Intro

Last week was a clear reminder of the importance of staying the course. Those who panicked and sold are likely regretting it now—patience and discipline once again proved to be the investor’s greatest advantage.

When the broader market sells off, the share prices of even high-quality dividend growth stocks can fall. But as their prices drop, their dividend yields rise (since yield = dividend ÷ price). At a certain point, the higher yield becomes too attractive for investors to ignore, especially for income-focused or value-conscious buyers.

This rising yield acts like a magnet, drawing in new buyers who want that growing income stream. As demand increases, the stock price stabilizes and often rebounds, creating a natural price floor.

This dynamic is especially strong with dividend growth stocks because:

• Their dividends are reliable (often backed by decades of increases).
• Investors trust the payout will keep rising, even during downturns.
• Retirees, institutions, and income-seekers step in when yields get juicy.

So, while growth stocks might keep falling in a panic, dividend growth stocks often find support sooner—because the rising yield makes them increasingly attractive the lower they go.

Timely Ten

Below are the ten most undervalued dividend growth companies 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.’