I had posed this question in a previous article with regards to the list of Dividend Champion stocks. For reference, Dividend Champion stocks are those which have increased their dividends for at least 25 consecutive years. The main result from that article was that, yes, Dividend Champion stocks with dividend growth rates (DGRs) greater than or equal to 15% outperform the entire basket of Dividend Champion stocks based on analysis of two-year returns. The select list of Dividend Champions with DGRs >= 15% also outperforms the S&P 500 by, on average, ~20%.
Since I have all of the codes and scripts set up to answer this question, I figured why not test this hypothesis on another data set. Consequently, in this article, I ask a similar question that does a subset of Dividend Contender stocks with DGRs >=15% outperform the entire Dividend Contender group. Here, Dividend Contender is defined as a stock which has increased its dividends at least 10 consecutive years, but has not yet reached Champion status.
For each year from 2000 to 2009, the Dividend Contender stocks with year-over-year (YoY) DGRs greater than or equal to 15% were identified, and their subsequent two-year total returns were computed. As a benchmark, the performance of these Dividend Contender stocks were compared against the average two-year performance of the entire Dividend Contender group. I realize that a two-year return is arbitrary, but the motivation for the selection of this metric is that the time frame is sufficiently long for the stock price to reflect the anomalously large DGR, while being short enough to allow someone to switch into other high DGR stocks upon completion of the two-year period.
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 dividend growth rate (DGR):
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 Contenders with a YoY dividend growth rate >= 15% is 39%. During this timeframe, the average two-year total return of all Dividend Contender stocks was 31%. Thus, the sub-group of Dividend Contenders with significant dividend growth rates outperformed the Dividend Contender group benchmark, on average, by 8%. All year bands except 2005-2006 and 2006-2007 featured outperformance by the sub-group of Dividend Contender stocks with DGRs >=15% relative to the entire Dividend Contender group.
Furthermore, the Dividend Contender sub-group with DGRs >=15% featured two-year total returns greater than the S&P 500 in all year bands except for 2006-2007. In this case, the S&P 500 only outperformed the Dividend Contender subset by 1% point. The average two-year performance of the S&P 500 was 10% from 2002 to 2010, which is more than 29% lower than the corresponding average performance of Dividend Contender stocks with DGR>=15%.
Thus, as was the case with the Dividend Champion group, DGRs of Dividend Contenders can be used to predict future outperformance.
The list of Dividend Contender stocks used in the calculations for each of the year bands are provided in the tables below.
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 Contender group as a whole and the S&P 500 index.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.