Canadian Stable Dividends Strategy

Models
1

I have read the following article and tried to replicate but with a half baked success:

Here are the key points:

  • Custom Universe with 300 largest stocks in Canada;
  • 20 stocks rebalanced on a yearly/monthly basis;
  • Stocks must pay a dividend (Yield>0);
  • Pick 20 stocks with the lowest annual volatility;

I calculated the return from 1999-2019 to make a fair comparison because that’s the most historical data we have access. His CAGR is 12.66% for that period. I’m getting something similar (see portfolio simulation below). However, when I turn this into monthly rebalancing the performance turns bad. Does anyone know what’s missing to replicate the article’s results?

https://www.portfolio123.com/port_summary.jsp?portid=1574339

Thanks!

2

There are two reasons for the discrepancy.

  1. When you rebalance yearly, your turnover is 0.75X. When you rebalance monthly, it’s 2.63X. You’re often paying 50 basis points in transaction fees, because these are not very high-volume stocks and you’re using variable slippage, and occasionally it’s even more; for example, for CNU you’re paying 500 basis points. So with round-trip costs of about 1.3% per stock, you’re paying altogether about 3.5% per year in transaction costs.

  2. The starting point is EVERYTHING in a 20-stock model with a yearly rebalance. If you start in January 1999 you get a nice 13% CAGR. If you start in July 1999, you only get a 9% CAGR, using exactly the same system.

3

Use this version instead.
https://www.portfolio123.com/port_summary.jsp?portid=1574382

Note that in the universe you had it set to All Fund Canada. I set it to TSX as per the article. This probably hurt performance however and didn’t improve it.

You were using daily beta as a proxy for volatility. I have not found beta to be a very good replacement for volatility. I use it to enhance but not replace the signal. My preferred factor is ATRN or Average True Range Normalized. It only has 100 look back days but that is enough.

I removed transaction fees as I don’t believe he used any. The goal is to replicate his system as close as possible and you can add fees back in later once you feel it jives.

I raised the threshold of dividends to a yield of 3%. You can alter it but basically everything in Canada has dividends so I wouldn’t place much emphasis on a system called Canadian Stable Dividends if the the dividend requirement is only to have one. Basically, it is a volatility system which does work well in Canada. But I suggest raising the threshold of dividend yield if it is in fact a Canadian dividend system.

I added in a sector weighting rule.

4

Hi Hemmerling,
Thanks alot for your input, I appreciate it. Here are my comments on your improvement:

  1. Very good thinking for using the ATRN. However it is not limited to 100 days look back anymore. Try 252 days, it doesn’t return an error. I believe Marco increased the limit a couple months ago when people were complaining about the arbitrary limits on technical indicators.

  2. Yes you are right he didn’t use any transaction fees that’s for sure. However that’s a major flaw, I wouldn’t present a model portfolio strategy in the newspaper with that kind of omission. By removing them, it gets closed to what he has done for sure.

  3. Your point is totally valid. It is more of a volatility ranking system than it is a dividend one unless you state a minimum level, just like you did.