Last updated by BM on May 22, 2023
Summary
- This is a weekly installment of our MP Market Review series, which provides updates on the financial markets and Canadian dividend growth companies we monitor on ‘The List’.
- Last week, ‘The List’ was down slightly with a YTD price return of +7.0% (capital). Dividend growth remained the same and is now at +8.4% YTD, highlighting growth in income over the past year.
- Last week, no dividend increases from companies on ‘The List’.
- Last week, no earnings reports from companies on ‘The List’.
- Two companies on ‘The List’ are due to report earnings this week.
- If you’re interested in creating your own dividend growth income portfolio, consider subscribing to our premium service, which grants you access to the MP Wealth-Builder Model Portfolio (CDN) and exclusive subscriber-only content. Learn More
Introduction
“You have a pair of pants. In the left pocket, you have $100. You take $1 out of the left pocket and put it in the right pocket. You now have $101. There is no diminution of dollars in your left pocket. That is one magic pair of pants.”
This ‘magic pants’ analogy was from a Seeking Alpha article on dividend investing I read about a decade ago and was one of the catalysts for me to take a closer look at this type of investing and see if it truly was magical.
After conducting additional research, I have shifted towards utilizing a dividend growth investing (DGI) strategy as my primary investment approach. While I maintain portfolios consisting of high-quality dividend growers from both the United States and Canada, I have opted to concentrate on Canadian (CDN) dividend growth companies in this blog. This is due to several reasons, including a smaller pool of DGI companies to track, a lack of coverage for the DGI strategy by the North American investment media, and a tendency for those who do cover DGI to narrowly focus on only a handful of sectors (Energy and Financials).
While ‘The List’ is not a portfolio in itself, it serves as an excellent initial reference for individuals seeking to diversify their investments and attain higher returns in the Canadian stock market. Through our blog, we provide weekly updates on ‘The List’ and offer valuable perspectives and real-life examples of the dividend growth investing strategy in practice. This helps readers gain a deeper understanding of how to implement and benefit from this investment approach.
DGI Thoughts
“Your money is like a bar of soap – the more you handle it, the less you’ll have.”
– Eugene Fama, Famous Economist
At the end of April, we completed our first fiscal year managing our MP Wealth-Builder Model Portfolio (CDN) according to our Business Plan. Here are the quality companies we purchased during the year and their dividends and prices as of April 30, 2023. The portfolio is off to a good start as we purchased a number of quality companies at sensible prices.
Here are a few notable points to consider when reviewing the transactions. Firstly, it is worth mentioning that we successfully attained our targeted average initial yield of 3% and annualized total return of 10%, as projected in our Business Plan. This accomplishment is particularly noteworthy considering that numerous ETFs and Mutual Funds experienced negative total returns during the same time period. Secondly, take note of the three trades we executed for Franco Nevada. Each time the price experienced a significant decline, we capitalized on the opportunity to increase our holdings. Ultimately, all three trades have proven to be fruitful. Our confidence in the process empowered us to buy more as the price declined. Lastly, it is important to observe the frequency of our trading activities. Despite not engaging in active trading, we have managed to achieve success. Our bar of soap hasn’t been handled much with only fourteen trades over the past twelve months!
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Recent News
Searching for the sweet spot of yield and dividend growth (Gobe & Mail)
The author talks about how to estimate returns for dividend growth stocks.
“Specifically, the equation holds that a stock’s annual return should equal the current dividend yield plus the dividend growth rate. For example, a stock that yields 6 per cent, and whose dividend grows at 4 per cent annually, should theoretically return 10 per cent annually, assuming all dividends are reinvested in additional shares.”
The problem with this simplistic equation is that it does not take into consideration the ‘quality’ of the dividend growth stock or its current valuation. We use several quality indicators to screen for our investment candidates not just yield and growth. When it comes to valuation, we also want to be sure we are only buying at a sensible price as we have found that this affects future returns the most.
John Bogle, the founder of the Vanguard Group, has an alternative methodology for estimating future returns. What we like about Bogle’s formula is that it backtests well and seems to align with the dividend growth stocks we invest in.
Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio
Bogle calls the first two components, Yield + Growth, investment aspects of the investment return and the last component, +/- Change in P/E Ratio, the speculative return – what people will pay for a dollar’s worth of earnings.
To learn more about Bogle’s formula, see our article, ‘Estimating Future Returns’.
Cash is king. Here’s why we should resist its allure (Globe & Mail)
Although the last year has been difficult for many investors, dividend growth investors that follow our process have thrived. The reason is that we don’t invest in just any stocks. We invest in quality dividend growth companies that continue to grow their cash flow and only buy when they are sensibly priced. Down markets make for excellent entry points for companies on ‘The List’. Knowing these subtle differences is crucial.
The author of this article discusses that in some cases holding cash is fine but holding it too long and you risk losing out on gains elsewhere. This is where the difficulty for most investors comes in. How do you know when it’s too long? We have never been able to figure that out, either. Hence, we remain invested in our portfolio of high-quality dividend growers across all market conditions. The growing dividends they provide compensate us for our patience, and when the economy rebounds, we reap the benefits, regardless of the timing.
To receive breaking news about companies on ‘The List’ follow us on Twitter @MagicPants_DGI.
The List (2023)
Last updated by BM on May 19, 2023
The Magic Pants List contains 27 Canadian dividend growth stocks. ‘The List’ contains Canadian companies that have raised their dividend yearly for at least the last ten years and have a market cap of over a billion dollars. Below is each stock’s symbol, name, current yield, current price, price return year-to-date, current dividend, dividend growth year-to-date and current dividend growth streak. Companies on ‘The List’ are added or subtracted once a year, on January 1. After that, ‘The List’ is set for the next twelve months. Prices and dividends are updated weekly.
| SYMBOL | COMPANY | YLD | PRICE | YTD % | DIV | YTD % | STREAK |
|---|---|---|---|---|---|---|---|
| AQN-N | Algonquin Power & Utilities | 6.0% | $8.46 | 25.7% | $0.51 | -29.0% | 12 |
| ATD-T | Alimentation Couche-Tard Inc. | 0.8% | $66.01 | 9.8% | $0.56 | 19.1% | 13 |
| BCE-T | Bell Canada | 6.0% | $63.43 | 5.3% | $3.82 | 5.0% | 14 |
| BIP-N | Brookfield Infrastructure Partners | 4.4% | $37.07 | 5.2% | $1.44 | 6.3% | 15 |
| CCL-B-T | CCL Industries | 1.5% | $70.68 | 21.8% | $1.06 | 10.4% | 21 |
| CNR-T | Canadian National Railway | 2.0% | $161.39 | -0.9% | $3.16 | 7.8% | 27 |
| CTC-A-T | Canadian Tire | 4.1% | $169.53 | 15.6% | $6.90 | 17.9% | 12 |
| CU-T | Canadian Utilities Limited | 4.7% | $38.02 | 2.9% | $1.79 | 1.0% | 51 |
| DOL-T | Dollarama Inc. | 0.3% | $84.51 | 5.8% | $0.27 | 23.8% | 12 |
| EMA-T | Emera | 4.8% | $57.00 | 8.3% | $2.76 | 3.0% | 16 |
| ENB-T | Enbridge Inc. | 7.1% | $50.07 | -6.1% | $3.55 | 3.2% | 27 |
| ENGH-T | Enghouse Systems Limited | 2.3% | $37.46 | 4.9% | $0.85 | 18.2% | 16 |
| FNV-N | Franco Nevada | 0.9% | $153.08 | 10.8% | $1.36 | 6.3% | 15 |
| FTS-T | Fortis | 3.9% | $58.65 | 6.0% | $2.26 | 4.1% | 49 |
| IFC-T | Intact Financial | 2.2% | $203.60 | 4.0% | $4.40 | 10.0% | 18 |
| L-T | Loblaws | 1.4% | $122.98 | 2.2% | $1.74 | 10.3% | 11 |
| MGA-N | Magna | 3.5% | $52.73 | -8.3% | $1.84 | 2.2% | 13 |
| MRU-T | Metro | 1.6% | $75.20 | -0.4% | $1.21 | 10.0% | 28 |
| RY-T | Royal Bank of Canada | 4.2% | $127.19 | -0.7% | $5.28 | 6.5% | 12 |
