After a miserable 2015, we predicted last January that the Canadian market, along with the Dividend Champions Portfolio, would deliver a strong performance in 2016. Thankfully, we were not disappointed.

The Thomson Reuters Equity Canada Index, which we use as the benchmark for the Dividend Champions Portfolio, delivered a 25.4% total return in U.S. dollar terms. By comparison, the S&P 500 gained nearly 12%, while the MSCI World Equity Index (excluding the U.S.) eked out a return of 3.4%.

The Dividend Champions Portfolio did even better, generating a total return of 26.5%.

In one respect, our portfolio’s outperformance of the Canadian market was somewhat surprising. After a gut-churning start to 2016, commodity-oriented stocks finally hit bottom, and their subsequent rebound helped drive the broad market’s return. While resource stocks account for nearly a third of the Canadian market, we hold only a few such stocks in the Dividend Champions Portfolio.

Over the 21 months since its inception, the Dividend Champions Portfolio managed to beat its benchmark by 8.1 percentage points in Canadian dollar terms, as shown in the table below.

What Went Right

Even with our focus on staid dividend stocks, some of our holdings still turned in spectacular performances during the year. Top of the pops was financial market operator TMX Group Ltd. (TSX: X, OTC: TMXXF), which has doubled since we added it to the portfolio last January.

Two of our holdings, the ski resort Whistler Blackcomb and hotel investor InnVest REIT, were taken over at significant premiums, giving us sizable capital gains after a relatively brief holding period. Though there was no way that we could have predicted they would be acquired, the fact that other investors also recognized the quality and value of these companies is a nice affirmation of our stock-selection process.

Rounding out our top-five performers for the year were two companies involved in the energy sector, Finning International Inc. (TSX: FTT, OTC: FINGF) and Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF).

Finning, which sells heavy equipment to mining and energy companies, managed to sustain its dividend throughout the sector’s punishing downturn, thanks to its strong balance sheet, good cash flow, and sensible dividend policy. Inter Pipeline, a mid-cap pipeline operator, has been one of our favorites for some time, and we were glad to see the company finally get some well-deserved recognition from the market.

What Went Wrong

Of course, we also had our share of disappointments in 2016, particularly laundry-processing operator K-Bro Linen Inc. (TSX: KBL, OTC: KBRLF), whose stock lost 15%. We still strongly believe in the merits of this investment, but made the mistake of buying the stock when it was too expensive.

Two other poorly performing stocks, Potash Corp. of Saskatchewan Inc. (TSX: POT, NYSE: POT) and loyalty-program manager Aimia Inc. (TSX: AIM, OTC: GAPFF), were both sold from the portfolio during the year.

In the case of Potash, we were wrong to believe the CEO’s assertion that the firm could maintain its high payout despite difficult market conditions. And Aimia’s attractive dividend yield caused us to underestimate the potential risks of its business model.

Looking Ahead

The Dividend Champions Portfolio’s strong return in 2016 has also boosted its performance since inception to within our targeted range of 8% to 15% annually. Although there is more work to do, we’re comfortable that a portfolio of holdings that yield 3.5% and are forecast to grow earnings 6% annually should enable us to meet our long-term objective.

A Bounce-Back Bet

On Jan. 3, we issued an email alert announcing the addition of rubber product manufacturer AirBoss of America Corp. (TSX: BOS, OTC: ABSSF) to the Dividend Champions Portfolio, with an initial allocation of 2.0%.

There’s a full profile of AirBoss on page 8 of this issue. But in short, we believe AirBoss is an excellent value at current prices, and that investors will be well rewarded over time. The stock’s forward dividend yield of 2.4% is lower than what we would normally prefer, but rapid growth in the dividend should resume once the operating environment improves.