Month: July 2024

This week, I was reading a white paper by one of my mentors, Tom Connolly. He posed an intriguing question: Would you purchase an apartment building if the tenants did not pay rent?

At first glance, the answer is obvious: of course you wouldn’t. But isn’t that what most investors do when buying a stock that doesn’t pay a dividend?

Our strategy focuses exclusively on companies that pay dividends and, even better, those that offer growing dividends. The more income our quality dividend growers produce, the higher another investor is willing to pay. This growing income is the secret sauce in our strategy and what sets us apart.

It might take a few years to see how a growing dividend drives the price forward in your Dividend Growth Investing (DGI) portfolio, but when it eventually happens—and it will—you’ll wonder why it took you so long to figure it out.

As a bonus, this week, we’re offering free subscribers a snapshot of all the trades in our model DGI portfolio since its inception on May 1, 2022. The model portfolio is an example of our strategy and process in action. Although we are only a couple of years into our business plan, the chart clearly shows that, on average, dividend growth (DIV UP %) and price growth (PRICE UP %) are in sync.

Ideally, you will have created a Dividend Growth Investing (DGI) business plan that outlines your objectives and how you are going to deploy your hard-earned capital. Next, you will have a list of companies that meet your investment criteria and will select from this list when they are sensibly priced. Finally, you will be patient and build your portfolio over a few years, as not all quality companies will be sensibly priced at the same time.

Our blog follows this process with our model dividend growth portfolio. Paid subscribers can build their portfolios alongside ours, saving time on research and eliminating much of the emotion of investing. We send alerts for every buy or sell action and conduct quarterly performance reviews to track our progress.

But what if you’re new to the blog, have a lump sum to invest, and want to start quickly? The answer is simple: invest in our All Canadian ‘No-Look’ DGI Portfolio. This portfolio is a streamlined version of ‘The List’ we follow, featuring a diversified selection of the top twenty Canadian stocks, rated for quality by reputable third-party agencies (Value Line and S&P) as of January 2024.

By investing equal amounts in each of these twenty companies, you’re on your way to building a robust DGI portfolio. For more details on how we manage risk and determine when to buy or sell, read the business plan in the premium content section of our site.

                                            All Canadian ‘No-Look’ DGI Portfolio                                                                                                     (As of July 19, 2024)

Weeks like the one we just experienced remind me of the benefits of our dividend growth strategy. As retirees, we invest in quality companies, allowing us to generate income without the need to buy and sell frequently. Our approach is backed by decades of data demonstrating the challenges of timing the market.

Consistently timing the market is impossible. There literally is no human being who can claim that he or she has been successful at that task with any degree of honesty. However, timing the market is not only unachievable, attempting to time the market can lead to poor investment returns.

The next chart, taken from CNBC, gives insights into the impact on a portfolio when an investor misses the 10 days in each decade when the market registers the largest gains.

It’s been a few months since we last reviewed our ‘Timely Ten’ dividend growth stocks. For those new to the blog, these are the ten most undervalued stocks on ‘The List,’ determined by one of our key valuation metrics, dividend yield theory.

This latest update of the ‘Timely Ten’ reveals a fascinating trend: a significant number of companies from ‘The List’ are signalling undervaluation. Fourteen stocks meet the criteria based on dividend yield theory—representing half of the companies on ‘The List.’ Even more encouraging, some of our highest-quality companies are now meeting our threshold, making our investment decisions even more straightforward.

Here’s a recap on how we select our ‘Timely Ten’:

Step three in our process involves monitoring our quality dividend growers regularly, which can become quite challenging depending on the number of companies we track. Fortunately, we rely on ‘The List’ instead of the vast array of stocks in the index, which streamlines our task. Nevertheless, we continually seek methods to enhance our efficiency. Through dividend yield theory, we’ve discovered an approach that has proven remarkably effective in aiding us with our efforts over the years.

Dividend yield theory is a simple and intuitive approach to valuing dividend growth stocks. It suggests that the dividend yield of quality dividend growth stocks tends to revert to the mean over time, assuming that the underlying business model remains stable. In practical terms, if a stock pays a dividend yield above its ten-year average annual yield, its price will likely increase to return the yield to its historical average. Knowing that price and yield go in opposite directions, this theory helps us find stocks poised for a positive price correction.

We have pre-screened our candidates using the criteria we initially laid out in building ‘The List’. This helps us considerably narrow the universe of investable stocks.

1. Dividend growth streak: 10 years or more.
2. Market cap: Minimum one billion dollars.
3. Diversification: Limit of five companies per sector, preferably two per industry.
4. Cyclicality: Exclude REITs and pure-play energy companies due to high cyclicality.

Next, we rank ‘The List’ by how significantly each stock is priced below its fair value (Low Price), as calculated using dividend yield theory. To determine fair value, divide the current dividend by what you consider to be the stock’s historically high yield.

All companies above the thin black line have a current price below fair value (sensibly priced). The stocks above the thick black line make up our ‘Timely Ten’.