monster portfolio fell 51 per cent and the Dividend Monster declined 52 per cent. Ouch!
The third worst decline for the market index was its slip of 22 per cent from its prior highs in the sudden pandemic-related crash of 2020. The Dividend Monster fared a bit worse with a 25-per-cent decline during the period and the All-Dividend Monster toppled 35 per cent. As it happens, the later portfolio sucked wind since hitting a high in 2016 and only hit bottom in 2020.
The third worst period for the portfolios occurred after inflation took hold in 2022, which prompted the market index to decline a modest 14 per cent. The Dividend Monster was harder hit and slipped 24 per cent into 2023 while the All-Dividend Monster gave up 33 per cent.
With a little luck, the Monster portfolios will refresh more than a few members of the zombie zoo and help push up their returns over the long term.
Details on the stocks in the Dividend Monster portfolio and the others I follow for The Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.