A portfolio that plays it safe

What are we looking for?

Safety, in a word. Given the neck-wrenching ups and downs of the market in recent months, we went hunting for the best Canadian stocks for conservative investors.

More about today's screen

This is an update of a screen we ran on Jan. 24. It's designed to find stocks that aren't volatile and aren't expensive, but have consistent earnings and a decent, sustainable dividend.

Craig McGee, a senior consultant with Morningstar CPMS, used multiple criteria to search for the top conservative picks among about 200 Canadian large and mid-cap stocks.

To make the list, a stock must have low beta (meaning it is less volatile than most); low earnings volatility or variability; a low price-to-earnings ratio (it also must be positive); a low price-to-book value per share; a favourable trend for earnings revisions in the past three months and positive earnings surprises. It also must have a dividend yield above 1 per cent and a dividend payout ratio less than 80 per cent.

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What did we find out?

Since Jan. 24, an equal weighted portfolio of conservative picks provided a total return of 0.8 per cent while the S&P/TSX composite had a return of minus 10.1 per cent over the same period.

As the table shows, investors in many of the more stable, income-generating companies were rewarded as investors fled risky securities. But not all of our conservative picks fared so well and some suffered significant losses.

The disparate results demonstrate that even conservative stocks are not immune to liberal losses. To reduce risk, safety-seeking investors should not only focus on stable stocks but diversify widely.

Disclosure: I own shares of Emera, Fairfax and TransCanada.