Month: July 2025

Intro

The only time price matters is when we buy and when we sell.

One of the things I enjoy most about writing my own blog is that it often leads to conversations with other seasoned investors. Because I do things a bit differently, I frequently find myself explaining what I do and why I’m so passionate about dividend growth investing (DGI).

Sometimes that passion can come across as a belief that DGI is the only valid approach. While I’ve used several different strategies over the years, I keep returning to DGI because, outside of index investing, it is one of the simplest and most passive strategies to learn. It also offers the satisfaction of active participation in the stock market, allowing investors to benefit from long-term market growth while keeping things straightforward. Even better, it has the potential to outperform the indexes on a total return basis, which many active strategies struggle to achieve.

As I explained to a seasoned retail investor last week, DGI is ultimately about growing your dividend income over time. While quality companies in our portfolios often appreciate in value, capital gains are not our primary focus. I know this may sound counterintuitive, especially if you’ve been taught that stock investing is all about price appreciation. I could tell the gentleman I was speaking with found this perspective a bit confusing.

But here is the key: if your dividend income continues to grow, it will not be long before your yield on cost (dividend return) surpasses the historical total returns of the broader market. Capital appreciation becomes the bonus, not the goal.

With dividend growth investing, our income increases every year, often by 7 to 10 percent, simply by holding high-quality companies. Over time, this compounding effect becomes substantial. The challenge for most investors is not the strategy itself; it is behavior. Many lack the patience to let the process play out or they sell out during periods of volatility.

Another common mistake is shifting to fixed-income products with age. These may seem safer, but their returns are often eroded by taxes and inflation, which can ultimately diminish purchasing power.

Knowing that we are often our own worst enemy when it comes to investing, I focus my coaching on timelines of a decade or less. If you are unable to commit to and follow a ten-year plan, you may want to reconsider managing your own investments.

The chart below, our 7 x 10 Test, illustrates how long it takes for the dividend yields of our quality companies to reach 7 percent, a figure that happens to match the historical annualized return of the stock market over the past 25 years.

Intro

Every month, our Timely Ten post draws hundreds of readers, and for good reason. It highlights the most undervalued dividend growth stocks from our carefully curated watchlists, often pointing to some of the best long-term opportunities on the market. In this update, I’m spotlighting two past standouts: one Canadian and one American. We added both to our model portfolios after they appeared in the Timely Ten, and each has since delivered impressive returns.

Keeping with our incremental buying strategy in downward trending markets, we added Toronto Dominion Bank (TD-T) to our Canadian model portfolio on four separate occasions over the past three years. At the time of each purchase, the dividend yields were 4.5%, 4.93%, 5.18%, and 5.38%, all well above the stock’s ten-year historical average of 4.02%.

Since then, TD’s share price has climbed significantly, and the current yield has returned closer to its long-term average. Our total price return on the position is now approaching 30%, with our growth yield (yield on cost) now well above 5% and still growing.

Intro

John Bogle, founder of Vanguard and a pioneer of index investing, left behind a remarkably simple formula for understanding long-term stock market returns:

Total Return = Investment Return + Speculative Return

This equation helps investors separate what truly drives long-term wealth from what merely adds short-term noise.

Investment Return is the foundation. It consists of two measurable components:

• Earnings growth: the rate at which a company’s profits increase.
• Dividend yield: the income paid out to shareholders based on the current price.

This is the part of the equation that reflects actual business performance. If a company grows earnings at 6% per year and pays a 3% dividend, the investment return is 9%. It’s based on productivity, not prediction.

Speculative Return, on the other hand, comes from changes in valuation—specifically, how much investors are willing to pay for a dollar of earnings. If a stock’s price-to-earnings (P/E) ratio rises, the share price can climb even if the business itself hasn’t improved. But if the P/E contracts, it can drag returns down despite strong fundamentals.

Bogle warned investors not to rely on this speculative component. It’s fickle and often mean-reverting over time.

This framework maps perfectly onto dividend growth investing (DGI). As dividend growth investors, we focus almost entirely on the investment return side of the equation. We look for high-quality companies with consistent earnings and a track record of increasing dividends. We care less about what the market might pay tomorrow and more about what the business is producing today.

The best part? Dividend growth and earnings growth are often tightly linked. A company can’t raise its dividend for 10, 20, or 30 consecutive years unless its profits are also growing.

Even during periods when valuations compress and speculative return turns negative, our dividends continue. And by reinvesting those dividends, we acquire more shares at lower prices—compounding our future income even faster.

That’s what makes DGI so powerful: it’s not reliant on market timing, headlines, or sentiment. It’s grounded in fundamentals and powered by time.

Bogle’s formula reminds us that we don’t need to predict the market to succeed. We just need to focus on what we can control—buying great businesses at reasonable valuations and letting compounding do the heavy lifting.