Category: MP Market Reviews

Intro

YTD Performance: The List +11.9% | Model Portfolio (CDN) +20.0%

Each January, we assemble a curated watchlist of Canadian and American dividend growth companies that we monitor throughout the year. These lists help coach our process, guide new investments, and serve as the foundation for our model portfolios.

We rarely invest outside these lists, but how we weight our investments once they enter the portfolio is what creates the edge.

The List: A Quality Benchmark 

Think of The List as an equal-weighted exchange-traded fund (ETF) made up of Canada’s best dividend growth companies. The performance you see, like this year’s +11.9% gain, assumes equal investment in every stock on January 1.

That is impressive on its own, but our Wealth-Builder Model Portfolio (CDN) has delivered nearly double the return.

The Secret: Position Sizing with Purpose

Before any company from the watchlist earns a place in our model portfolio, it must pass two final hurdles:

1. Quality – look for only the best of the best when we invest. Stocks must possess as many of our quality indicators as possible.
2. Valuation – look to buy a quality company that is sensibly priced based on historical fundamentals and valuation metrics.

Once in the portfolio, we apply a position sizing framework. Core holdings, our highest-quality companies, receive larger allocations. Non-core holdings take smaller weights.

This disciplined approach tilts the odds in our favor and amplifies the performance of our best ideas.

As an example: Had we weighted each company equally, our return of our model portfolio this year would have almost mirrored The List at +12.1%. By sizing positions in line with our current portfolio position sizes, the Wealth-Builder Model Portfolio (CDN) would stand at +20.0% YTD.

Intro

I’ve lost count of how many times I’ve been called old-fashioned for the principles I live by. Whether in business, parenting, or investing, I’ve found it pays to take the best lessons from those who came before us and use them as a foundation for building a productive and successful life.

The pullback in goeasy Ltd. shares this week was a reminder of why a data-driven, historically tested process is so important and why sticking to it matters. Paid subscribers who received my DGI Alert on goeasy saw that I topped up my position after the stock dropped 15%. I don’t know for certain whether the accusations of accounting irregularities have merit, but I feel confident we won’t be talking about them one or two years from now.

Buying quality companies at sensible prices may sound simple, but it’s never easy when the stock price is falling. The discipline to lean in during moments of fear is one of the most valuable lessons I learned early on, and it remains a cornerstone of how dividend growth investing outperforms over time.

Take Toronto-Dominion Bank as an example. A couple of years ago, I wrote an article titled Toronto-Dominion Bank: Time To Supercharge Your Dividend Growth Investing (DGI) Returns when TD was trading near $77. Last Friday it closed above $110. On top of that, our dividend return (growth yield) has already reached 5.4% in just two years, and the compounding is only getting started. Good luck finding that kind of return in on a bond or GIC today.

The investment thesis behind our TD Bank purchase was straightforward: look past the noise surrounding the U.S. banking sector, including credit delinquency fears and uncertainty around the First Horizon acquisition, and focus on TD as a high-quality business trading at a sensible price. More negative headlines followed, but as always, the cream rose to the top.

The Core Lesson

Market narratives are often just noise. Your greatest challenge as an investor is to stay steady when others are unsettled. To keep doing what’s right for you even as the crowd moves the other way. To trust your plan most when you’re tempted to abandon it.

Intro

The quote above speaks to the S&P 500, but the lesson applies no matter where you invest: valuation matters. In our dividend growth investing process, we spend a lot of time emphasizing undervaluation and the importance of buying at a sensible price. For today’s article, though, I want to flip the script and look at the other side of the coin, what can happen when you buy stocks that are overvalued.

Dividend growth investing works because it combines two of the most powerful forces in wealth building: rising income and compounding. The best companies increase their payouts year after year, and over time the snowball effect creates serious results.

But there is a catch. Even the highest-quality dividend grower can deliver disappointing returns if you buy it at the wrong price. Paying too much for a great business is one of the most common mistakes investors make.

Why Quality Alone Is Not Enough

It is tempting to believe that a wide-moat business with a long dividend streak is always worth owning. The problem is that returns depend not only on business quality but also on the valuation you lock in when you buy. If the stock is trading far above its fair value, future returns get squeezed.

A strong dividend record cannot save you from a poor entry point.

The Three Levers of Returns

Three factors drive every dividend growth investment:

1. Dividend yield at purchase
2. Future dividend growth
3. Valuation multiple

If the starting yield is low because the stock is overpriced, the compounding engine is weakened from the start. Worse, when the valuation multiple eventually drifts back to its historical average, you can face years of stagnant or negative price performance.

Imagine a stock that usually yields 3 percent but now yields only 2 percent because the price has run ahead. For that stock to return to its normal yield, the price would need to fall by one-third. That is enough to wipe out several years of dividend growth. 

