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An underfollowed S&P/TSX sub index just might form the basis for an effective buyer's guide to domestic dividend stocks.

The S&P/TSX Composite High Dividend index is rarely quoted as a benchmark but that may be about to change. The market capitalization-weighted index (the performance of larger companies moves the index far more than smaller cap stocks) consists of all S&P/TSX Composite stocks with projected dividend yields above the median level for the main Canadian equity benchmark.

Three year valuation data for the Dividend Index has only just become available – the previous lack of valuation history is likely one reason few investors have been aware of the benchmark. And, while we'll have to be careful about putting too much faith in patterns only three years old, a look at index valuations and performance turned up some interesting results.

I compared three valuation metrics – Enterprise Value to Earnings Before Interest, Taxes, Deductions and Amortization (EBITDA), price to earnings and price to book value – against the dividend benchmark's returns. The first two turned up nothing, but price to book value levels does appear to forecast performance.

The chart below plots the index against its average P/BV multiple. The most important level has been two times book value. When the aggregate P/BV climbed above two times, a drop in the index wasn't far behind.

A bit less apparent is the 1.75 times book value level that seem to be a safe zone for buyers of dividend stocks. The index has not declined significantly when the average P/BV has been below 1.75.

Dividend stocks are perfectly suited for long term, buy-and-hold investors, so I'm not suggesting that yield-hungry investors sell their stocks when the index hits two times book. But investors who add to dividend holdings when the key multiple drops below 1.75 times, and who stop buying as stocks approach two times, are likely to increase portfolio returns.

Follow Scott Barlow on Twitter @SBarlow_ROB.