Temperatures surged earlier in March, which prompted dreams of sun-filled summer days just around the corner. Personally, I’m looking forward to indulging in perch and bubbly beverages on the shores of Lake Erie this summer.
The thought of feasting on fish prompted me to look in on the Perch portfolio, which is up almost 9 per cent over the past 12 months. I’ll also take the opportunity to introduce the Pickled Perch portfolio, which is closely related to the original.
Both portfolios seek out relatively stable Canadian dividend stocks trading at reasonable price-to-earnings ratios (P/Es), while avoiding the very largest companies. The idea is to highlight slightly smaller companies that can help to diversify dividend portfolios, which are often stuffed to the gills with huge stocks such as the big banks.
The portfolios start off with the largest 300 common stocks on the Toronto Stock Exchange by market capitalization and then remove the biggest 50 from consideration. The next step is to select the dividend payers from the remaining 250 stocks, which pares the list down to 162 candidates these days.
The two portfolios diverge at this point.
The standard Perch portfolio takes the list of candidates and keeps the half with the lowest volatilities over the prior 260 days. It then purchases the 20 stocks with the lowest P/Es.
The Pickled Perch portfolio begins with the same list of candidates, but flips the next two steps. It keeps the half of dividend payers with the lowest P/Es and buys the 20 with the lowest volatilities over the prior 260 days.
The Perch portfolio gained an average of 14.1 per cent annually from the end of 1999 to the end of February, 2024. The Pickled Perch portfolio trailed slightly with average annual returns of 13.7 per cent over the same period. By way of comparison, the overall market, as represented by the S&P/TSX Composite Index, lagged with average annual gains of 6.7 per cent. (The returns herein reflect monthly data from Bloomberg and include dividend reinvestment, but not fund fees, commissions or other trading costs. The portfolios are all equally weighted and rebalanced monthly.)
You can see the growth of both portfolios, and the market index, over the past 24 years (and two months) in the accompanying graph.
The Perch Portfolio was about 9 per cent more volatile than the Pickled Perch portfolio over the period, but the latter provided slightly better risk-adjusted returns as measured by each portfolio’s Sharpe ratio.
The downside experience of both portfolios, along with that of the market index, is highlighted in the second graph, which shows how far they fell from their prior peaks in hard times.
Both portfolios sailed through the internet-fuelled downturn of the early 2000s, which is common for many Canadian dividend portfolios. But investors shouldn’t expect such good fortune to persist, because the portfolios tumbled in the financial crisis of 2008-2009. The Perch portfolio gave up 35 per cent before hitting a low in 2009, and the Pickled Perch portfolio dipped 29 per cent. Both fared better than the market index, which declined 43 per cent to its 2009 low.
The portfolios fared worse than the market in the sudden downturn of 2020, when the COVID-19 pandemic invaded Canada. The Perch portfolio flopped 34 per cent by the end of March, 2020, the Pickled Perch portfolio dropped 32 per cent and the market index slipped 22 per cent.
After climbing to new highs in 2021, the portfolios turned down again when inflation infected the nation and interest rates jumped. The market slipped 14 per cent to hit a low in the fall of 2022, while the Perch portfolio floundered 25 per cent and the Pickled Perch portfolio suffered a 20 per cent decline.
While the market rebounded and hit new highs in recent months, the portfolios have yet to fully recover. But, with a little luck, they’ll return to their sunny ways soon and I’ve high hopes they’ll continue to perform well over the long term.
You can find the stocks in the Perch portfolio via this link, 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 StingyInvestor.com.
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Norman Rothery