Like a championship sports team, a well-constructed investment portfolio contains more than one type of stock. For example, if you love investing in dividend stocks, it’s not enough to own 10 large caps that provide a minimum yield and are consistently growing their dividends.
You want to spread the love beyond Royal Bank of Canada (TSX:RY)(NYSE:RY) and other Canadian bank stocks — although an investment in the Big Five over the past 10 years delivered wonderful results — to companies with smaller market capitalizations.
I’ve always found that a good way to create a championship-calibre portfolio is through the use of an all-cap selection process, where you allocate an equal weighting in large-cap, mid-cap, small-cap, and micro-cap stocks.
When and how you rebalance and reconstitute is up to you.
Almost two years later
In May 2016, I’d picked four stocks as part of a miniature all-cap portfolio; I haven’t rebalanced or reconstituted the portfolio since. The performance suggests that the team concept works equally as well with stocks as it does with athletes.
Total return — May 27, 2016, to March 21, 2018
| Market Cap | Company | % Return |
| Large Cap | Brookfield Asset Management Inc.
(TSX:BAM.A)(NYSE:BAM) |
16.5% |
| Mid Cap | Alaris Royalty Corp.
(TSX:AD) |
-29.8% |
| Small Cap | DHX Media Ltd.
(TSX:DHX.B)(NASDAQ:DHXM) |
-35.1% |
| Micro Cap | Canopy Growth Corp.
(TSX:WEED) |
1,198% |
Source: Yahoo Finance
If you’d invested $1,000 in each of these stocks, today you’d have $14,496 — an annualized total return of 90.4%.
However, because I recognized the risk involved in allocating an equal weighting to Canopy, I’d suggested 40% go into Brookfield, 30% into Alaris, 20% into DHX, and 10% into Canopy.
Under this suggested allocation, the all-cap portfolio has delivered an annualized total return of 41.6% — still outstanding, but not quite as impressive.
The all-cap portfolio illustrates how you can generate outstanding returns by diversifying beyond the usual large-cap dividend stocks. Except for Canopy, all pay dividends.
All-cap dividend stocks
Like last time, I’m going to recommend four stocks, one for each market cap that I think will do well over the next two years; three of which pay dividends.
Keep in mind, these are stocks I’m familiar with; I’m not going to give you a lot of information to go on, so you’ll want to do your own due diligence.
Large-cap stock
I’d love to go with Brookfield again, because it’s one of my favourite TSX stocks, but it’s only right that I recommend a new batch for the ultimate all-cap dividend stock portfolio.
Restricting my large-cap selection to stocks with a market cap of $20 billion or more, I’ll go with Alimentation Couche-Tard Inc. (TSX:ATD.B) — what I consider to be one of the five best TSX stocks; Brookfield is another.
Couche-Tard stock is getting walloped at the moment as a result of soft sales in its U.S. stores. That’s great news if you want to buy its stock for less. It will recover.
Mid-cap stock
It’s one of Canada’s tech darlings, but it was the recent hiring of Amy Shapero as CFO by Shopify Inc. (TSX:SHOP)(NYSE:SHOP) that’s got me excited about the e-commerce platform’s next leg up.
Shopify’s success is critical to Canada’s tech sector continuing to grow. If it fails, much like a couple of high-profile flame-outs before it, tech in this country will fail to take off.
It won’t fail.
Small-cap stock
This one isn’t going to deliver WEED-like growth over the next two years, but since Couche-Tard doesn’t pay a big dividend, I thought I’d include a pick that does.
Rogers Sugar Inc. (TSX:RSI), which sells sugar under the Rogers and Lantic brand names, currently yields 5.7%. In November, the company acquired one of Canada’s biggest producers of maple syrup for $160 million, providing it with a growth vehicle for a future with less sugar in it.
This is an income investor’s dream stock.
Micro-cap stock
Finally, I saw an article in the Globe and Mail that reminded me that good things come in small packages. Two years ago, I’d recommended Brick Brewing Co. Limited (TSX:BRB) when it was just over $2.
It’s upgrading its can line in 2018. The $3.5 million investment will double its canning capacity to 400,000 hectoliters per year, which should add to the top and bottom lines.
