Category: MP Market Reviews

Last updated by BM on January 23, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was up slightly with a positive +4.1% YTD price return (capital). Dividend growth of ‘The List’ ticked upwards to +3.7% YTD, demonstrating the rise in income over the last year.
• Last week, there was one dividend increase from a company on ‘The List’.
• Last week, there were no earnings reports from companies on ‘The List’.
• Two companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“We all hope for capital gains, but the only thing we can really count on is the dividend” and “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

– Warren Buffett

As successful dividend growth investors, we understand that rising dividends are a foundation for higher share prices over time. 

Here is the Compound Annual Growth Rate (CAGR) of dividends and the CAGR of price over the last decade so that you can study the evidence that as the dividend grows, so does the price.

10YR_CAGR-The List-01-01-2023

A few things are to be gleaned from this historical data.

First, the current yield of ‘The List’ is rising. Stocks were expensive in 2013 and are more sensibly priced now than they were a decade ago.

Secondly, the historical growth yield of ‘The List’ at 6.6% is only about 1% lower than the total annualized return (7.7%) of the TSX composite index over the last decade. Dividends alone, received from companies on ‘The List’ bought ten years ago, will soon outperform the total return of the index after a couple more years of dividend growth.

Nineteen of the twenty-seven companies on ‘The List’ more than doubled their price in the last decade, and you would be hard-pressed to find a dividend ETF or dividend mutual fund that outperformed the total return (CAGR 10Y TR) of ‘The List’ in the last ten years.

Finally, notice the alignment of dividend growth (CAGR 10Y DG) and price growth (CAGR 10Y PG). For the last decade, they have been almost identical, with annualized returns of 10.0% and 10.3%. An increasing income, over time, drives our capital returns.

Once again our yearly decade long, annual year-by-year dividends sheet shows our dividends are stable and predictable. Understanding how dividends work and how they ultimately drive portfolio performance is one of the most powerful concepts to understand about investing. It is what we do differently that sets us apart from the crowd.

Last updated by BM on January 16, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was up sharply with a positive +3.8% YTD price return (capital). Dividend growth took a step back with the dividend cut announced by (AQN-N). ‘The List’ is at +3.5% YTD, demonstrating the rise in income over the last year.
• Last week, there were no dividend increases from companies on ‘The List’, but there was a dividend cut.
• Last week, there were no earnings reports from companies on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Having a framework that objectively improves the probability of being directionally accurate is more important than having the most intellectually compelling narrative. Some of the smartest people out there are just as likely to be dead wrong, no matter how compelling their narratives sound. Investing success is a game of having a probabilistic advantage that enables returns to compound over time.”

– Josh Steiner, Hedgeye

One of the reasons we publish ‘The List’ is so that we can ‘coach’ others on how to select and monitor dividend growth stocks for their portfolios. Its purpose is to provide investment ideas and a real-time illustration of dividend growth investing in action. It is not a ‘Buy List,’ nor a portfolio that reflects the composition or returns of our Magic Pants Wealth-Builder (CDN) Portfolios. It is only a starting point for our analysis and discussion of dividend growth investing concepts.

Last week one of the companies on ‘The List’, Algonquin Power & Utilities (AQN-N) announced a 40% dividend cut. Although dividend cuts are rare for dividend growth companies, they do happen.

As part of our process audit, we will take a few paragraphs to review the signs leading up to the dividend cut by (AQN) to see if we need to change anything or if an investor following our process could have seen this one coming. A good process means you review your decisions when they fall outside your expectations.

Here is an excerpt from the article we published on our blog titled ‘Our Dividend Growth Investing Process’.

“By standing on the shoulders of giants, those great investors who came before us, we have come up with a process that is simple to understand with only three basic rules:

1. Quality; only buy large-cap companies that have a long dividend growth streak and good financial safety metrics in an industry that is stable and growing.
2. Valuation; look to buy a company that is sensibly priced or undervalued by looking at a company’s track record. Undervaluation introduces a margin of safety. You are in essence tilting the odds in your favor that future price movements will be upwards.
3. Monitor; keep an eye on your dividend growers; especially the current yield; fluctuations in yields send signals. The consistency of a firm’s dividend growth is the best measure of management’s confidence in the long-term growth outlook for a company.”

“We will also review our outcomes regardless of if they were good or bad. Having a good process means you go back and review your decisions when they fall outside your expectations. We can then make tweaks based on our findings and enhance our process. Only then will we know if we were good or just lucky.”

This week we see the importance of Rule # 3. By monitoring our quality dividend growers, we can see signs of possible dividend cuts and mitigate the damage they can do to our portfolios.

