It's important to keep track of one's progress in any goal. As a dividend growth investor, dividend growth is one of the top metrics to indicate how well the investments are doing. I get a headache though, when I try to figure out a method to track all the dividend growth companies which I own. It is a breeze to track dividend growth of companies, which raises them consistently on certain quarters. The problem comes when companies raise the dividends inconsistently.
This article is related to my previous article on tracking dividends. This article however, further strives to explore ways of tracking dividend growth of individual companies.
I think all investors who have a dividend growth portfolio would agree that tracking the income stream produced from that portfolio year by year is essential to determining the success of that portfolio. At the end of each year, one would expect the dividend stream to be higher than the previous year's. However, tracking dividends at the portfolio level only shows you the health of your portfolio. It says nothing about the performance (in terms of dividend growth) for each company that's in it.
Then, what's the most logical way to track the dividend growth for each company in the dividend growth portfolio?
At a high level, it really depends. The reason being dividend growth companies raise their dividends at different times. Other times, one company might decide to keep the dividend stable for more quarters than expected. Yet, another company might decide to increase its dividends twice within 4 quarters! I want to explore a method or methods which really tells how the dividend growth of a company is doing. This is important because one might want to switch to a company with a higher rate of dividend growth, if they find out one of their holdings' dividends is growing at a rate lower than inflation. And you'll only know if you have been tracking the dividend growth of each company.
Exploring some examples at a lower level, we'll soon see that a one size fits all method wouldn't work well for tracking dividend growth of individual companies.
1) Company with a Dividend Cycle
For example, McDonald's (MCD) was paying out is $0.70 per share per quarter before raising the dividend to $0.77 per share per quarter, thereby a 10% increase. In fact, because McDonald's has been consistently raising its dividend on the 4th quarter since 2000, I'm going to show the dividends received annually. However, I think it makes more sense to start recording the dividend received at the start of what I like to call the dividend cycle. The dividend cycle begins when the dividend is first raised for that year. In terms of tracking dividend growth for McDonald's, there's a little burp between 2007 to 2008 because that's when it changed from paying out an annual dividend to a quarterly one. As a result, I'm going to show the following graphs between 2009 and 2012 only.
Because McDonald's raises its dividend every Q4, I begin the dividend cycle in Q4. However, the dividend cycle method wouldn't work as well for companies which stalled their dividend for a period.
2) Company having Stalled Increase of Dividend
Using Aflac (AFL) as an example, it stalled its dividend for a short period of time (starting Q1 of 2009, and didn't raise it until the 7th quarter). I'm not trying to single out Aflac, it just happens to have the scenario I want to illustrate. I just want to find a logical way to track a company that has stalled its dividend growth... a way that would make sense visually, so that I know whether to keep it in my portfolio or not as a dividend growth investor. That said, the criteria for selling a security will differ amongst each individual investor. Alas, I can't think of a better way to track dividends for companies which stall dividend increases, other than using the annual total dividends method.
3) Company Raising Dividends More than Once within a Year
To be fair, I'm just going to mention that Scotiabank (BNS)* stalled its dividends for more than 2 years during the financial crisis. However, maybe because the economic outlook improved, in 2012 it raised its dividends twice. Actually, looking at its dividend history (as far back as Google Finance allows), it doesn't seem to have a dividend cycle. So again, the best way to track dividends for such companies is to use the annual total dividends method.
* described in Canadian currency terms
With a company like McDonald's, where the dividends are raised consistently like clockwork when Q4 rolls around, the dividend cycle DG graph shows a more meaningful picture than the annual total dividends DG graph. Thus, for any DG company which increases dividends annually at the same time, I would use the dividend cycle DG graph method to illustrate the dividend growth.
For companies which don't follow a dividend cycle, I would record the dividends annually and compare the dividend growth annually.
Which way do you use to track your dividend growth? Do you use different methods depending on the company? Perhaps to keep it simple, you use the same method for every company? Or maybe you only track the portfolio dividend growth to keep it super simple.