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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 (NYSE: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 (NYSE: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.

Source: Are Dividend Champion Growth Rates Indicative Of Future Outperformance?