Redefining Risk as a Dividend Growth Investor
MP Market Review - April 5, 2024
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'.
In this week's newsletter, find out how we view ‘risk’ as dividend growth investors.
Last week, dividend growth was up and has increased by +8.3% YTD, highlighting the dependable growth in our income.
The YTD price return of 'The List' was down from the previous week with a return of +3.5% (capital).
Last week, there was one dividend announcement from a company 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.
DGI Clipboard
Redefining Risk as a Dividend Growth Investor
By heeding the wisdom of mentors, we come to realize that our perception of risk diverges from the mainstream. The risk inherent in our portfolios is contingent upon the quality of our holdings and the prices we've paid for them. Armed with high-quality dividend growth stocks acquired at reasonable valuations, we mitigate risk without sacrificing the growth trajectory of our capital and income.
Thoughtful investing is paramount to sustaining wealth and ensuring a legacy for future generations. However, navigating the maze of financial advice requires a discerning eye, particularly for those of us committed to dividend growth investing.
As Jim Garland noted in his 2013 paper 'Memo to the Darcy Family: To Thine Own Self Be True,' the world often fails to grasp the essence of dividend growth investors like us. This truth is painfully evident when attempting to coax a traditional wealth advisor into constructing a concentrated portfolio geared towards securing a steadily increasing, inflation-resistant income for retirement. The bewilderment on their faces speaks volumes.
This preference for concentration tends to ruffle the feathers of most wealth advisors, who earnestly believe they're acting in our best interests. Their playbook typically advocates for a low-beta, broadly diversified stock portfolio supplemented with no-growth fixed-income investments as a means of risk mitigation.
Entrenched in the teachings of luminaries like Harry Markowitz, William Sharpe, and Eugene Fama, advisors are conditioned to adhere closely to the principles of Modern Portfolio Theory (MPT) to safeguard against career risk (losing their jobs).
Yet, as George Athanassakos argued in his 2015 paper 'A Value Investor’s Take on Diversification and Risk,' the tenets of MPT don't always hold true.
Value investors, like us, maintain concentrated portfolios not out of disdain for diversification but because we operate within the boundaries of our competence; we select only securities we understand. We gravitate towards companies with robust cash flows and a consistent track record of earnings, allowing us to gauge their intrinsic value accurately.
In dividend growth investing, our focus is squarely on the future income streams generated by our stock holdings. Price fluctuations are but a fleeting concern, for we aren't reliant on selling assets to fund our retirement. Our objective is safeguarding the uninterrupted flow of retirement income, underpinned by a strategy that ensures both capital growth and income appreciation over time.
By heeding our mentors' wisdom, we realize that our perception of risk diverges from the mainstream. The risk inherent in our portfolios is contingent upon the quality of our holdings and the prices we've paid for them. Armed with high-quality dividend growth stocks acquired at reasonable valuations, we mitigate risk without sacrificing the growth trajectory of our capital and income.
DGI Scorecard
The List (2024)
The Magic Pants 2024 list includes 28 Canadian dividend growth stocks. Here are the criteria to be considered a candidate on ‘The List’:
Dividend growth streak: 10 years or more.
Market cap: Minimum one billion dollars.
Diversification: Limit of five companies per sector, preferably two per industry.
Cyclicality: Exclude REITs and pure-play energy companies due to high cyclicality.
Based on these criteria, companies on ‘The List’ are added or removed annually on January 1. Prices and dividends are updated weekly.
While 'The List' is not a standalone portfolio, it functions admirably as an initial guide for those seeking to broaden their investment portfolio and attain superior returns in the Canadian stock market. Our newsletter provides readers with a comprehensive insight into the implementation and advantages of our Canadian dividend growth investing strategy. This evidence-based, unbiased approach empowers DIY investors to outperform both actively managed dividend funds and passively managed indexes and dividend ETFs over longer-term horizons.
For those interested in something more, please upgrade to a paid subscriber; you get the enhanced weekly newsletter, access to premium content, full privileges on the new Substack website (magicpants.substack.com), and DGI alerts whenever we make stock transactions in our model portfolio.
Performance of 'The List'
Last week, dividend growth was up and has increased by +8.3% YTD, highlighting the dependable growth in our income.
The YTD price return of 'The List' was down from the previous week with a return of +3.5% (capital).
Last week's best performers on 'The List' were Dollarama Inc. (DOL-T), up +10.96%; Franco Nevada (FNV-N), up +2.64%; and Toromont Industries (TIH-T), up +2.41%.
Brookfield Infrastructure Partners (BIP-N) was the worst performer last week, down -7.59%.
The Canadian market is still digesting ‘the higher for longer’ inflation narrative, so expect more volatility as we enter the spring months. In this week’s full edition of the newsletter, see who announced another double-digit dividend increase and how one retiree thinks about ‘risk’…
