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In an article published on July 2, I explored “The 14 Highest-Yielding Dividend Champions”—stocks that have increased their annual payouts for 25 or more consecutive years. The list and all its accompanying data are researched and compiled by David Fish at DRiP Investing Resource Center. The compilation is available here.

Frequent readers know that I consider this listing to be superior to the better-known Dividend Aristocrats list compiled by S&P. Mr. Fish’s list—unconstrained by membership in the S&P 500—has more than twice as many stocks (100). He fits a tremendous amount of supporting and instructive information into a small amount of space without sacrificing readability. The Dividend Champions document is in the same league with the Daily Racing Form in that respect—and I say that as a high form of compliment. He updates everything monthly.

This week, let’s look at the Dividend Champions with the highest rate of dividend growth. Usually in the stock market, when you hear about “growth,” it is a reference to price growth. But in dividend growth investing, it is a reference to the dividend’s rate of growth, without regard to price. In dividend growth investing, the key metric is the increasing dividend stream you receive from your portfolio—not the price of each stock. Since it pushes price into the background, dividend growth investing is a strategy for the very long term, measured in years if not decades.

Whenever you talk about growth, you need to specify a timeframe. “My son is growing so fast—he shot up 3 inches this year.” “Yao Ming was seven feet tall by the time he was 16.” “I’ve put on 6 pounds in the last two weeks; I’ve got to get my weight back under control.” Each of those sentences is a statement about growth. Merely specifying the amount of growth without specifying the length of time to achieve it would be almost meaningless. You need the timeframe to provide the proper context.

It’s the same way with dividend growth. If you say that a company grew its dividend 20%, was that in just one year, was it over two years, or more? You need both figures to understand the significance of the growth number.

In the Dividend Champions list, Mr. Fish provides a new feature for 2010, called “Dividend Paid by Year.” This table shows the actual payout per share for each Champion from 1999-2009, as well as the 5-year and 10-year average dividend growth rate for each stock. He also calculates an “Acceleration/Deceleration” ratio, which is the rate of increase for the most recent 5-year period divided by the 10-year rate of increase. A ratio over 1.0 indicates an accelerating dividend, while a ratio under 1.0 indicates a decelerating dividend over those timeframes.

Notice that a decelerating dividend does not mean that a dividend is being cut, no more than a decelerating car means that it is going backward. It just means that the rate of growth is slowing. If the dividend weren’t still growing, the stock wouldn’t be on the Dividend Champions list at all.

Let’s look at the nine fastest-growing dividend streams among the Champions. This list is in order of the average growth rate per year for the most recent five years. These nine are the only companies out of the 100 Dividend Champions with average dividend growth rates of 30% or more from 2005 through 2009. Five-year rates of increase are as of year-end 2009. I have added projected current yield and 2010 increases as of July 9, 2010 using Morningstar data. After the table, you will find a few additional facts and comments.

Stock (Ticker)

5-Year Average Change

% per Year

Projected Current Yield %

2010 Dividend Increase % (Month or Usual Month of Increase)

CenturyLink (NYSE:CTL)

224%

8.4%

4% (March)

Nucor (NYSE:NUE)

100%

3.6%

3% (February)

Lowe’s (NYSE:LOW)

80%

2.2%

(July)

McDonald’s (NYSE:MCD)

55%

3.2%

(December)

AFLAC (NYSE:AFL)

39%

2.3%

(See note)

Weyco (NASDAQ:WEYS)

35%

2.7%

7% (July)

Walgreen (NYSE:WAG)

32%

1.9%

(September)

Mine Safety Appliances (NYSE:MSA)

32%

4.1%

4% (July)

Medtronic (NYSE:MDT)

30%

2.4%

10% (July)

Here are some additional notes and observations:

  • Appearance on this list is not a recommendation or endorsement of any stock for investment. It is simply a presentation of information. Before making any investment, do your own due diligence.
  • According to the Dividend Champions document, the average company on the list has delivered a 10.6% annual average increase in its dividend over both the past 5- and 10-year periods. Note that all dividend increase percentages are annual average increases, computed by taking the final year’s dividend, dividing it by the first year’s dividend, turning that into a total percentage increase over the five years, and then dividing by 5 to get the average percentage increase per year. Thus the averages reflect compounding.
  • None of the five companies that have already announced dividend increases for 2010 comes close to matching its annual average increase over the past five years. This can mean that the bulk of the 5-year average was caused by one or two significantly large dividend increase(s). For example, CenturyLink increased its dividend from $0.26 to $2.17 in 2008, an increase of 734% in one year. CenturyLink also appeared in my earlier article on highest yields and generated several comments questioning its business model, acquisitions strategy, and sustainability of its dividend. The comments can be seen here.
  • As a result of the various paths that dividends and increases can take, each investor must decide how predictive of future increases the past 5-year or 10-year record actually is. That requires an examination of the company’s business model, balance sheet, revenue and earnings growth potential, and other financial factors.
  • None of the fastest-growing dividends, except CenturyLink, is associated with a particularly high current yield. This lends more credence to the observation often made by dividend writers that high-yielding stocks tend to have slower dividend growth rates, while lower-yielding stocks often sport the highest growth rates.
  • AFLAC has not increased its dividend since March, 2009. If it does not increase its dividend in 2010 (and ordinarily its dividend-increase month would have been March), it will lose its status as a Dividend Champion.

Disclosure: Author is long CTL, MCD.

Source: 9 Dividend Champions With the Fastest Rates of Growth