15 stocks to help investors ride market swings

The past couple of years were prosperous year for many investors. The S&P 500 delivered a gain of 12% in 2016 and 21.8% in 2017. The S&P/TSX Composite performed admirably as well, with a 21.1% 2016 return followed by 9.1% in 2017. However, when concerning the stock market, what comes up usually must come down. So far this year, we have observed declines of 10.1% and 8.4% for the S&P 500 and S&P/TSX Composite, respectively, in a period of just a few weeks. Stock market corrections are often associated with increased volatility. The VIX Index, which measures stock market implied volatility, saw its largest one-day rise in history last month. The VIX is also used as a general investor fear gauge, so the current higher levels indicate an increased consensus of investor anxiety. Even with recent speculation on VIX index manipulation, a pattern still seems to hold more times than not in which increased levels on the VIX comes with declines in stocks, as so the case with market turmoil in February.

Although equities have recovered somewhat since the dip last month, some experts believe increased volatility won’t be going away anytime soon. This does not necessarily mean investors should stay out of the market. Rewarding stock returns are still possible, albeit the current environment may deliver larger swings in your portfolio. However, if volatility is something you are especially concerned with, you have opportunities to mitigate that risk.

Last year I wrote about how investing in low beta stocks with dividends can help to alleviate undesirable portfolio volatility. Low beta stocks have historically exhibited lower price movement swings than others. These investments can sometimes be on the “boring” side vs. other, trendier and hot-topic stocks. However, boring can be ever more beneficial in times of increased stock market uncertainty, and that protection, can be at least satisfying even if its not exciting.

Today we revisit that strategy and its latest portfolio. The following criteria is used for the strategy’s stock picks:

Expected dividend growth (higher values scored better)
5 year normalized dividend growth (higher values scored better)
Dividend yield of at least 1%
Beta of 0.75 or lower (a value below 1 would indicate the stock is less volatile than the market)

The results

I back-tested the strategy using Morningstar CPMS from February 2007, to February 2018. During this process, a maximum of 15 stocks were purchased and equally weighted with a maximum of four stocks per sector to ensure a degree of diversification. Annually, the portfolio would be replaced with the newest and best stocks based on the strategy’s criteria. Over this period, the strategy produced an annualized total return of 12.7% while the S&P/TSX composite total return index advanced 4.9%. Downside deviation (a measure for volatility of negative returns) for the strategy was 5.3% vs. 9.5% for the S&P/TSX Composite. The lower the downside deviation indicates a lower history of “bad” volatility.

You can find the strategy’s latest 15 stock picks below based on February month-end data.

Rank	Symbol	Company	Sector	5Y Dividend Growth Rate	Yield	Expected Dividend Growth	BETA	Market Cap (in $millions)
1	MFI	Maple Leaf Foods Inc.	Consumer Staples	33.5%	1.6%	18.2%	0.59	$4,109
2	GIL	Gildan Activewear	Consumer Discretionary	28.3%	1.5%	19.8%	0.58	$8,159
3	HWD	Hardwoods Dist. Inc.	Industrials	20.4%	1.5%	16.0%	0.45	$406
4	MRU	Metro Inc.	Consumer Staples	19.2%	1.8%	10.8%	-0.07	$9,218
5	ENB	Enbridge Inc.	Energy	19.0%	6.6%	11.2%	0.74	$69,173
6	CTC.A	Cdn Tire Corp. Ltd.	Consumer Discretionary	17.4%	2.1%	38.5%	0.74	$11,552
7	BIP.UN	Brookfield Inf Partner	Utilities	20.7%	4.6%	8.0%	0.64	$14,274
8	CGO	COGECO Inc.	Consumer Discretionary	15.6%	2.2%	10.6%	0.64	$1,053
9	NFI	New Flyer Industries	Industrials	12.5%	2.3%	15.6%	0.20	$3,587
10	BAM.A	Brookfield Asset Mgmt	Financials	18.0%	1.5%	7.1%	0.67	$49,246
11	CU	Cdn Utilities Ltd., A	Utilities	10.2%	4.6%	10.0%	0.52	$9,188
12	IIP.UN	InterRent REIT	Real Estate	10.1%	2.8%	9.1%	0.59	$806
13	IFC	Intact Financial Corp.	Financials	9.8%	2.8%	9.4%	0.49	$13,815
14	BEP.UN	Brookfield Renewable	Utilities	16.4%	6.2%	6.1%	0.03	$7,151
15	SXP	Supremex Inc.	Materials	15.6%	6.0%	6.1%	0.38	$124

A Word of Warning

The performance results are impressive, but they are based on a back-test, which comes with settings not likely replicated in real-life, such as transacting on closing day prices and no trading fees. Also, the strategy buys stocks for its portfolio then essentially goes to sleep for a year before transacting again. In real-life, you would likely pay regular attention to news on stocks that you own and ensure that conditions of those companies are worthy for investment based on other criteria you find worthy.

As always, past performance (back-tested or real life) may not be indicative of future results. However, I believe these types of investments are good candidates for your portfolio in times of elevated stock market volatility.

Michael Pe, CFA is an Institutional Product Specialist at Morningstar Research Inc.

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About Michael Pe, CFA

As a CFA charterholder with over a decade of experience in the financial industry, Michael writes about the real estate market, personal finance and investing.