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The Dividend Champions spreadsheet (and PDF) have been updated through 12/31/10 and is posted here. Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years.

Dividend Growth and the S&P 500

Recently, I've run across many comments from detractors of the dividend growth strategy and one of the frequent criticisms centers on returns, but mistakenly cites the past decade, when “the S&P 500 was flat” or “lost ground.” The problem here is that using the S&P 500 as a proxy for dividend growth (or just dividend-related) investing is questionable at best and, as I'll spell out below, an inappropriate benchmark for dividend growth. Keep in mind that dividend growth investors want to own companies that increase their payouts year after year, preferably by percentages that easily exceed the rate of inflation. Many such investors are income-oriented, so price appreciation is simply a nice bonus when it happens. But having “dismissed” its importance, I believe that the same fundamentals (primarily earnings growth) that drive dividend growth also tend to provide a steady dose of capital appreciation.

In his recent article, new SA contributor Todd Mayberry quotes Robert Shiller as citing the yield on the S&P 500 as 1.74%, “only half the yield on the 10-year T-Note.” Such a low yield would hardly be acceptable to a dividend growth investor, but it's not surprising, given the fact that 130 of the companies in that index do not pay a dividend at all. So anyone using the S&P 500 as ammunition against a dividend growth strategy must be relying on the other 370 companies that do pay dividends and surely, those firms must be dividend boosters, right? Not quite. While some are, many more are not...at least not habitually.

On January 12, The Wall Street Journal posted the following article under its WSJ Blogs section, and while it would be easy to quibble with its title, the information presented does provide some insight about the dividend composition of the S&P 500 index, especially in light of my recent comparison of that index to the Dividend Champions, Contenders, and Challengers (posted on December 23 and 24). In all, I found that the S&P 500 included 52 Champions, 30 Contenders, and 63 Challengers...or 145 companies that have paid higher dividends for at least five years. From this latest listing, I counted 65 other companies that have increased their payouts for 1-4 years...a total of 210 components that had 2010 increases. That leaves 130 non-payers and 160 companies that pay dividends, but did not increase them in 2010. (There were four that actually decreased their dividends.)

Where's the Dividend Growth?

It's unfortunate that an index like the S&P 500 has become so ubiquitous not only in its widespread use as a fund and ETF benchmark, but also as a reference for stock market performance in general and as a proxy for any and all investment strategies. Clearly, when commenting on a dividend growth strategy, it's inappropriate to cite an index where only 42% of its components increased their dividends last year and a full 26% don't even pay dividends. Only 29% of the companies have boosted their payout for five years or more...not exactly a model for dividend growth!

Consider the index's relationship to the Champions/Contenders/Challengers. Only 145 of the 417 “CCC” companies (less than 35%) are in the S&P 500. Of course, this does not change the fact that some of the best known Dividend Champions are components of that index. It simply means that citing the S&P 500 as some kind of proof that a dividend growth strategy doesn't work is misguided at best.

So where can an investor find the best dividend growth? My first answer would be to read my series of monthly “Smackdowns,” which screen the Dividend Champions, Contenders, and Challengers by various criteria. I also suggest reading (and following) several SA Contributors (who I'll mention below) to obtain some of the best dividend-oriented information available today, either on the Internet or elsewhere. As an additional answer, I decided to perform a “mini-smackdown” of the CCC companies, starting with the 10-year Dividend Growth Rates (or DGRs) and drilling down through the 5-, 3-, and 1-year rates, to find the greatest consistency.

There were 10 Champions with double-digit dividend growth rates in all four periods:

Company

Symbol

1-yr

3-yr

5-yr

10-yr

Becton Dickinson & Co.

BDX

12.1

14.7

15.5

14.9

Colgate-Palmolive Co.

CL

18.0

13.2

12.8

12.4

Family Dollar Stores

FDO

13.2

10.1

10.2

10.8

Lowe's Companies

LOW

14.3

15.4

32.0

27.6

McDonald's Corp.

MCD

10.2

14.6

27.5

26.5

Sigma-Aldrich Corp.

SIAL

10.3

11.6

11.0

15.2

Target Corp.

TGT

23.5

17.3

18.5

14.9

W.W. Grainger Inc.

GWW

16.9

15.8

17.7

12.0

Walgreen Company

WAG

25.0

21.9

21.6

16.5

Wal-Mart Stores Inc.

WMT

11.8

12.6

15.3

17.8

Notably, all 10 are members of the S&P 500, but that doesn't mean that they are typical of that index. There were 30 Contenders with double-digit DGRs in all four periods:

Company

Symbol

1-yr

3-yr

5-yr

10-yr

Atlantic Tele Network Inc.

ATNI

10.8

12.2

12.8

11.7

Bank of the Ozarks Inc.

OZRK

15.4

11.7

10.2

19.0

Canadian National Railway

CNI

17.5

10.1

16.8

16.2

Cardinal Health Inc.

