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After being stuffed with turkey, the country is ready for the most spooktacular time of year. Yes, Halloween is nearly upon us when wee ghosts and goblins roam the streets searching for sweets.

While chocolates and candy are treats at any age, investors can nibble on my homage to the Monster Mash, which brings together dividend investing and momentum investing. It starts with Canadian dividend stocks that are loved by income investors and bolts on momentum electrodes to power the Dividend Monster portfolio.

Building the portfolio begins with the largest 300 stocks in the land, by market capitalization, that have their primary listing on the TSX.

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The Dividend Monster Portfolio

1-year

total rtrn.

Name

Price

Yield

Algonquin Power (AQN)

$18.00

4.16%

46.12%

ATCO (ACO.X)

49.32

3.28

40.11

Canadian Utilities (CU)

39.40

4.29

35.54

Caribbean Utilities (CUP.U)

22.33

4.18

39.99

Emera (EMA)

58.37

4.20

55.32

First National Financial (FN)

39.14

4.85

56.51

Fortis (FTS)

56.78

3.37

41.65

Genworth MI Canada (MIC)

52.55

3.88

38.89

Innergex Renew. En. (INE)

16.09

4.35

37.15

TransAlta Renew. (RNW)

13.89

6.77

35.19

THE GLOBE AND MAIL, Souce: Bloomberg,

Oct. 7, 2019

The Dividend Monster Portfolio

1-year

total rtrn.

Name

Price

Yield

Algonquin Power (AQN)

$18.00

4.16%

46.12%

ATCO (ACO.X)

49.32

3.28

40.11

Canadian Utilities (CU)

39.40

4.29

35.54

Caribbean Utilities (CUP.U)

22.33

4.18

39.99

Emera (EMA)

58.37

4.20

55.32

First National Financial (FN)

39.14

4.85

56.51

Fortis (FTS)

56.78

3.37

41.65

Genworth MI Canada (MIC)

52.55

3.88

38.89

Innergex Renew. Energy (INE)

16.09

4.35

37.15

TransAlta Renewables (RNW)

13.89

6.77

35.19

THE GLOBE AND MAIL, Souce: Bloomberg, Oct. 7, 2019

The Dividend Monster Portfolio

Name

Price

Yield

1-year total return

Algonquin Power (AQN)

$18.00

4.16%

46.12%

ATCO (ACO.X)

49.32

3.28

40.11

Canadian Utilities (CU)

39.40

4.29

35.54

Caribbean Utilities (CUP.U)

22.33

4.18

39.99

Emera (EMA)

58.37

4.20

55.32

First National Financial (FN)

39.14

4.85

56.51

Fortis (FTS)

56.78

3.37

41.65

Genworth MI Canada (MIC)

52.55

3.88

38.89

Innergex Renewable Energy (INE)

16.09

4.35

37.15

TransAlta Renewables (RNW)

13.89

6.77

35.19

THE GLOBE AND MAIL, Souce: Bloomberg, Oct. 7, 2019

The list is similar to the old TSE 300 index, which was transformed into the S&P/TSX Composite index in the early part of the century.

Taken together, the 300 stocks form the market portfolio, which provides a benchmark when weighted by market capitalization like an index. The market portfolio gained an average of 8.9 per cent annually over the 20 years through to the end of September. (All of the returns herein include dividend reinvestment, but do not include commissions, fees or other trading frictions. The portfolios are rebalanced monthly.)

A dividend portfolio is then formed by picking stocks in the market portfolio that pay dividends to investors. It follows roughly 200 of the 300 stocks and gained an average of 9.8 per cent annually over the 20 years, when it was weighted by market capitalization. (That is, when it put more of its money into larger stocks and less into smaller stocks.) If the dividend portfolio bought an equal dollar amount of each dividend stock, and rebalanced monthly, it would have gained an average of 10.8 per cent annually.

But income investors love stocks that pay generous dividend yields. The high-yield portfolio splits the dividend portfolio in half by yield, and keeps the stocks with the highest yields. It gained an average of 11.7 per cent over the 20 years to the end of September, assuming an equal amount of money was put into each stock.

It’s worth pointing out that the dividend portfolios fared quite well over the period. They likely benefited from the declining interest rate environment of the past few decades.

The next step might be frightening to many dividend investors because I’m about to mash momentum into the mix. Momentum investors look for stocks on the upswing with the expectation they will continue to rise.

It’s an active strategy that has worked well over the long term.

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The Dividend Monster portfolio looks through the high-yield portfolio and invests an equal amount of money in the 10 stocks with the highest returns over the prior year. It gained an average of 17.7 per cent annually over the 20 years through to the end of September, according to Bloomberg’s back-testing facility. That’s a monstrously good result.

You can see the return history in detail in the accompanying graph, which includes the returns of the market portfolio for comparison.

It is important to know that momentum strategies can suffer from nasty reversals. You can see the impact of one big reversal in the return graph because the Dividend Monster portfolio gave up 51 per cent in the 2008 crash. Many investors would have bailed on the strategy in the face of such a huge decline.

The approach also requires a level of activity that would not be appreciated by many dividend investors because it assumes the portfolio is updated monthly. In addition, trading frictions would reduce the method’s returns in practice.

That said, you can examine the 10 stocks that currently make up the monster portfolio in the accompanying table.

With a bit of luck, the strategy will continue to do well and prove to be a graveyard smash.

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Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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