I’ve seen several comments from SA’ers, who are “skeptical” about dividend growth investing, that ask, “Yeah, dividends are great when they go up, but what about when the market drops 10, 20, 30, 40, 50 percent, and all those companies decrease or suspend their dividends?”
We can’t run a scientific laboratory experiment, but we can look back to see what happened during the Great Recession of 2008-2010. (I personally believe the Great Recession continues to this day, but my database contains only full-calendar-year dividend information, so I cannot yet comment about 2011.)
The Dow Jones dropped 34% during calendar 2008. Skeptics might expect many or most dividend growth companies to decrease or suspend their dividends in 2008, 2009, or 2010.
So what really happened? How many dividend growth companies decreased or suspended their dividends in 2008, 2009, or 2010?
To answer this question, I needed a database of information about dividend growth companies, and their dividend growth rates, before, during, and after the Great Recession.
I asked David Fish, proprietor of the Dividend Champions list, if he happened to have a copy of the list circa end of 2007, and he kindly sent me a copy of it dated 12/25/07 (I think David should stop working on Christmas!). I am most grateful to David for his help. There were 139 Dividend Champions as of that date.
I computed the dividend growth rate (DGR) of each Dividend Champion, from the year it began to pay dividends until the end of 2007, to see what it was before the Great Recession. For example, Procter & Gamble’s (PG) DGR was 9.847676%.
I then computed the DGR from 2007 to 2008 (i.e. calendar 2008), from 2008 to 2009 (i.e. calendar 2009), and from 2009 to 2010 (i.e. calendar 2010), to see what it was during the Great Recession. For example, Procter & Gamble’s DGR in 2008 was 13.970588%, in 2009 was 10.967742%, and in 2010 was 9.616279%.
From one year to the next, the DGR could change in any of the following ways, listed in decreasing order of value to me, an income investor:
- A - an increase, greater than the pre-Great-Recession DGR
- B - an increase, but not greater than the pre-Great-Recession DGR
- C - a “freeze” (i.e. the same dividend this year as last year)
- D - a decrease, but not a “zero” (see next sentence)
- E - a “zero” (i.e. the dividend this year was $0.00)
For example, Procter & Gamble’s 2008 dividend was an A, its 2009 dividend was an A, and its 2010 dividend was a B.
Using my alphabetical disignations, we can now “score” Dividend Champions from AAA (highest) to EEE (lowest), with apologies to the ratings agencies (Moody’s, S&P, and Fitch) and to shoe salesmen everywhere.
A score of ZZZ means “did not survive in its current form” (i.e. split or was acquired).
Here are the results:
Score number percent of 139 Dividend Champions Evaluated:
- AAA 6 4.316547
- AAB 15 10.791367
- ABB 20 14.388489
- BBB 47 33.812950
- BBC 7 5.035971
- BBD 1 0.719424
- BBE 1 0.719424
- BCC 4 2.877698
- BCD 2 1.438849
- BCE 0 0.000000
- BDD 18 12.949640
- BDE 0 0.000000
- BEE 0 0.000000
- CCC 0 0.000000
- CCD 0 0.000000
- CCE 0 0.000000
- CDD 3 2.158273
- CDE 0 0.000000
- CEE 0 0.000000
- DDD 4 2.877698
- DDE 0 0.000000
- DEE 1 0.719424
- EEE 1 0.719424
- ZZZ 9 6.474820
Which companies received AAAs? In alphabetical order, they are:
- Clarcor (CLC)
- Colgate-Palmolive (CL)
- Connecticut Water Service (CTWS)
- Northwest Natural Gas (NWN)
- Walgreen (WAG)
- W.W. Grainger (GWW)
Which companies received ZZZs? In alphabetical order, they are:
- Anheuser Busch (BUD) (acquired)
- EnergySouth (ENSI) (acquired)
- Florida Public Utilities (FPU) (acquired)
- Harleysville National (HNBC) (acquired)
- Hillenbrand (HI) (split)
- Marshall & Ilsley (MI) (acquired)
- Rohm and Haas (ROH) (acquired)
- Wilmington Trust (WL) (acquired)
- Wrigley (WWY) (acquired)
How badly did the financials do? There were 39 financials, of which 1 scored AAB (AFLAC (AFL)), 2 scored ABB, 6 scored BBB, 2 scored BBC, 1 scored BBE, 2 scored BCC, 2 scored BCD, 12 scored BDD, 3 scored CDD, 4 scored DDD (KeyCorp (KEY), Legg Mason (LM), Regions Financial (RF), and Synovus Financial (SNV)), 1 scored EEE (SLM Corp (SallieMae) (SLM)), and 3 scored ZZZ (Harleysville National, Marshall & Ilsley, and Wilmington Trust).
How well did the utilities do? There were 18 utilities, of which 2 scored AAA (Connecticut Water Service (CTWS) and Northwest Natural Gas (NWN)), 2 scored AAB, 1 scored ABB, 9 scored BBB, 1 scored BBC (Integrys Energy Group (TEG)), 1 scored BCC (Otter Tail (OTTR)), and 2 scored ZZZ (EnergySouth and Florida Public Utility). 10 out of 16 non-ZZZ utilities paid smaller and smaller increases after 2007; for example, Vectren’s (VVC) DGR was 8% before 2008, but the increases from 2008 to 2010 were 3.15%, 2.67%, and 1.49%.
Who scored one or more D’s? 1 conglomerate scored BDD (General Electric (GE)), 2 consumer goods companies scored BDD (Altria (MO) and Avery Dennison (AVY)), 1 consumer goods company scored DEE (LaZBoy (LZB)), 2 financials scored BCD, 12 financials scored BDD, 3 financials scored CDD, 4 financials scored DDD, 1 healthcare company scored BDD (Pfizer (PFE)), 1 industrial goods company scored BDD (Masco (MAS)), 1 services company scored BBD (Supervalu (SVU)), and 1 services company scored BDD (Gannett (GCI)). 100% of the basic materials, technology, and utilities did not score any D’s.
Who scored one or more E’s? 1 consumer goods scored a DEE (LaZBoy (LZB)), 1 financial scored a BBE (Progressive (PGR)), and 1 financial scored an EEE (SLM Corp (SallieMae) (SLM)). 100% of basic materials, conglomerates, healthcare, industrial goods, services, technology, and utilities did not score any E’s.
A total of 88 companies out of 139, or 63.309353%, increased their dividends from 2008 to 2010, some at rates even higher than their previous DGR.
A total of 99 companies out of 139, or 71.223021%, increased or maintained their dividends from 2008 to 2010. They did not give me a cost-of-living-adjustment (COLA) or an increase for inflation, but at least they did not decrease their dividends.
To the “skeptics” who say, “Yeah, dividends are great when they go up, but what about when the market drops 10, 20, 30, 40, 50 percent, and all those companies decrease or suspend their dividends," I now respond, “The market DID drop 34%, but 71% of the Dividend Champions increased or maintained their dividends”.
For more information about dividend growth companies, please check here. You can download a spreadsheet containing all of my data (so that you can sort it any way you wish) from here.