This is a low-turnover model, best described as an active investing model rather than a trading model. Rebalance is done weekly for market timing purposes to switch to other asset class types if it increases the risk of severe contraction. The model also verifies weekly if dividends were cut or reduced – if so, it will sell that stock and replace with another high ranked one. The model will sell to lock gains and a full evaluation to be replaced with a higher ranked stock is done at every 6 months. It holds up to 10 stocks and it only contains stocks from TSX (so no Venture Exchange stocks).

In April 2018, this model has been revised to provide a better balance between value, income, quality and momentum.  This model  seeks low valuation by sorting stocks from Toronto Stock Exchanges that pays and has grown dividends. The model employs other techniques to attempt to rule out high yield stocks with poor prospects, or high yield stocks that are very volatile. If a stock typically trades with a certain dividend yield and it now presents a higher yield, then that is one mechanism to identify valuation, specially if such stock doesn’t typically have a volatile behavior. The model also attempt to identify upward momentum to avoid buying a declining stock, and there’s a strong ranking weight towards quality. Since the focus is on dividend income, cyclical resourcing sectors are excluded and the portfolio attempts to have a diversification across different sectors, to achieve better balance and minimize risks.

The stocks are only sold if dividends are cut or reduced, or to lock gains (upwards of 15%) or if they lose momentum, from both price and fiscal perspectives.

This is a mechanical model that chooses what to buy and sell based on a set of rules. Therefore, there will be losing trades from time to time. By no means it reflects a broken strategy. No model can outperform at all times, so it’s paramount to have the proper temperament to stick what a strategy that is aligned to your goals and risk tolerance.

See backtest information below to evaluate how these rules would have worked since 1999:

Model summary, including variable slippage (starting capital was $50,000) and fixed commission of $4.95:

Performance summary:

 

Stats information below, with winners, losers and how long typically these stocks are held for:

 

Below are various risk indicators as well:

 

Since the model typically holds positions for 5 months on average, the following histogram was run, to evaluate how consistently the model would perform if it started at different periods (roling offset was set to 1 week, while the performance period was set to 5 months); below is the histogram excess performance when compared to the benchmark (TSX):

 

And below is the same histogram, but showing the actual model portfolio performance, instead of the excess when compared to the benchmark (TSX);

TSX performs better during recovery periods (after crashes), but it’s more volatile, and not meant for income; this portfolio performs more steadily while focusing on dividend and quality.

The first screening criteria is to identify the biggest companies in TSX as per market cap. Then it narrows down the Universe of companies according to liquidity (via float turnover) and domicile (must be Canadian or have TSX as the primary Exchange).

The next screening criteria (buying rule) excludes stocks from cyclical resourcing sectors.

Then the next screening rule trims down the initial list so that only the top 20% least volatile remains in the list. This is to support the logic of having high yield as a form of valuation, if the stock is typically not volatile and historically has traded at a lower yield.

Then the model filters the list further by only keeping the stocks with upward momentum and the ones with highest dividend yield.

A final list is then compiled by selecting the top companies of each sector. To avoid sector concentration, the model will allow only up to 3 stocks from the same sector.

The model verifies weekly if any holding had their dividends reduced or cut – if so, the stock is sold and the process above repeats to find the next one. Otherwise, holdings are evaluated after being held for 6 months, or if after gains were locked. That evaluation continues weekly (to either determine if there are profits to be locked or if it’s been 6 months that the purchase was made), and it would be replaced only if a higher ranked stock is found.

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Performance Info:

 

(last updated on April 21, 2024)

 

 

 

 

 

 

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