The Bank of Canada lowered its policy rate by a quarter-point to 2.5 per cent last week. Such reductions are usually followed – with alacrity – by similar cuts to the rates offered by the big banks.
Before the BoC rate cut was announced, most of the big banks paid 2.3 per cent on Canadian deposits in their “A” series of investment savings accounts. A cut of a quarter-point would push the rate closer to 2.05 per cent, and some banks have already made the move.
Lower rates are bad enough, but interest income is also fully taxable (outside RRSPs and the like), which can be particularly painful for those in higher tax brackets.
Investors who are willing and able to take on more risk might look instead to Canadian dividend stocks for better returns. The Stable Dividend portfolio offers a good starting point for investors migrating away from savings accounts thanks to its focus on low-volatility dividend payers.
The portfolio fared well over the long term, with average annual returns of 14.1 per cent from the end of 1999 through to the end of August, 2025. In comparison, the Canadian stock market (as represented by the S&P/TSX Composite Index) climbed by an average of 7.7 per cent annually over the same period. (The returns herein are based on backtests using data from Bloomberg taken at the end of each month. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly.)
The Stable Dividend portfolio starts its search of steady stocks with the 300 largest on the Toronto Stock Exchange (TSX) by market capitalization. It then narrows in on dividend-paying stocks, which currently represent 200 of the largest 300. As a final step, it buys an equal amount of the 20 stocks with the lowest volatilities over the prior 260 days. The portfolio is subsequently updated monthly, but annual updating also worked well.
The portfolio currently sports an average dividend yield of 3.9 per cent, and you can examine its long-term track record in the accompanying graph along with that of the market index.
The graph also includes two variations of the Stable Dividend portfolio that are similar to the original but pick low-volatility dividend stocks from the largest 100 or 200 stocks on the TSX rather than the largest 300.
Both of the variants outperformed the market index but trailed the original portfolio. The 100-stock and 200-stock variants gained an annual average of 12.1 per cent and 13.3 per cent, respectively, over the period from the end of 1999 to the end of August, 2025.
The return reduction is a little disappointing but not entirely unexpected because the very largest stocks tend to lag smaller stocks over the long term – with some notable exceptions. The returns of the two variants were also a bit more volatile than those of the original portfolio.
The second graph highlights the downside experience of the Stable Dividend portfolio along with those of the 100-stock variant and the market index. The 200-stock variant was excluded to avoid cluttering up the graph, but its downside performance was generally a touch better than that of the 100-stock variant and a little worse than that of the regular portfolio.
The biggest decline for the portfolios occurred during the financial crisis of 2008-2009, when the market index plunged 43 per cent. The Stable Dividend portfolio gave up 22 per cent during the crash, while the 100-stock and 200-stock variants fell 30 per cent and 23 per cent, respectively.
Despite faring better than the market over the long term, the Stable Dividend portfolio’s sharp decline may have been too much for some risk-averse investors, and a future crash may be even worse.
On the other hand, many of the stocks in the portfolio have strong dividend growth records, and the portfolio’s returns have been quite satisfactory since the turn of the century. Hopefully, fortune will continue to favour it over the next 25 years.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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