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A shockingly good track record: Norman Rothery's portfolio of dividend momentum stocks

Norman Rothery, PhD, CFA, is the founder of

It's almost time to unleash the wee ghouls and goblins, with plastic jack-o'-lanterns in hand, to scour the neighbourhood for chips and candy. It's an odd ritual when you think about it.

But the treasure it generates pales in comparison to what might be provided by the thing that recently broke free from the sealed-off ruins of the Strategy Lab. It was hiding among the beakers and test tubes of John Heinzl's well-worn apparatus and burst forth in the form of an entirely sensible portfolio of dividend growth stocks.

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John's new portfolio is best suited to an unusual class of peculiar investors with conservative natures who love to collect dividends and watch them grow over time. That is, it's a good option for sensible souls.

But if investing in solid stocks bores you to tears and you're willing to take on more risk for the slim possibility of gigantic rewards then I might have the just thing for you.

Step right up and clamber aboard my mechanical monster momentum portfolio before it lifts off and takes to the skies.

It holds an equal amount of 10 Canadian stocks that may prove to have the right stuff. If you're keen on spoilers, you can examine the list in the accompanying table. (I happen to own a few of the stocks myself.)

The method behind the madness starts by taking a page from Mr. Heinzl's lab book. It sticks to dividend payers and to Canadian dividend stocks in particular. It then focuses in on the largest 200 companies in the land by revenue. It buffs itself up by avoiding stocks with weak and flabby dividend yields while ignoring those with extremely high ones.

But the radioactive fuel that really powers the mechanism comes from momentum. Only firms that have seen their stocks rise from the market's depths to break through the surface and rocket higher get a place in the portfolio. The idea being that they'll continue their upward trajectory for months to come.

While the mechanical monster wouldn't be complete without a few smaller gears and sparking electronics thrown in for good measure, at its heart it is a dividend-momentum machine.

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The approach has a shockingly good track record – at least in theory.

A recent back-test of it was so spectacular that it elicited a spate of gleeful cackling from the ghost of Vincent Price, or something that sounded eerily similar.

I'm a little loath to mention the exact figure, but the back-test pointed to average annual returns of just a touch over 20 per cent from the start of 2000 through to the end of 2016.

While the returns should be more than sufficient to pique one's interest, only a mad man would expect such gains to persist without diminution in the future. More modest gains should be expected from the approach.

The monster portfolio sports an average dividend yield of 4 per cent. Chorus Aviation (CHR) has the highest yield of its holdings at 5.41 per cent while New Flyer (NFI) generates the lowest yield at 2.41 per cent.

All 10 stocks gained 39 per cent or more over the past year. AGF Management (AGF.B) fared the best with returns of 66.2 per cent. The money manager raked in $439-million in revenue over the last four quarters, which makes it the smallest of the bunch on this measure. Wajax (WJX) has the smallest market capitalization (share price times shares outstanding) at $451-million.

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The mechanical monster is an unusual dividend portfolio to be sure.

But it has the fuel necessary for it to fly sky high. Mind you, it could also slam into a zombie-infested graveyard leaving wreckage and radioactive waste in its wake. Either way, the ride should be an entertaining one. But don't say I didn't warn you.

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