The Champions, Contenders And Challengers List: A 6-Year Review

by: The Part-time Investor

I recently wrote an article showing how the stocks on the Dividend Champions, Contenders and Challengers (CCC) list compiled by David Fish performed in 2013. As a quick review Dividend Champions are stocks which have raised their dividend for at least the past 25 years, Contenders have raised their dividend for the past 10-24 years, and Challengers have raised their dividend for the past 5-9 years. Since the CCC list is used by so many dividend investors I thought it would be instructive to see how the stocks on the list actually performed based on the data Mr. Fish tracks. To summarize the results of this first study, the 1 yr dividend growth rate (DGR) and the Chowder Number (5 yr DGR + yield) both showed a positive correlation with returns, the market cap showed a possible negative correlation with return (as market cap increases returns decrease), and the starting yield showed no correlation.

But this was only one year's worth of data, so it's hard to tell if these results were statistically significant. Therefore I decided to expand the study to include all the years that the CCC list has been in existence, going back to the beginning of 2008. This would give me 6 years' worth of data to work with. I also expanded the study to look at more criteria. Instead of just looking at the 1yr DGR, I also looked at the 3yr, 5yr and 10 yr DGRs, and I looked at the payout ratio. The Chowder number, yield and market cap were also included in this study, just as they had been in the first study.

To do this study I started with the January 2008 list. This is the first list that Mr. Fish produced with the price of the stocks included. The stock prices quoted for this specific list were dated January 15, 2008. This list was then compared to the December 2008 list, in which the prices listed were dated 12/31/08. I took the stock price on 12/31/08 and subtracted the price on 1/15/08 and added in the dividends paid during the year to calculate the total return. Some stocks were removed from the list during the year due to mergers and acquisitions, dividend freezes or dividend cuts. In each of these cases Mr. Fish gave the date that the stock was removed from the list. This information can be found in the CHANGES tab of the spreadsheets. For all of these stocks I used the stock price on the date it was removed as the final stock price, on the assumption that I would have sold the stock on that date, or that that would be the date that the merger/buy out would have been complete. Using this "sale price" I calculated the return for these stocks.

I repeated this process for every year, using the stock price listed on the December CCC list of one year as the starting price, and the stock price listed on the December CCC list of the following year as the final price. The dividends paid for any particular year were also taken from the information in the CCC spread sheet, or through my own research when the information was no longer listed. The actual dates used, as per the CCC lists were, 1/15/08, 12/31/08, 12/31/09, 12/31/10, 12/30/11, 12/31/12, and 12/31/13.

After these calculations were completed I had over 2200 yearly returns for individual stocks. In some cases, if the stock remained on the CCC list for all six years that the CCC list has been compiled, then the stock is listed 6 times. Other times a stock only appeared for one year. All of the returns were then sorted based on the following metrics: Yield, 1 yr DGR, 3 yr DGR, 5 yr DGR, 10 yr DGR, Market Cap, EPS payout ratio, and the Chowder Number. Mr. Fish did not always keep track of all of these categories, so not all of them have 2200+ data points to work with. Within each category the sorted returns were grouped into ten decile groups, the average for each group was calculated, and these averages were plotted. The coefficient of determination was determined and plotted for each of these graphs to show if there was any correlation between the results and the category being studied.

The results are as follows:

YIELD

The comparison of returns based on the yield showed that higher yielding stocks performed only slightly better than lower yielding stocks. The coefficient of correlation was only .000516, so this relationship is extremely weak, if it even exists. Interestingly, the single best performing decile was the 5th, which consisted of stocks with a yield of between 2.86 and 3.24.

Decile

Ave Return

1

8.94%

2

9.94%

3

13.09%

4

12.63%

5

17.74%

6

12.16%

7

11.38%

8

13.89%

9

10.43%

10

7.93%

Click to enlarge

Click to enlarge

1 YR DGR

The comparison of returns based on the 1 yr DGR showed a very strong correlation, showing that stocks with a higher 1 yr DGR performed better than stocks with a lower 1yr DGR. The coefficient was .5738, and the graph shows a strong trend with the 1yr DGR and the returns both decreasing as you go from left to right.

Decile

Ave. Return

1

17.40%

2

11.84%

3

14.02%

4

12.15%

5

13.22%

6

14.37%

7

7.79%

8

7.97%

9

9.78%

10

9.63%

Click to enlarge

Click to enlarge

3 YR DGR

The comparison of returns based on the 3 yr DGR showed a strong correlation, indicating that stocks with a higher 3 yr DGR performed better stocks with a lower 3yr DGR, but the coefficient, .2442, was not as strong as for the 1 yr DGR.