The Hidden Cost of Overpaying

Buying an overvalued dividend stock does more than hurt your immediate returns. It also carries a heavy opportunity cost. Capital tied up in a stretched valuation is capital that could have been compounding at higher yields elsewhere.

Dividend Yield Theory helps investors avoid this trap. By comparing the current yield to long-term averages, you can quickly spot when a dividend grower has become too expensive.

Investor Psychology at Work

Many investors still pull the trigger on expensive stocks because of behavioral traps:

• Fear of missing out after a big run
• Anchoring to recent performance
• Confirmation bias from hearing only bullish commentary

These biases can push you into thinking that valuation no longer matters. History shows otherwise.

Lessons From the Past

Even legendary Canadian dividend growers have gone through long stretches of poor returns when purchased at extreme valuations. Canadian National Railway (CNR-T) is a good example from the last few years.

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

Black line: Price

Yellow line: Dividend

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

Our Timely Ten list remains the fastest way to assess valuation, which explains why it continues to be the most-read article each month.

On the Canadian side, there was little movement at the top this month. The only change was goeasy Ltd. (GSY) and Enbridge Inc. (ENB) swapping places in the tenth spot. While goeasy remains a quality name, it does not look deeply undervalued at present since its ten-year average yield still sits just below our high-yield estimate.

One stock worth watching is Waste Connections (WCN). It climbed two spots from last month, even as its share price has drifted lower since March. The company’s latest earnings were solid, suggesting this may be more a case of valuation cooling after a frothy run. Magna (MG) also deserves attention: its valuation metrics are appealing, and if tariff headwinds ease, it could be a timely opportunity to begin building a position.

Turning to the U.S. list, I want to correct an oversight. In last month’s update I mistakenly included Accenture (ACN) and Elevance Health (ELV), both strong holdings in my portfolios, but left out American Water Works (AWK) and Home Depot (HD), which are part of our watchlist. That error has now been corrected. From time to time, we do invest in companies that are not currently on our watchlists, which is what caused the confusion here.

As for current opportunities, Zoetis (ZTS), Amgen (AMGN) , and NextEra Energy (NEE) continue to get cheaper, making them good candidates for deeper research. UnitedHealth (UNH) still looks significantly undervalued despite a modest rebound in its share price. We already hold a full position there, so patience is the best course.

These names should keep us busy on the research front until Q3 earnings season ramps up at the end of October.

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 short term. These are our Timely Ten.

Intro

The List has kicked off 2025 on a strong note, rising more than 11% year-to-date in our equal-weighted example that we track weekly in the newsletter. We use the Canadian version of The List to demonstrate our dividend growth investing (DGI) process in action.

It is important to emphasize that The List is not a portfolio. It is a coaching tool. While many of the companies on The List do eventually find their way into our model DGI portfolios, its primary purpose is to guide decision-making, not to serve as a ready-made portfolio. The same principle applies to our U.S. version, The List (USA).

Long-time subscribers will recall the process we go through each January when curating our watchlists for the year ahead. In addition to applying our four key criteria for identifying quality dividend growers, we follow a disciplined approach: additions or removals occur only once per year, on January 1.

Around this time of year, we begin looking ahead to identify new candidates for potential inclusion.

Identifying Potential Candidates

We’ve identified four companies on the TSX that will soon meet our first two criteria for inclusion on The List:

1. Dividend Growth Streak: At least 10 years.
2. Market Cap: Minimum of one billion dollars.

Intro

When I launched our model portfolios for coaching purposes in Canada in May 2022 and in the United States in May 2023, I had two clear goals.

The first and most important goal was to generate a steadily rising stream of dividends from high-quality companies. The second goal was to build portfolios capable of delivering above-average total returns over the long term (five to ten years). By “average,” I mean the benchmark indexes: the TSX Composite in Canada and the S&P 500 in the United States.

Achieving our second goal (outperforming the indexes) has proven to be challenging in the short term.

This past week I shared the quarterly performance results for our Canadian and American model portfolios. Both are now delivering annualized returns above 10% since inception.

Intro

It is becoming almost routine in today’s volatile markets: each month, one or two companies that appeared in the previous Timely Ten fall off the list. The reason is straightforward: when a stock’s price rises, its dividend yield falls back toward its average, sometimes pushing it out of contention. Seeing this happen in just a few weeks is unusual, but it happens more often than you might expect.

Below are this month’s Canadian and American Timely Ten lists. Two names worth highlighting are goeasy Ltd. (GSY-T) from Canada and Johnson & Johnson (JNJ-N) from the U.S.:

• goeasy Ltd. was trading at $169 with a 3.4% yield when it last appeared on July 11, ranking seventh in our Canadian Timely Ten. By last Friday, the stock had climbed to $209.13, dropping the yield to 2.8%.
• Johnson & Johnson entered the American Timely Ten at ninth place last month with a price of $156.90 and a 3.3% yield. By last Friday, it had risen to $179.29, with the yield now at 2.9%.