In the case of Algonquin Power & Utilities (AQN-N), the fluctuation in yield and slowing dividend growth in 2022 were definitely ‘red flags’. While many investors would have been attracted to a higher yield, we see yield fluctuations as a warning sign. This, combined with a lower dividend growth rate announcement in July 2022, should have alerted the dividend growth investor to do a deeper dive into company fundamentals. In doing so, the dividend growth investor would have seen that the company had issues servicing its debt due to higher interest rates. This was noticeable when looking at the dividend payout ratio, which climbed to over 100%. Paying out more than you take in eventually leads to financial trouble. A high payout ratio often precedes a dividend cut.

Fortunately, we have never owned a position in (AQN-N) in any of our Wealth-Builder Portfolios, but if we did, it is reassuring to know that our process would have signalled us to do more research and then it would have been up to us to take action and decide what to do next.

Here is an excerpt from an article on the blog dated March 2021 that may help when you have this type of decision to make. Selling Dividend Growth Stocks

“When we make an investment, we take a patient, long-term investment horizon and expect to hold the stock for decades, keeping portfolio turnover low. Generally speaking, we will only sell a stock if the safety of the dividend payment has come into question, the company’s long-term earnings power appears to have become impaired, the stock’s valuation reaches seemingly excessive levels, or we find a more attractive idea.”

As dividend growth investors, a dividend cut means the wealth-building stops, so, we know what to do. Deep-value investors may need more of a push. Research shows us that the probability of a successful outcome is greatly reduced after the dividend is cut or eliminated.

Last updated by BM on January 09, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• ‘The List’ ends 2022 with a negative -6.0% price return (capital) and positive +10.6% dividend growth (income). See summary below. We started a new list last week for 2023. We decided to keep ‘The List’ the same for 2023 as all companies increased their dividend again last year.
• Last week, ‘The List’ began the year with a positive +2.1% YTD price return (capital). The dividend growth of ‘The List’ is off to a fast start at +4.6% YTD, demonstrating the rise in income over the last year.   
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there were no earnings reports from companies on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Learn to eventually and mentally manage price declines as your dividend grows.”

Happy New Year!  It is that time of year when we reflect on our dividend growth strategy and how it fared in the worst stock market decline since 2008.

We can only imagine the amount of wealth destruction that took place for a lot of people last year. Fortunately, we discovered dividend growth investing after the last major market decline in 2008 and vowed we would not let that happen again. This 2022 summary of ‘The List’ will help demonstrate that even the most passive dividend growth investing strategy can safeguard your capital and provide you with a growing income stream.

At market close on the first trading day of the new year, we publish ‘The List’ of Canadian dividend growth stocks we will follow that year. The companies selected are from various industries, usually no more than four from one industry. We stay away from REITs and pure-play energy companies due to their cyclical nature. Next, we look for ten years of consecutive dividend growth and over one billion market cap. We hold the stocks for the entire year with weekly updates on their performance and insights throughout the year into how the company aligns, or not, as a candidate for your dividend growth portfolio.

Here is a copy of ‘The List’ and its year-to-date (YTD) performance on the last trading day of December 2022.

Last updated by BM on January 03, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a minus -6.0% YTD price return (capital). The dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.   
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there were no earnings reports from a company on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

 “…for a lot of people, generating a portion of their income from lightly taxed – or even negatively taxed – dividends makes a lot of sense.”

– John Heinzl, (Negative tax on dividends? Yup, really), Globe & Mail

DGI Truth #5: Dividend growth investing is a tax-efficient strategy

One of the first things you discover when you begin working is how much money is taken off your pay cheque each week for income tax purposes. Eventually, you discover that the more you make, the higher tax rate applies (increasing marginal tax rate). It is then that you start to ask questions; “How do I hold onto a larger share of my income?”

For those looking to hold onto a larger share, generating dividend income may be part of the answer. Dividend income is taxed at a lower rate than many other forms of income due to the dividend tax credit (DTC). To avoid ‘double-dipping’ by the CRA and account for the tax the corporation issuing the dividend has already paid, the individual receiving the dividend is then entitled to a federal and provincial dividend tax credit.

Let’s look at an excerpt from the 2019 example published in the Globe & Mail by John Heinzl:

How to earn $52,000 tax free – no offshore account required

You are a resident of Ontario and have saved $1.3 million. You decide to retire and invest the money in a portfolio of dividend-growth stocks yielding an average of 4%. Your portfolio would generate an annual dividend income of $52,000, which we’re assuming is all received in a non-registered account.

When it’s time to file your tax return, the $52,000 would be listed on your tax slip as the ‘actual amount of eligible dividends’. To understand how dividend taxation works, however, we need to look at two other important numbers on your tax slip: the ‘taxable amount of eligible dividends’ and the federal ‘dividend tax credit for eligible dividends’.

