Dividend addicts beware, because you might suffer from a relapse after learning about our new portfolio.
It all begins with the Frugal Dividend portfolio, which seeks out low-volatility dividend payers trading at bargain levels. The portfolio is a top performer with average annual gains of 16.2 per cent over the 26 years through to the end of January, 2026. It handily beat the Canadian stock market, as represented by the S&P/TSX Composite Index, which gained an average of 8.1 per cent annually over the same period.
(The returns herein are based on backtests using monthly data from Bloomberg. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly, unless otherwise noted.)
The Frugal Dividend portfolio finds stocks by starting with the largest 300 on the Toronto Stock Exchange (TSX). It then narrows in on the 50 dividend payers with the lowest volatilities over the prior 260 days before finally buying the 10 with the lowest price-to-earnings ratios (P/E).
The portfolio was extended in 2024 to make two variants using a similar method that replaced the low-P/E requirement with a low price-to-cash-flow or low price-to-free-cash-flow test in the final step. Today’s focus is on similar variants but this time the low-P/E requirement is swapped for a low price-to-book-value (P/B) or high dividend-yield test.
That is, the variants begin with the largest 300 stocks on the TSX, focus on the 50 dividend payers with the lowest volatilities over the prior 260 days, and then buy either the 10 with the lowest P/Bs or the 10 with the highest dividend yields.
The long-term gains of the Frugal Dividend portfolio along with its low-P/B and high-yield variants are shown in the accompanying graph, which also includes the market index.
The low-P/B portfolio grew at an average annual rate of 14.4 per cent over the 26 years to the end of January, 2026, while the high-yield portfolio beat them all with average annual gains of 17 per cent.
Before discussing the big returns of the high-yield portfolio, a diversion is in order because two additional variants were tested but not shown in the graph.
The first opted for stocks with low price-to-tangible-book-value ratios instead of low P/Bs and it gained an average of 14.3 per cent annually over the 26 years to the end of January, 2026. (Tangible book value excludes intangible assets – like goodwill – that are included in book value.) As it happens, using book value or tangible book value resulted in similar gains over the 26-year period.
The second portfolio picked stocks with low price-to-sales ratios (P/S) rather than low P/Es. It was a little disappointing, with average annual gains of 13.6 per cent over the same 26-year period. While it handily beat the market index, it did not exceed the gains of its parent portfolio that follows the 50 dividend-paying stocks, with the lowest volatilities over the prior 260 days, selected from the largest 300 on the TSX. The parent climbed at an average annual rate of 13.8 per cent over the same period. Adding the low P/S requirement hindered rather than helped returns.
All of the backtesting is both reassuring and worrisome. It’s good to see that applying a value filter to a low-volatility portfolio provided a nice return boost in most cases. But the process also has more than a whiff of data-mining about it. That is, random chance might erroneously lead investors to the variants with the highest past returns, which may go on to disappoint.
As a result, it seems unwise to expect the high-yield version of the portfolio to continue to generate 17-per-cent average annual returns in the future. Investors should temper their expectations and I’d be pleased indeed if the portfolio goes on to outperform the market over the long term.
Speaking of the longer term, investors can adopt a lower turnover version of the high-yield portfolio, which gained an average of 14.9 per cent annually over the 26 years to the end of January, 2026, when it was rebalanced at the end of January each year rather than monthly.
Because I’m an unrepentant dividend addict, the high-yield portfolio will be regularly updated and henceforth called the Stable High-Yield portfolio. The portfolio isn’t without risk and it’ll be interesting to see how it performs over the long term.
Details on the stocks in the Stable High-Yield portfolio and the others regularly followed at the Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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