Month: May 2025

Intro

Later this week, I’ll be sharing our quarterly review summary for both the Canadian and American model portfolios.

One of the key themes we’ve emphasized this year is how our dividend growth companies tend to outperform the broader indexes during times of uncertainty and volatility. That’s no accident—it’s the result of a disciplined process that starts with quality.

When markets get rocky, investors often rush back to the kinds of companies we’ve been holding all along. Another cornerstone of our strategy is patience. By staying the course and focusing on fundamentals, we’ve been able to grow both our income and capital—even in turbulent times.

TD Bank reported strong Q1 earnings this past week, and I wanted to highlight it as a great example of the value of patience and conviction in quality businesses. We added to our position in TD over the past couple of years—through the money laundering investigation, the failed First Horizon bid, and the recent trade war. Despite the noise, the fundamentals remained intact, and year-to-date the stock is up ~ 21%. The recent earnings beat was followed by several analyst upgrades, reinforcing our long-term thesis.

The following colours/lines on the FASTgraphs charts shown below represent: 

Black line: Price

Yellow line: Dividend Payout Ratio

Orange line: Graham average of usually 15 P/E (price/earnings) for most stocks

Blue line: Normal P/E

Dashed or dotted lines: Estimates only

Green area: Earnings

Green dots: Purchases

Intro

All ten names from last month’s Timely Ten (CDN) list remain undervalued, but there’s been notable movement within the ranks. CTC.A has slipped down the list, while ATD and GSY have moved up. Whether CTC.A can maintain its momentum is something to watch. ATD continues to be weighed down by uncertainty around its pursuit of Seven & i (owner of 7-Eleven), and GSY recently posted an earnings miss. Meanwhile, the market is beginning to recognize the value in CCL.B and TD — both may graduate off the list soon.

The headline change in our Timely Ten (USA) list is UnitedHealth, which jumped from 19th to 1st. The stock tanked after the U.S. Department of Justice launched a Medicare fraud investigation, alleging that UNH overstated patient diagnoses to bill Medicare more. Shortly after, the company withdrew guidance and unexpectedly announced a new CEO on May 13.

With several notable shifts this month, both lists present compelling starting points for further research. Each stock has already passed our rigorous screening process, so much of the heavy lifting has been done. If you’d like to follow along more closely or invest alongside us in our model portfolios, consider subscribing to our paid service.

Timely Ten

Below are the ten most undervalued dividend growth companies (according to dividend yield theory) from our Canadian and American watchlists, based on last Friday’s closing prices.

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 favourable price correction.

We have pre-screened our candidates using the criteria we initially laid out in building our watchlists. 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 our Canadian and American watchlists based on how far each stock’s price is below its fair value (Low Price), as determined by dividend yield theory. To find fair value, divide the current dividend (Dividend) by the stock’s historical high yield (High Yield).

Since price and yield move in opposite directions, a lower price results in a higher yield, and vice versa. The ten companies above the thick black line have a current price (Price) below fair value (Low Price). Put simply, these stocks have a current dividend yield higher than their historically high yield. According to dividend yield theory, these companies are sensibly priced and have the highest probability of a price increase in the shorter term. These are our ‘Timely Ten.’

Intro

In a blog post last November titled When a Stock Fails to Raise Its Dividend, we discussed the steps investors should consider when a company pauses or reduces its dividend, highlighting Bell Canada’s decision at the time to freeze its dividend. Last week, the situation escalated, as Bell Canada announced a substantial 56% dividend cut.

Here’s the statement from BCE’s Q1 2025 earnings report:

“There are a number of significant changes in our economic and operating environments that have occurred since the Fall of 2024 that we need to address. We have made the appropriate decision to adjust our annualized dividend to $1.75 per common share to strengthen our balance sheet while maintaining flexibility in the context of economic uncertainty.

Today we also announced a major strategic partnership with Public Sector Pension Investment Board (PSP Investments), one of Canada’s largest pension investors, to accelerate the development of fibre infrastructure through Ziply Fiber in underserved markets in the United States. PSP Investments will potentially commit in excess of US$ 1.5 billion, enabling us to support our U.S. fibre growth strategy in a cost-efficient manner, while optimizing our balance sheet and improving our free cash flow profile.

As we look ahead to the rest of 2025, we will be focused on disciplined execution and continuing to strengthen the balance sheet. We will remain resilient in a challenging environment to deliver for our customers and shareholders.”

The announcement has sparked an important question in our model portfolio: What should we do with our existing position in BCE-T—sell, hold, or buy more?

In my early years of dividend growth investing, I faced similar situations. Each time, I chose to hold the shares. They eventually recovered—but in one case it took five years, and in the other, two. In both cases I could have made more by selling and investing in a quality company that was growing its dividend.

As noted in the blog post above, we ask ourselves two key questions whenever a company freezes or cuts its dividend:

1. Has the company’s long-term earnings power been impaired?
2. Are there more attractive opportunities elsewhere?

Last fall, we gave Bell Canada the benefit of the doubt and held our shares, hoping for a potential turnaround. However, after reviewing the latest earnings report—marked by confusing signals and a noticeably cautious tone from management—we now have a clear answer to both of our guiding questions: it’s a resounding yes.

Intro

I’m currently preparing the quarterly review of our model portfolios as of April 30, 2025, with the full report set to be released to paid subscribers in the coming weeks. Our fiscal year runs from May 1 to April 30. Just completing its third year, the Canadian model portfolio is beginning to show the compounding effects of wealth building. While the U.S. portfolio is only two years old, it benefited from a well-timed launch during a market upswing, resulting in stronger capital appreciation. More details on overall performance will be shared soon.

One of the most meaningful highlights in each review is the list of companies that raised their dividends during the quarter—a testament to the steady and dependable income growth that anchors our investment strategy. Here’s a sneak peek at the latest dividend growth activity in our Canadian portfolio:

Thirteen companies in the portfolio announced dividend increases this quarter:

Thomson Reuters (TRI-N) .54 to .595 up 10.2% payable March 10, 2025

Magna (MGA-N) .475 to .485 up 2.1% payable March 14, 2025

Manulife Financial (MFC-T) .40 to .44 up 10% payable March 19, 2025

Intact Financial (IFC-T) 1.21 to 1.33 up 9.9% payable March 31, 2025

CCL Industries Inc. (CCL-B-T) .29 to .32 up 10.3% payable March 31, 2025

Toromont Industries (TIH-T) .48 to .52 up 8.3% payable April 4, 2025

goeasy Ltd. (GSY-T) 1.17 to 1.46 up 24.8% payable April 11, 2025

Stantec Inc. (STN-T) .21 to .225 up 7.1% payable April 15, 2025

Stella-Jones Inc. (SJ-T) .28 to .31 up 10.7% payable April 18, 2025

TC Energy (TRP-T) .8225 to .85 up 3.3% payable April 30, 2025

Dollarama Inc. (DOL-T) .092 to .1058 up 15.0% payable May 9, 2025

Enghouse Systems (ENGH-T) .26 to .30 up 15.4% payable May 30, 2025

Loblaw Companies Limited (L-T) .513 to .5643 up 10.0% payable July 1, 2025

Dividend growth itself is a magical thing—it puts more money directly into your pocket, letting you spend more on the things you love. But the true magic happens when dividend growth drives the stock price higher. As dividends rise consistently, stock prices tend to follow suit over time.