Month: September 2024

The bid for Carrefour was ultimately dropped after strong opposition from the French government, which cited the need to “preserve the country’s food security and sovereignty.” Despite this setback, Couche-Tard’s stock more than doubled in value afterward.

The key takeaway is that while we can’t predict the future, investing in quality dividend growers that meet our valuation criteria increases the probability of long-term success. By staying patient and focusing on quality and value, we increase the probability of successful investment outcomes.

Many of the remaining ‘Timely Ten’ have been regulars on the list this year, indicating that their challenges might take longer to resolve. This reinforces our commitment to continuously monitoring all companies on ‘The List,’ as we aim to avoid tying up capital for extended periods in favour of seizing better opportunities in quality companies that have temporarily fallen out of favour.

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

Although the sample size is small, with only seven trades, the data offers several key takeaways that should inspire confidence in those new to our strategy and process.

First, both our dividends and capital have seen remarkable growth. On average, our dividend income has surged by 122%, while our capital has appreciated by 89%. Notably, two of the five stocks in our portfolio have earned a place in the exclusive “double-double” club, and the overall portfolio is nearing this milestone. A company qualifies for our “double-double” club when both its income and capital have doubled from the original investment.

Second, our dividend return has reached 7.37% on the original capital invested over a decade ago—and it’s still growing. This means we’re now outperforming the historical average return of the stock market (~7%) based on dividends alone.

Lastly, we’ve achieved all this despite the price of one of our key holdings, Bell Canada, remaining relatively flat during this period.

As Ben Graham wisely said, I believe we’ve “…put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

As of July 31, 2024, we have invested $79,162 of our initial capital according to our model portfolio business plan. Our annual income now stands at $3,094, resulting in a current portfolio yield of 3.9% and growing ($3,094 divided by $79,162). Our yield will eventually surpass what can be earned from other fixed-income investments thanks to dividend growth, but there’s another component to our strategy that fixed-income alternatives lack: capital growth.

While we have predictability of income growth with our DGI strategy, capital growth is driven by market forces—requiring patience. As dividends increase, the share price typically follows suit over time. We are starting to see this correlation in our model portfolio. Our portfolio value has now increased to $89,957 (including dividends and dividend reinvestment).

Over the past decade, Fortis Inc.’s stock price has shown a strong correlation with its Normal P/E Ratio. Historically, purchasing shares when the price falls below this Normal P/E Ratio has proven to be a sound investment strategy, particularly for those with a long-term investment horizon.

When using the Forecasting feature in FASTgraphs, it’s essential to choose the appropriate forecasting method. Given the historical correlation between Fortis’s price and its Normal P/E Ratio, we opt for the Normal Multiple method to guide our projections.

Forecast