The taxable amount of dividends is calculated by multiplying the actual amount by a ‘gross-up’ factor of 1.38 (38% is the basic federal corporate tax rate for Canadian-controlled corporations). This produces taxable dividends of $71,760. The purpose of the ‘gross up’ is to roughly estimate the pre-tax income the company (or, in this case, companies) would have to earn to pay you the dividend.

In our example, applying these DTC rates to the grossed-up dividend of $71,760 produces a federal DTC of $10,778 and a provincial DTC of $7,176. These amounts, combined with a federal tax credit of $1,810 (15% of the basic personal amount of $12,069), reduce your taxes to zero.

The reason is that before any credits, $71,760 of income would attract a tax of $16,858 but because you receive more than that in tax credits, you pay no tax on the dividend income.

Due to how the dividend tax credit functions, individuals with lower marginal tax rates receive a comparatively bigger benefit from earning income through dividends than individuals with higher marginal tax rates, but both will benefit from the dividend tax credit.

Will 2023 be the year you consider adding tax-efficient dividend income to your income mix?

Note: It is always a good idea to consult a tax professional to determine the most tax-efficient strategies for your specific situation.

Last updated by BM on December 26, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a minus -5.2% YTD price return (capital). Dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.   
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there were no earnings reports from a company on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Compounding is mankind’s greatest invention because it allows the reliable, systematic accumulation of wealth.”

– Albert Einstein

DGI Truth #4: The power of compounding with dividend re-investment

Most people are aware of the ‘magic’ (there is that word again) of compound interest; returns balloon over time under the effects of compound interest accumulation. The same effects happen by re-investing your dividends in shares of your quality dividend growers. You not only add to your growing income, but you also add to your capital returns when the stock price goes up because you have more shares than you would have otherwise had.

For those who do not need dividend income to pay the bills or have fun with, dividend re-investment is important. Many of the companies we follow on ‘The List’ offer ‘Dividend Re-Investment Plans’ (DRIPs) that sell you additional shares in amounts equivalent to your dividend distribution at a discount to the current market price. You can automate this in your brokerage account, so there are no fees or trading required.

In the graphics below, let’s look at the same input values (starting principal, dividend yield, dividend/share growth rates, years invested, etc. ) and see the difference that dividend re-investment can mean to your income and portfolio values.

Last updated by BM on December 19, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a minus -4.5% YTD price return (capital). Dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.  
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there was one earnings report from a company on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Cash is not a safe investment; it is not a safe place because it will be taxed by inflation.”

– Ray Dalio

DGI Truth #3: Dividend growth investors enjoy inflation-protected income

With annual inflation rates at or below 2% for most of the last decade, there was not a lot of attention paid to ones purchasing power over time. That has changed, with inflation rates in the mid to high single digits. Many investors are now not keeping pace or are falling behind.

Dividend growth investing keeps pace with inflation in two ways. The most obvious is the growth rate of the dividend. If the dividend grows faster than the inflation rate, your income’s purchasing power is protected. The second way is by investing in a portfolio of dividend growth stocks that have the potential to generate price returns that are higher than the rate of inflation over time.

When the central banks talk about inflation in the news, we can quickly look at our dividend growth YTD% and measure how we are doing.  Last we checked, the inflation rate was between 6-7%, and our sample dividend growth portfolio DIV YTD% was up 10.6% (‘The List’).

It is important to point out, though, that our PRICE YTD% column from ‘The List’ did not keep pace with inflation this year. That can sometimes happen in the short term, but I have yet to see it over longer time horizons.

By focusing on the dividend growth rate every year, we have a metric where we can easily see the effects inflation has on our purchasing power. We know from our other DGI Truths that our capital will soon rise above the inflation rate, even if it is not evident in the short term.

Last updated by BM on December 12, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a minus -2.5% YTD price return (capital). Dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.  
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there was one earnings report from a company on ‘The List’.
• One company on ‘The List’ is due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“What is an investment, anyhow, but a body of capital that produces income. The income may be current income, or it may be prospective income, but it is the magnitude of the income, current or prospective, that determines the value of the capital which produces it.”

– Arnold Bernhard, The Evaluation of Common Stocks

DGI Truth #2: A rising dividend income stream will eventually lead to rising stock prices.

Let’s use real estate investing as an example. If you own a rental property in an area where rents have risen by ten percent annually for the past ten years, and someone approaches you to buy the property, the buyer must factor in future rent increases when deciding on a fair offer price. The property is worth more than its present value because of the relatively predictable rising income stream it produces.

Stocks with a long history of dividend growth offer the same type of value proposition, in that future dividend increases, are expected and will produce a growing stream of income that add value to the underlying company’s worth. Without a dividend and its growth, the future price for a stock becomes more speculative.

Now let’s look at a few examples from ‘The List’ to see if this theory holds true.