| SJ-T | Stella-Jones Inc. | 1.5% | $61.53 | 24.1% | $0.92 | 15.0% | 18 |
| STN-T | Stantec Inc. | 1.0% | $79.43 | 21.6% | $0.77 | 8.5% | 11 |
| TD-T | TD Bank | 4.7% | $82.27 | -6.2% | $3.84 | 7.9% | 12 |
| TFII-N | TFI International | 1.3% | $109.01 | 8.9% | $1.40 | 29.6% | 12 |
| TIH-T | Toromont Industries | 1.5% | $112.70 | 15.3% | $1.68 | 10.5% | 33 |
| TRP-T | TC Energy Corp. | 6.8% | $54.36 | 2.0% | $3.69 | 3.4% | 22 |
| T-T | Telus | 5.2% | $27.38 | 4.0% | $1.43 | 7.3% | 19 |
| WCN-N | Waste Connections | 0.7% | $140.30 | 6.5% | $1.02 | 7.4% | 13 |
| Averages | 3.1% | 7.0% | 8.4% | 19 |
Six Canadian stocks on ‘The List’ declare earnings and dividends in US dollars and are inter-listed on a US exchange in US dollars. The simplest way to display dividend and price metrics for these stocks is to show their US exchange symbols along with their US dividends and price. The stocks I am referring to have a -N at the end of their symbols. You can still buy their Canadian counterparts (-T), but your dividends will be converted into CDN dollars and will fluctuate based on the exchange rate.
Note: When the dividend and share price currency match, the calculation is straightforward. But it’s not so simple when the dividend is declared in one currency, and the share price is quoted in another. Dividing the former by the latter would produce a meaningless result because it’s a case of apples and oranges. To calculate the yield properly, you must express the dividend and share price in the same currency.
Performance of ‘The List’
Feel free to click on this link, ‘The List’ for a sortable version from our website.
Last week, ‘The List’ was down slightly with a YTD price return of +7.0% (capital). Dividend growth remained the same and is now at +8.4% YTD, highlighting growth in income over the past year.
The best performers last week on ‘The List’ were Toromont Industries (TIH-T), up +6.66%; Enghouse Systems Limited (ENGH-T), up +6.06%; and Stella-Jones Inc. (SJ-T), up +5.04%.
Fortis (FTS-T) was the worst performer last week, down -4.71%.
Dividend Increases
“The growth of dividend paying ability is of significance in the determination of a stock’s quality, or general safety…”
– Arnold Bernhard (the founder of Value Line)
“As a dividend increase is a positive sign of a company’s financial strength, the safest purchase, after research, is a stock with a recent dividend increase.”
– Tom Connolly (the founder of dividendgrowth.ca)
Last week, no dividend increases from companies on ‘The List’.
Earnings Releases
Benjamin Graham once remarked that earnings are the principal factor driving stock prices.
Each quarter we will provide readers with weekly earnings updates of stocks on ‘The List’ during the calendar earnings season. Q2 2023 earnings season begins this week as we hear from the Banks.
The updated earnings calendar can be found here.
Earnings growth and dividend growth tend to go hand in hand, so this information can tell us a lot about the future dividend growth of our quality companies. Monitoring our dividend growers periodically is part of the process, and reading the quarterly earnings releases is a good place to start.
Two earnings reports from companies on ‘The List’ this week
Canada’s big Banks report their fiscal Q2 earnings this week.
Royal Bank of Canada (RY-T) will release its second-quarter fiscal 2023 results on Thursday, May 25, 2023, before markets open.
TD Bank (TD-T) will release its second-quarter fiscal 2023 results on Thursday, May 25, 2023, before markets open.
Last week, no earnings report from companies on ‘The List’.
