Small dividend stocks offer growth, stability

By the Editorial Team · Monday, September 21, 2026

A portfolio of 20 low-volatility, smaller Canadian dividend stocks from the TSX has achieved an average annual return of 14.4% over 27 years, outperforming the broader S&P/TSX Composite Index's 9.1% gain. This strategy not only enhanced returns but also reduced volatility, demonstrating resilience during past market downturns and highlighting its appeal for investors seeking steady growth with lower risk.

A portfolio focused on smaller Canadian dividend stocks with low volatility has delivered strong long-term returns, outperforming the broader Canadian equity market over nearly three decades, according to recent analysis.

The Smaller Stable Dividend portfolio, which invests in 20 low-volatility dividend-paying stocks selected from the midsized segment of the Toronto Stock Exchange (TSX), achieved an average annual return of 14.4 percent over the 27 years ending in August 2026. By comparison, the S&P/TSX Composite Index, representing the broader Canadian market, posted an average annual gain of 9.1 percent during the same period.

The strategy behind the portfolio begins by excluding the 300 largest TSX-listed companies by market capitalization, focusing instead on the 100 next largest stocks. From this subset, dividend-paying companies are identified, reducing the pool to 37 stocks in the most recent review. The portfolio then selects the 20 stocks among them with the lowest price volatility over the prior 260 trading days, maintaining equal weighting and monthly rebalancing.

The stepwise construction of the portfolio reveals key drivers of performance. Simply holding the 100 smaller stocks yielded an average annual return of 10.1 percent, slightly surpassing the market index. Narrowing the focus to dividend payers among these smaller firms increased returns significantly, producing a 13.5 percent average annual gain. The final filter for low-volatility dividend-paying stocks further boosted returns to 14.4 percent annually.

Volatility measures also improved through this filtering process. While the initial smaller stock portfolio showed around 51 percent higher volatility than the final Smaller Stable Dividend portfolio, the smaller dividend stock group had roughly 13 percent greater volatility than the low-volatility dividend portfolio — underscoring the risk mitigating effect of the volatility screen.

Regarding market downturns, the Smaller Stable Dividend portfolio demonstrated resilience during past crises but was not immune to losses. It notably avoided significant declines during the tech-driven market collapse of the early 2000s and outperformed the broader market during the 2008-09 financial crisis, falling 34 percent compared to the index’s 43 percent drop. However, it experienced a more pronounced setback in the rapid market sell-off accompanying the COVID-19 pandemic in 2020, losing 30 percent.

The findings suggest that small-cap dividend stocks with low volatility can provide a balance of growth potential and relative stability for investors over the long term. While recognizing that dividend-focused strategies do not eliminate risk during severe market turbulence, the portfolio’s strong historical performance and lower volatility signal its potential as a viable option for those seeking steady returns in the Canadian equity market.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.