For two stocks on the Timely Ten to appreciate this much in just over a month is certainly not the historical norm. Still, it reinforces how effective dividend yield theory can be as a valuation tool for identifying candidates that are undervalued and worth further research.

So how did we miss these? In goeasy Lts.’s case, we already owned shares within our Canadian model portfolio and chose patience over adding more. With Johnson & Johnson, the valuation was attractive, but we were already properly weighted in Healthcare with UnitedHealth and Zoetis, both trading below our cost base. Adding JNJ would have pushed us beyond our sector limits, so we passed.

The takeaway is clear: even when companies look attractively priced, they still need to fit within our broader investment process. A disciplined framework may hold you back at times, but it prevents bigger mistakes in the long run. We are happy to see gains in our existing goeasy Ltd. position and would consider adding more on a pullback. As for Johnson & Johnson, we continue to believe UnitedHealth will deliver better long-term returns, so staying balanced in Healthcare is a trade-off we are comfortable making. 

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 short term. These are our Timely Ten.

Intro

Last week’s article in the MP Market Review (“The All-Canadian DGI Portfolio”) was a good primer for anyone looking to begin their dividend growth investing (DGI) journey with a lump sum investment.

This week, I decided to make my position sizing analysis available in the Free Subscriber section of the newsletter, rather than restricting it to Paid Subscribers. That said, our DGI Candidate List 2025 – Quality/Category/Sizing document remains exclusive to Paid Subscribers in the Premium Content section of our website. This ensures you’ll always have access to an up-to-date version if you are looking for options to put a lump sum to work using our valuation weighted strategy.

In this follow-up article, I’ll focus on how I might invest that lump sum today, with particular attention to current valuations.

Valuation is the second step in our three-step process. Once we’ve separated the “wheat from the chaff” by identifying quality companies, we turn to valuation.

First, we sort The All-Canadian DGI Portfolio by category (Core and Non-Core) and display our minimum and maximum position sizes for each stock, we now have a clear framework to guide allocation decisions.

Intro

One question from subscribers has come up more than almost any others:

“How would you invest right now if you were starting from scratch?”

Our dividend growth investing strategy produces such predictable returns that simply buying the highest-quality companies from The List and holding them long term has historically been a winning formula. I’ve called this the “No-Look DGI Portfolio” in past writings.

In light of today’s macro environment, I’m making a few tweaks. The portfolio will shrink from twenty to thirteen stocks, and instead of equal weighting, each position will follow our recommended size based on current valuation.

All companies in this updated portfolio have at least twenty consecutive years of dividend growth, with a few exceptions worth noting. TD Bank and Royal Bank of Canada were forced to pause dividend increases in 2010 during the financial crisis by the federal government, so we are making the assumption that their long-term dividend growth records would have remained intact. Franco-Nevada is the only stock without a two-decade streak, included here because it’s one of my highest-conviction ideas for today’s market. Finally, a few names have been removed from the original No-Look DGI Portfolio due to weaker growth prospects in the current environment.

Here are the ten-year historical performance metrics for our new All-Canadian DGI Portfolio:

Intro

The first step in managing anything well is setting a clear goal. The second step is tracking your progress toward that goal. Most investors rely on annualized returns and benchmark comparisons to evaluate their performance. But beyond these basics, there is little consistency in how investors measure success.

Dividend growth investors track a different metric: Yield on Cost (YOC). This is calculated by taking the annual dividend income, dividing it by the original purchase price, and multiplying by 100. We refer to this as Growth Yield because it captures the essence of what makes dividend growth investing so powerful: growth over time.

Growth yield measures not just dividend yield but dividend growth as well. It reflects the impact of both the starting yield and the compounding effect of rising dividends. That is why some low-yielding stocks at the time of purchase can end up delivering far more income than higher-yielding alternatives, simply because they grow faster.

If your goal as a dividend growth investor is to build a rising stream of income, growth yield is one of the most effective ways to track your success.

You can see the power of compounding clearly in the example below. Using last Friday’s closing prices, the average starting yield of the companies on The List is 3.2 percent. So far this year, the average dividend growth has been 6.9 percent. If you invested $10,000 across all stocks on the watchlist, here is what the income would look like over time:

• With dividend reinvestment (DRIP), your annual income would grow to $848
• Without DRIP, it would still grow to $583, just from dividends alone

That is before any capital appreciation is included.

Thanks to dividend growth, our initial 3.2 percent yield has risen to 5.8 percent. With reinvested dividends contributing an additional 2.6 percent, the total income yield reaches 8.5 percent. This is the compounding effect in action: steady, powerful, and predictable for those who stay the course.