Establishing a sound investment portfolio comprised of dividend stocks requires evaluation of dividend payout over at least a decade of earnings. A graphical snapshot of dividends paid over a prolonged period can reveal cuts, uncertainty or inconsistency in the form of variance (risk), or a steadily growing dividend or a long period. Reinvestment of equities with higher yielding dividends on the order of 6-7% during pre-retirement will maximize the number of shares owned as well as yield to ensure a solid steady income throughout the retirement years.
There are several key factors to consider when owning dividend stocks over the long haul. First, the percentage of institutional ownership of a stock reflects the proportion of shares outstanding in the form of market capitalization owned by large mutual funds. Since the volume of shares purchased by mutual funds is larger than those purchased by individual retail investors, and since mutual fund companies have research analysts who spend every hour of the working day on conference calls, meeting with corporate CEOs and CFOs, and evaluating competitors, and potential earnings growths, they have a better reference frame for where a corporation is headed in the near future and a deeper understanding of future dividend growth. The greater the institutional ownership, the greater the chance that the future will be bright, since future earnings and payouts in the form of a growing dividend is the main goal for dividend investing.
Second, if the historical refection of a dividend-paying corporation reveals a steadily growing dividend, this portrays success in fulfilling a business plan for acquiring free cash flow that can be paid out in the form of dividends. Long-term success for raising dividends is usually the result of a product line that's in constant demand which cannot be quickly outsold by a Johnny-come-lately competitor, or the ability to adapt to new market threats and innovate new products that are in continual demand. Third, greater values of annual yield in the range 6-7% will ensure that payouts stay ahead of inflation, although there is greater risk of a dividend cut when yield goes beyond 7%, unless it's a REIT or a financial firm that invests in higher-than-normal risked securities.
This article covers dividend growth of 110 equites over a total follow-up period of 13 years. Growth is determined by visual recognition of a consistent positive trend in the dividend over more than a decade of earnings. In the following 8 charts, the symbol of each stocks is followed by the percentage of institutional ownership, and dividend yields (in parentheses). The x-axis reflect each dividend payout going back in time, where the greatest x-value represents 52 quarterly payouts -- so the latest dividend paid out occurred prior to today's data (Nov 22, 2010). The y-axis is the dividend paid in units of US dollars. The legend of each chart lists each stock symbol followed by percentage of institutional ownership and annual dividend yield in parentheses.
The chart below shows the top ranked equities with the greatest percentage of institutional ownership (84.9-100%). Dividend cuts for DO and VNO are readily apparent, while for LO and [[VTR] the dividend has grown strongly positively at a rather steady pace. A dividend trend like that of MCHP, does not reflect dividend growth, but rather has stabilized and remained constant.
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The chart below reflects stocks with institutional ownership in the range 73.5-83.8%, and reveals steady dividend growth for ETR, HCN, LLY, YUM, NU, and ITW, and large cuts made by FPO and DRE.
The chart below reflects stocks with institutional ownership in the range 70.6-75.3%, and shows steady dividend growth for MCD, KMB, and GIS, while cuts are visible for PFE.
The chart below reflects stocks with institutional ownership in the range 63.7-70.5%, and shows steady dividend growth for INTC, WR, PPL, SUI, PCG, PEP, NEE, and PPG. There has been no change in the dividends for DD, SUI, and EXC for a while.
The chart below reflects stocks with institutional ownership in the range 47.7-62.5%, and shows steady dividend growth for VZ, T, and RAI, while recent cuts by MO and HCBK are visible.
The chart below reflects stocks with institutional ownership in the range 18.4-47.3%, and shows steady dividend growth for most stocks considered, with exception to PWE, which has monthly payouts which have been steadily decreasing.
The chart below reflects stocks with institutional ownership in the range 3.1-18%, and shows steady dividend growth for KMP, APU, and EPE. SCCO has a widely fluctuating dividend that nevertheless is increasing. CH is a mutual fund (Chile).
The last chart happens to show stocks whose percentage of institutional ownership was N/A. TGP's dividend has been growing steadily growing while GSK and VOD have been fluctuating.
By graphically visualizing the historical reflection of a corporation's dividend over a decade or more, and comparing relative growth rates (or cuts) of dividends, it is possible to quickly grasp which equities may be safer in the near term. This approach simply presents another angle for establishing the quality of dividend equities. Some conclusions drawn from the charts presented were that Southern Copper's (NYSE:SCCO) dividend may fluctuate more than expected. In addition, Penn West Energy (NYSE:PWE) has been reducing its dividend for quite a while. Merck (NYSE:MRK) Pfizer, (NYSE:PFE) and Glaxo-Smith Kline (NYSE:GSK) have a dividend that's recently been stable or fluctuating. Eli Lilly & Co (NYSE:LLY) has stable dividends that are not growing. Abbott Laboratories (NYSE:ABT) may have the fastest growing dividend among pharmaceutical stocks, while Bristol-Myers Squibb is also growing. Southern Company (NYSE:SO)'s dividend is growing like Duke Energy's dividend, but not as fast as Pacific Gas & Electric (PGE).
It was also apparent that dividend stocks with the greatest percentage of institutional ownership (>80%) did not always have the greatest dividend growth. Whereas, stocks with institutional ownership in the range of 60-70% seemed to collectively have tremendous growth rates and much less fluctuation in their dividends over the historical period considered. Fast dividend growers in this group were PPG(70.5,2.9), NSC(70.4,2.4), GPC(70.3,3.5), PPL(70.1,5.4), WR(69.5,5), ABT(68.7,3.7), PEP(67.6,3), HNZ(67.5,3.8), and PCG(66.6,3.9).
Disclosure: I am long ABT, ACG, AJG, AWF, CH, CPNO, D, ETP, FL, HCN, HIX, LGCY, LINE, MCD, MCHP, NLY, NS, PWE, SCCO, SUI, WIN