Decile

Ave Return

1

15.17%

2

19.51%

3

13.38%

4

12.60%

5

12.10%

6

14.23%

7

15.40%

8

13.03%

9

11.91%

10

13.38%

Click to enlarge

Click to enlarge

5 YR DGR

The correlation between returns and the 5 yr DGR is even weaker than the correlation with the 3 yr DGR. The coefficient is only .06818. From the 1yr, 3yr and 5 yr DGRs it seems pretty clear that it is the most recent dividend increase, the 1 yr DGR, that has the strongest correlation with how the stock performs in any particular year.

Decile

5-yr DGR

1

11.23%

2

14.22%

3

17.27%

4

15.92%

5

15.94%

6

16.35%

7

17.54%

8

12.31%

9

12.10%

10

11.06%

Click to enlarge

Click to enlarge

10 YR DGR

The correlation with the 3 yr DGR and the 5yr DGR were decreasing, but now with the 10 yr DGR they jump back up again and show a very strong correlation. The coefficient is .65317, second only to the Chowder Number in terms of the strength of correlation.

Decile

Ave Return

1

14.66%

2

15.98%

3

15.35%

4

15.17%

5

16.86%

6

14.70%

7

12.60%

8

12.90%

9

11.26%

10

8.49%

Click to enlarge

Click to enlarge

Chowder Number

The Chowder Number (5 YR DGR+ Yield) shows a very strong correlation with stock returns. As the Chowder Number decreases the returns drop considerably. The correlation coefficient is .6589, which is the strongest of all the criteria studied.

Decile

Ave. Return

1

12.17%

2

15.68%

3

17.63%

4

14.79%

5

13.68%

6

14.39%

7

11.61%

8

8.58%

9

6.67%

10

2.37%

Click to enlarge

Click to enlarge

Market Cap

The results for the market cap comparison show that as market cap decreases the returns increase, but the correlation is not especially strong. The coefficient is only .12049.

Mkt Cap

Ave return

>100b

8.62%

50-100b

15.28%

25-50b

15.36%

10-25b

14.11%

5-10b

11.60%

2.5-5b

15.51%

1-2.5b

15.68%

.5-1b

15.08%

0-.5b

12.79%

Click to enlarge

Click to enlarge

Payout Ratio

In this case the lowest payout ratio stocks are in the 1st decile, to the left. So the payout ratio increases as the graph moves to the right. There is a slight decrease in results as the payout ratio increases, but it is not very strong. The correlation is only .0185.

Decile

Ave Return

1

16.84%

2

9.60%

3

17.07%

4

17.22%

5

17.61%

6

12.19%

7

13.71%

8

14.09%

9

11.58%

10

16.42%

Click to enlarge

Click to enlarge

Discussion and Conclusion

Going into this study I would have expected that stocks with higher DGRs, higher Chowder Numbers, lower payout ratios, and lower market caps would have had superior returns. The results confirm these hypotheses, but to varying degrees. The 1yr DGR, 10 yr DGR and Chowder Number show very strong correlations. The 3 yr and 5 yr DGR also show increasing returns as the DGR increases, but the correlation is not as strong. It makes sense that the most recent DGR is the most important in determining the annual return, and that as the period of time increases the correlation will decrease. But then why would the correlation increase again for the longest time period, the 10 yr DGR? My best guess is that as time goes on, and the DGR remains high, investors confidence in the stock increases causing them to want to hold on to the stock longer, thereby decreasing the selling pressure, allowing the purchases to cause the increase in the price. But I'm open to better explanations.

The results for the payout ratio and the market caps do agree with my hypothesis, but the results are fairly weak, indicating that these two metrics are not as important as the DGR in determining returns.

The yield showed almost no correlation with returns. Higher yielding stocks usually have a slower growth rate, but the high dividend contributes to the yearly return. The dividend of lower yielding stocks doesn't contribute much to the return in any particular year, but they often have higher DGRs, helping to boost the returns. The balance between the two may explain why high yielding and low yielding stocks had similar annual returns in this study. The Chowder Number looks to combine the best of the two, high yielding stocks with high DGRS. This may explain why there was such a strong correlation between a high Chowder Number and high returns.

These results seem to validate the idea that the DGR of a stock, whether short term (1 yr) or long term (10 yr) is a powerful metric that can be used to make stock selections and build a solid portfolio. Inclusion of the Chowder Number will reinforce the selections and could make the process even more powerful.

Thank you for reading my article. I welcome your comments and criticisms.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.