Last updated by BM on December 05, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was up slightly with a minus -1.3% YTD price return (capital). Dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.  
• Last week, there were three dividend increases from companies on ‘The List’.
• Last week, there were two earnings reports from companies on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“As Keynes wrote in 1936, “attach your hopes to its prospective yield”. It’s not the dividend that has the magic; it’s the increasing dividends that drive growing wealth. Realize this difference; it’s crucial.”

– Tom Connolly

We have spent some time this fall condensing everything we have read about dividend growth investing (DGI) over the past two decades and are in the process of creating a blog article on what we consider DGI Truths.

One of those truths we discovered is that we can’t control economic cycles (markets), but we can control income.

Nowhere is this more true than in the North American stock markets this year. In 2022 we have seen some amazing swings in market values with the overall trend downward. The markets, at times, have seemed out of control.

Last updated by BM on November 28, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was up again with a minus -1.4% YTD price return (capital). Dividend growth of ‘The List’ continues to grow and is now at +10.6% YTD, demonstrating the rise in income over the last year.
• Last week, there was one dividend increase from a company on ‘The List’.
• Last week, there was one earnings report from a company on ‘The List’.
• Two companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“As income investors, our primary concern is not the price of a stock on a given day. We are not sellers, we are always net buyers of stocks. So we want to constantly question whether changing conditions will put our dividends at risk. The good news is that the pressures of this selloff are valuation driven, not driven by the fundamentals. Fundamentally, the companies we are invested in likely have higher earnings this quarter than last quarter. Earnings are climbing, it’s the market’s valuation of those earnings that is declining.”

– Rida Morwa, Seeking Alpha Contributor

Changing conditions have certainly put Algonquin Power & Utilities (AQN-N) dividend at risk. Algonquin’s earnings are not climbing, they are dropping, and higher interest rates have certainly affected their ability to service their floating rate debt. With a cash flow deficit looming and a payout ratio set to exceed 100%, (AQN-N) will likely need to cut its dividend to fund its capital program.

We have never owned (AQN-N) in our portfolios because they did not score high enough on our quality indicators. Most dividend growth ETFs and model portfolios did, however own Algonquin Power & Utilities because they don’t put the same emphasis on quality as we do. They are more interested in yield than quality.

We have updated our post, ‘Finding Quality Dividend Growth Stocks’, from 2021. From time to time, we will update some of our learning material to reflect new research. Keep these indicators nearby whenever you are thinking about entering a position in a dividend growth stock.

Last updated by BM on November 21, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a minus -3.3% YTD price return (capital). Dividend growth of ‘The List’ remains at +10.3% YTD, demonstrating the rise in income over the last year.  
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, two companies on ‘The List’ reported their earnings.
• No companies on ‘The List’ are due to report earnings this week.  
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

Williams shared many of Graham’s views when it came to drawing a distinction between investing and speculating. Williams defined an investor as “a buyer interested in dividends, or coupons and principal,” and a speculator as “a buyer interested in the resale price” alone.

– John Burr Williams, The Theory of Investment Value

As dividend growth investors, we like to tell the story of the two farmers, the chicken farmer and the egg farmer. Given what we are seeing in markets now, we thought it was a good time to tell the story again.

“Imagine two farms and two farmers. One farmer raises chickens and sells them to grocery stores. We’ll call him a chicken farmer. The other farmer keeps hens in a henhouse and feeds the eggs to his rather large family. The second one is an egg farmer.

The first person, the chicken farmer, is vitally interested in the market value of chickens. The second one, the egg farmer, is vitally interested in the number of eggs that his hens can lay, and in the health of the hens, but he doesn’t care at all about the market value of his hens.

For the chicken farmer, risk means the probability of a decline in the price of chickens. On the other hand, the egg farmer could care less about market values. His risks are foxes, and viruses, and other such threats to the well-being of his hens.”

– Jim Garland,, Memo to the Darcy Family: To Thine Own Self Be True

The ‘chicken farmers’ make up most of the investing world and are still chasing the latest narrative or big idea after losing a substantial amount of their wealth during the volatile markets of 2022.  Many have either panicked and sold their high-flying ETFs and funds because they needed the income to live off or have not yet realized any losses and have re-entered on every bear market bounce to lower their cost base, only to see their lower prices go even lower. For the latter group, you are not alone. Maybe it’s time to take a page out of the ‘egg farmers’ playbook.

The ‘egg farmers’ above are fine as the dividends (eggs) from their chickens continue to grow in both up and down markets.

Our advice to someone who has been in your shoes, stop being a ‘speculator’ and look at dividend growth investing for a portion of your net worth. You won’t be disappointed. A growing dividend and a growing price (eventually) are a powerful combination.

Armed with a strategy that pays us in both up and down markets, we take a patient approach to investing and wait for a sensible price on our good dividend growers. Buying more income at a lower price is our key to wealth-building in today’s chicken-farming world.