CAH

14.3

19.7

32.0

25.7

Casey's General Stores Inc.

CASY

26.6

20.8

19.0

19.2

Church & Dwight

CHD

34.8

27.4

20.9

12.8

Computer Services Inc.

OTCQX:CSVI

13.9

12.2

14.3

15.7

Ecolab Inc.

ECL

10.7

10.5

12.1

10.0

Factset Research System Inc.

FDS

14.1

28.4

34.8

29.0

Fastenal Company

FAST

16.7

24.1

22.1

45.3

General Dynamics

GD

10.1

14.2

16.0

12.4

International Business Machines

IBM

16.3

18.6

26.2

17.2

Jack Henry & Associates

JKHY

11.8

13.5

16.1

14.3

John Wiley & Sons Inc.

JW.A

11.1

12.6

12.7

14.7

Meridian Bioscience Inc.

VIVO

11.8

20.6

28.9

21.7

Owens & Minor Inc.

OMI

15.2

16.0

15.3

15.7

Praxair Inc.

PX

12.5

14.5

20.1

19.2

Prosperity Bancshares

PRSP

12.7

11.3

13.4

14.5

Raven Industries

RAVN

14.8

13.9

18.5

18.2

Roper Industries Inc.

ROP

15.2

13.5

12.6

10.5

Ross Stores Inc.

ROST

45.5

28.7

25.0

23.7

Royal Gold Inc.

RGLD

12.5

11.5

12.5

21.8

SEI Investments Company

SEIC

18.8

13.5

12.6

17.9

Southside Bancshares

SBSI

29.8

18.7

14.3

19.0

Stryker Corp.

SYK

20.0

39.7

46.1

33.9

Teva Pharmaceutical Industries

TEVA

23.6

24.8

22.7

33.6

TJX Companies Inc.

TJX

21.3

18.8

20.4

22.1

Unisource Energy Corp.

UNS

34.5

20.1

15.5

17.2

United Technologies

UTX

10.4

13.9

14.1

15.2

Universal Forest Products

UFPI

53.8

51.5

30.7

17.5

Ironically, there were again 10 S&P 500 components, out of 30. And even with streaks of just 5-9 years, there were 26 Challengers with double-digit DGRs in all four periods:

Company

Symbol

1-yr

3-yr

5-yr

10-yr

Astrazeneca plc

AZN

15.3

11.3

18.6

12.0

Coca-Cola FEMSA S.A.B. de C.V.

KOF

127.6

42.8

30.6

22.3

Cummins Inc.

CMI

25.0

26.7

23.9

11.3

CVS Caremark

CVS

15.1

15.2

19.1

11.7

Darden Restaurants

DRI

26.7

24.6

36.6

35.8

Empresa Nacional de Electricidad SA

EOC

45.6

26.3

48.2

52.2

Flowers Foods

FLO

14.8

23.0

24.8

22.1

G&K Services Inc.

GKSR

17.2

23.6

37.2

17.1

Hanover Insurance Group (The)

THG

33.3

35.7

32.0

14.9

Harris Corp.

HRS

11.9

21.8

27.4

25.1

Hasbro Inc.

HAS

18.8

16.6

23.5

14.7

Intel Corp.

INTC

12.5

11.9

14.5

24.6

International Speedway Corp.

ISCA

14.3

17.0

21.7

10.3

ITT Corp.

ITT

17.6

21.3

22.7

12.8

Lockheed Martin

LMT

12.8

21.6

20.2

19.6

Novo Nordisk A/S

NVO

36.1

32.2

27.4

20.9

Occidental Petroleum

OXY

12.2

16.1

17.9

11.4

Raytheon Company

RTN

18.6

12.6

10.8

111.5

Rollins Inc.

ROL

28.6

21.6

22.0

19.8

Shaw Communications Inc.

SJR

15.8

16.3

47.2

42.3

Strayer Education Inc.

STRA

44.4

35.3

39.1

29.5

Suncor Energy Inc.

SU

42.2

29.0

29.7

16.3

Tiffany & Company

TIF

27.9

22.8

25.5

20.0

Union Pacific

UNP

11.1

21.1

14.9

11.6

VSE Corp.

VSEC

15.8

13.6

14.9

11.0

W.R. Berkley Corp.

WRB

12.5

10.5

15.2

10.1

Here, 12 of the 26 are S&P 500 components. So 32 of the 66 CCC firms with double-digit DGRs in all four periods...just under half...were S&P 500 members. More to the point, only 32 of the 500 stocks in that index (or 6.4%) can be described as exceptional dividend growth stocks.

Final Words

As promised above, I'd also like to highly recommend reading (and following) several SA contributors who write extensively about dividend growth stocks, including the following, in more-or-less alphabetical order:

There are others among a growing listing of SA authors and I apologize for not mentioning them here. If I have one talent as an author, it is recognizing excellence in the work of others, and I hope that you will start following these authors.

Source: Dividend Growth and the S&P 500