It’s been one year since we introduced the Dividend Champions portfolio in May 2015. As we said then, its main objective is to offer investors a portfolio of quality companies that offer an attractive combination of dividend yield and growth, with a focus on sustainability. Our first year provided pleasure and pain, with solid returns relative to the Canadian stock market.

A Credible First Year

From its inception on May 12, 2015, through the end of April, the portfolio delivered a total return of 1% in Canadian dollars and -4% in US dollars.

Although our first year’s return fell short of our long-term goal to return 8% to 15% per year, we remain confident that we’ll meet that objective over time.

Our reasoning is based on two key facts. First, stocks deliver an annual return of around 9% per year measured over very long periods of time, and dividend-paying stocks perform about 2% better per year.

Of course, these returns are not delivered in equal measures — some years are just better than others. And the past year was not a golden age for Canadian equities.

We took some consolation because the Dividend Champions portfolio fared well on a relative basis, beating the overall Canadian equity market by 5%. The graph below tells the story.

The second fact that gives us confidence is that the dividend yield on the Dividend Champions portfolio is now 4%, while annual dividend growth of 6% is baked into our medium-term estimates. If we are correct, the total return on the portfolio could be around 10% per year.

Now let’s look at some particular sources of pleasure and pain over the past year.

The Pleasures

The vast majority of our dividend champions either increased or maintained their dividends for the past year. Of the 32 stocks held over the course of the year, only one lowered its dividend, namely Potash Corporation (TSX: POT, NYSE:POT). Overall, the portfolio holdings increased their dividends by 6.5%, on average. Despite the one lapse, we believe that our selection methodology to identify companies that are able to sustain and grow their dividends works well.

We were pleased to see our best-performing stock, Whistler Blackcomb Holdings Inc. (TSX: WB, OTC: WSBHF), clocking up a total return of 46% over the past year. The reasons for including the stock in the portfolio, namely a unique business with reasonable growth potential, an attractive 5% dividend yield, solid balance sheet and excellent cash flow characteristics all held true. In addition, the company also had an excellent ski season which propelled profits and the stock price higher. For more on Whistler, see page 6.

TMX Group Ltd. (TSX: X, OTC: TMXXF) has also been a big winner, returning 37% since joining the portfolio in January 2016. We argued that the valuation on the stock was just too cheap and not reflective of the quality of the operation. The 4.4% dividend yield was supported by a good balance sheet, adequate cash flow and the prospect of improved growth under the new CEO.

The Pain

Our biggest disappointment during the year was the dividend reduction by Potash Corporation. This company was also our worst performer during the year, with a 41% share price decline. Citing difficult market conditions, Potash cut the dividend to “…preserve the strong balance sheet and investment grade rating.” While we still recognise the long-term value of the business, we placed too much trust in the “safe dividend” pronouncements of the CEO and understimated the large-scale industry expansion that will probably keep fertiliser prices under pressure for years to come. We sold the stock in February.

Another disappointment was Husky Energy (TSX: HSE, OTC: HUSKF), which first converted its cash dividend into equity-only dividends (and later removed the dividend completely). We sold the stock in November for a 22% loss after the conversion, as the dilutive action made no sense from a long-term shareholder perspective. Husky has a sound balance sheet and good cash flow, but it’s a second tier commodity producer – and its dividend elimination is further evidence that only the very best commodity producers can maintain their dividends during a commodity down cycle.

On balance, the Dividend Champions delivered a solid relative return under difficult market conditions. We look forward to much higher absolute returns as the overall market environment for Canadian equities improves.