Are Dividend Champion growth rates indicative of future outperformance? To answer this question, I computed year-over-year (YoY) dividend growth rates for all stocks currently listed in the US Dividend Champions list from 1997 to 2009 (see list here ). For each year from 1997 to 2009, the sub-group of Dividend Champion stocks with the dividend growth rates (DGRs) greater than or equal to 15% were identified, and their subsequent two-year total returns were computed.
Because it is possible to have large DGRs for stocks with low yield (i.e. dividing by a small denominator), only stocks with yields >= 1% had their DGRs computed. All dividend data was pulled from Yahoo Finance, and all stock price data was pulled from Google Finance. Yahoo does not automatically adjust their stock prices for stock splits, but they do adjust their dividend data.
As a benchmark, the performance of these Dividend Champion stocks were compared against the average two-year performance of the entire Dividend Champion group. After the DGR calculations were performed, obvious DGR anomalies were removed. In 2008, for example, Altria (MO) did a spin-off which created unrealistically large DGR values for MO for this year.
As an example of the dividend growth rate calculation, McDonald’s (MCD) featured a total 2007 payout of 1.50 per share, and a total 2008 payout of 1.625 per share. This results in a dividend growth rate (DGR) of:
DGR=(1.625-1.50)/1.50 = 8.33%
The performance metric used in this analysis was the two-year total return. Back to the example with MCD, the subsequent two-year total return assigned to 2008 is calculated as follows:
Two-year return = (price(@1/1/2011) - price(@ 1/1/2009) + Total Dividends (2009) + Total Dividends (2010) )/ price(@ 1/1/2009)= ( (76.76-63.75) + 2.00 + 2.26)/63.75 =27.1%
As summarized in the table below, the average two-year total return of all Dividend Champions with a YoY DGR >= 15% is 36%. During this time frame, the average two-year total return of all Dividend Champion stocks was 25%. Thus, the sub-group of Dividend Champions with significant DGRs outperformed the Dividend Champion group benchmark, on average, by 11%. All year bands except 1997-1998, 1999-2000, 2001-2002, and 2008-2009 featured outperformance by the sub-group of Dividend Champion stocks relative to the entire Dividend Champion group.
Furthermore, the Dividend Champion sub-group with DGRs >=15% featured two-year total returns greater than the S&P 500 in all year bands except for 1997-1998, 1998-1999, and 1999-2000. The average two-year performance of the S&P 500 was 13%, which is more than 21% lower than the Dividend Champion sub-group with DGR>=15%.
| Year Band | >=15 | all | SPY |
| 1997 - 1998 | 47 | 55 | 68 |
| 1998 - 1999 | 33 | 15 | 53 |
| 1999 - 2000 | 8 | 17 | 9 |
| 2000 - 2001 | 67 | 31 | -18 |
| 2001 - 2002 | 9 | 12 | -28 |
| 2002 - 2003 | 109 | 23 | -3 |
| 2003 - 2004 | 73 | 51 | 37 |
| 2004 - 2005 | 31 | 29 | 16 |
| 2005 - 2006 | 31 | 27 | 21 |
| 2006 - 2007 | 27 | 24 | 18 |
| 2007 - 2008 | -4 | -8 | -31 |
| 2008 - 2009 | -2 | 0 | -18 |
| 2009 - 2010 | 44 | 41 | 40 |
| avg | 36 | 25 | 13 |
The list of Dividend Champion stocks used in the calculations for each of the year bands are provided in the table below. Without getting into a breakdown of the stock list year-by-year, it is interesting to note that certain names appear throughout the table (e.g. MCD). 2006-2007 ties 2009-2010 with the largest number of stocks with DGRs >=15% (20).
| 1997 - 1998 | 1998 - 1999 | 1999 - 2000 | 2000 - 2001 | 2001 - 2002 | 2002 - 2003 | 2003 - 2004 | 2004 - 2005 | 2005 - 2006 | 2006 - 2007 | 2007 - 2008 | 2008 - 2009 | 2009 - 2010 |
| BRC | PNY | MCY | ORI | SYY | MSA | SYY | MCD | AFL | SYY | VFC | MCD | MSEX |
| SYY | WMT | ABM | EV | EV | MCY | SIAL | BDX | MSA | ITW | AFL | LEG | |
| SON | ITW | LEG | ITW | LEG | MO | EV | EV | NUE | MCD | WMT | LOW | |
| NFG | BRC | ORI | MCY | NUE | KO | NC | MCD | RLI | WEYS | SHW | WEYS | |
| ADM | CBSH | CBSH | ITW | HGIC | T | SIAL | MCD | EV | MSA | PBI | ||
| TNC | MCY | DCI | ORI | CL | CBSH | PNR | MSA | WEYS | HGIC | |||
| PNR | ORI | ABM | WRE | RAVN | PEP | SHW | RAVN | PEP | HRL | |||
| ORI | EV | CBSH | JNJ | NC | BDX | MHP | CLX | CLX | ||||
| LEG | PH | CTBI | RLI | RLI | PEP | AFL | RAVN | ITW | ||||
| MO | LEG | HRL | CTBI | ADM | ITW | SHW | EV | WAG | ||||
| MCY | PBI | UBSI | CLX | WEYS | GWW | DCI | GWW | PH | ||||
| ADP | JNJ | CSL | MKC | APD | MMM | ADP | HGIC | AFL | ||||
| DCI | AFL | FRT | JNJ | CINF | GWW | PH | EV | |||||
| ABM | AWR | MKC | JNJ | RLI | EMR | DCI | ||||||
| PBI | MSA | NUE | APD | BDX | LEG | DOV | ||||||
| RAVN | VAL | MCY | ADM | CB | BDX | |||||||
| CTBI | AFL | CB | RLI | PEP | ||||||||
| ADP | CL | BRC | VAL | APD | ||||||||
| WMT | ADM | GWW | ||||||||||
| HRL | TGT |
Finally, the novelty of this approach is that it can be utilized for future stock selection. As soon as 2011 is complete, the 2011 dividend growth rates can be computed, and all stocks with DGR >= 15% can be identified. Based on the data provided in this article, the list of stocks returned from this calculation should, on average, outperform the Dividend Champions group as a whole and the S&P 500 index.
