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Dividend growth investing, retirement
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What’s a fast-growing dividend? 4% per year? 7%? 10%?
Obviously reasonable minds can differ. Someone with a stock that’s already yielding 7% may say that 5% per year growth in that dividend is fine with her. On the other hand, someone with a 3% yielder may be looking for a minimum growth rate of 10% per year, looking to get as fast as possible to an 8% to 10% yield on its original cost.
Some investors might say that they just want to keep up with inflation, or inflation + 2%. Someone with a preferred stock paying 10% may say that no growth at all is needed, because the 10% yield is great already, without needing to wait years for a rising-dividend stock to get its yield on cost up to that level.
The U.S. Dividend Champions List —produced by David Fish for the DRiP Investing Resource Center—is the best compilation I know of domestic stocks that have raised their dividends for the past 25 years. I think it is superior to the more famous Dividend Aristocrats List from S&P. Mr. Fish’s list—unconstrained by membership in the S&P 500 and backed up by painstaking research—has more than twice as many stocks (100). Some terrific new data elements in David’s ever-improving document make exploring dividend-growth questions a lot easier than they used to be. I have used David’s data (updated through July 30) to produce this article.
Believe it or not, there are only 6 Dividend Champions that meet the following simple criteria for a dividend growth investor:
  • Current yield of at least 2.5%
  • 5-year and 10-year dividend CAGR of at least 10% (rounded)
  • 2010 dividend increase of at least 10% (rounded)
When I began this article, I thought there would be 15-20 stocks that would meet those requirements. But it turns out that when you require all of them at the same time, asking for a 2.5% current yield plus a consistent 10% dividend growth history is tough. Only 6 companies have done it. Here’s the list:
STOCK
YRS. INC.
YIELD
10-YEAR CAGR %
5-YEAR CAGR %
2010 INC.
%
Clorox (NYSE:CLX)
33
3.4
12
10
10
Colgate-Palmolive (NYSE:CL)
47
2.7
12
11
20
Illinois Tool Works (NYSE:ITW) (see note)
45
2.9
20
15
16
McDonald’s (NYSE:MCD)
33
3.2
30
27
10
Procter & Gamble (NYSE:PG)
54
3.2
12
11
10
Walgreen (WAG)
35
2.5
21
14
27
Where are the usual suspects?
  • Coke (NYSE:KO) and Pepsi (NYSE:PEP) fell down on their increases this year (7% each). So did Altria (NYSE:MO) (3%), Leggett & Platt (NYSE:LEG) (4%), VF Corp. (NYSE:VFC) (2(%), and ADP (3%). This seems odd in a generally better year for dividends than the past two, but those are the numbers.
  • Lowe’s (NYSE:LOW) (2.1%), Target (NYSE:TGT) (2.0), Grainger (NYSE:GWW) (1.9), Becton-Dickinson (NYSE:BDX) (2.2), Wal-Mart (NYSE:WMT) (2.4), Sherwin-Williams (NYSE:SHW) (2.1), and AFLAC (NYSE:AFL) (2.3) all fall short of the 2.5% current yield hurdle. The fact is, there is little correlation between lengthy strings of dividend increases and current yield. No fewer than 22 of the 100 Dividend Champions have yields under 2%. Tootsie Roll Industries has been increasing its payout for 45 years, but yields just 1.3%.
Note on Illinois Tool Works: It just announced a dividend increase for its final payment of 2010, coming in October. Without this increase, it would have dropped off the Dividend Champions list entirely, because it held its dividend steady in 2009. (Because its prior increase was at the end of 2008, 2009’s total payout was more than 2008’s, and thus it stayed on the Dividend Champions list throughout 2009 and the first part of 2010.)
As I noted in my article, “9 Dividend Champions with the Fastest Rate of Growth,” almost none of the stocks with extended high-growth histories has a particularly high current yield. This lends 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. The results of this current article refine that second point: Lower-yielding stocks are the only ones with consistently high growth rates (>= 10% per year).
For an article explaining the interplay over time of current yield with annual rates of increase, see my earlier article, “10 by 10: A New Way to Look at Dividend Yield and Growth.” And the usual fine print applies to these 6 stocks: This list is not a buy-list recommendation. Dividend growth investing is a long-term strategy, one that involves holding stocks for long periods of time and little portfolio churn. Do your own due diligence before making any investment.

Disclosure: Long CL, MCD, PG