Dividend Growth Investing Goes Mainstream: Should You Be Worried?

by: David Crosetti

It would certainly appear that Dividend Growth investing has started to go mainstream. Recently, Kiplinger's magazine published an article by Jeffery R. Kosnett, the Senior Editor at Kiplinger. In his article, titled: "8 Dividend-Growth Stock Picks," Kosnett outlines a strategy, born of necessity, when he says, in his opening paragraph:

Thanks to two catastrophic bear markets over the past dozen years, the strategy of buying stocks and holding them forever has fallen into disfavor. But that doesn't mean a buy-and-hold investing strategy is all bad; it just needs some tweaking. So in that spirit, allow us to introduce a variation that we think makes a lot of sense. Call it buy and hold and collect and grow, or BHCG for short.

So, there you have it. The new strategy summed up as "BHCG" or "Buy, Hold, Collect and Grow." This is a strategy that is something most of us have known for some time, even though none of us is a Senior Editor at Kiplinger.


So, what exactly do you need to do, in order to participate in this new and exciting strategy? It's simple enough for everyone to understand. Here's the strategy in a nut shell, according to Kosnett:

You buy stocks that regularly boost their dividends and hold for the long haul.

That's it. That's all there is to it. It is so simple, "even a caveman can do it." You simply buy stocks that regularly boost their dividends and hold for the long haul. When I read that, it struck me the same way that I've been struck when I realize that "I could have had a V-8."


The article expands to a discussion about a particular mutual fund that follows this BHCG strategy - with a slight twist. He goes on to tell us:

Some experienced investors believe BHCG offers the best mixture of safety and opportunity. One of them is Tom Cameron, who entered the investment business in 1953. Now head of Dividend Growth Advisors, in Ridgeland, S.C., and co-manager of Dividend Growth Trust Rising Dividend Growth Fund (ICRDX), Cameron requires any stock he buys to have annualized dividend growth of at least 10% over the previous ten years.

When he talks with company bosses, Cameron says, he makes sure big dividend increases are "part of the culture." He immediately boots out any company that cuts its dividend. In 2008, Cameron, 84, dumped all of his shares of Bank of America after the company halved its quarterly payout. BofA shares traded at $28 at the time. They now fetch less than $6 (all prices and related data are through December 2).


My concern with articles like this one is that they have a tendency to reduce Dividend Growth investing to nothing more or less than a strategy like the Dogs of the Dow. A strategy for the masses to be sure.

Because there are so many articles written about DG investing that reduce the strategy to its lowest common denominator, there is a significant amount of contrary information about the strategy.

As a result, the strategy becomes confusing and is often challenged by critics who either don't understand the strategy or who have only a partial understanding of it.

That's unfortunate, because as a result of the partial information, or misrepresented information, many critics of this strategy ignore or avoid the strategy as just another "pie in the sky" investing gimmick. Nothing could be further from the truth.

Kosnett has chosen the following eight stocks:

Automatic Data Processing (NASDAQ:ADP) yield, 3.1%
Church and Dwight (NYSE:CHD), yield 1.5%
Colgate Palmolive (NYSE:CL), yield 2.6%
Fastenal (NASDAQ:FAST), yield 1.3%
International Business Machines (NYSE:IBM), yield 1.6%
McDonald's (NYSE:MCD), yield 2.8%
Norfolk Southern (NYSE:NSC), yield 2.3%
Novo Nordisk (NYSE:NVO), yield 1.2%


Dividend Growth investing has as many different twists as any other strategy out there. Each investor seems to add or subtract his own personal twist on the concept.

Norman Tweed looks for yields beginning at 4%. I look for yields at 3% or better. Other folks have their own particular starting point for yield.

Some people focus very hard on diversification. Others hold a very concentrated portfolio. My own Retirement Portfolio For Do it Yourselfers, was fairly concentrated. By adding new companies this year, we achieved a little more diversification.

Some people actually sell positions when they feel that a company may be overvalued. Some people claim to never sell unless there is a fundamental flaw that develops for the company held in their portfolio.

Some never sell unless a dividend is cut or not raised. Some are active investors, some are passive.

Some look for a five-year dividend growth rate of 10% or more; some look for a 10-year dividend growth rate of 10% or more; and some use different variations on that theme as well.

The one that seems to get the most commentary is when a dividend growth investor says, "I don't care what the value of my portfolio is. I only care about the income stream that it generates." Now that comment tends to make people's eyeballs start to bleed.

The list of differences is almost infinite in its scope. There are some fundamental agreements among Dividend Growth investors, however:

  1. We invest the bulk of our money in stocks that pay dividends. Generally speaking, I prefer companies that yield above 3% and I will often wait for a price point that gives me that yield.
  2. We like to invest in companies that have a history of raising those dividends annually. I want to know that a company has a culture that supports the payment of dividends and that believes dividends matter.
  3. We like to invest in companies that appear to have the ability to continue raising those dividends moving forward. For me, I try to avoid companies that have high-dividend payout ratios. Some folks use payout relative to earnings per share and some use payouts as related to free cash flow. But the main principle here is sustainability of the dividend.
  4. We will usually consider selling a stock that suspends, reduces or does not increase its dividend moving forward.

There are plenty of companies out there with great stories and great fundamentals that pay dividends and meet the CCC requirements. I try not to fall in love with a company. When dividends are not raised, are reduced, or are cut, then I am a seller.


It would seem to me that every investor needs to investigate and try to understand the various investment strategies that are available to us. There is Growth, Value, Growth and Income, Growth at a Reasonable Price, Dividend Growth Investing, and many more.

Find the strategy or combination of strategies that offer the best fit for your temperament, your goals, and your risk tolerance levels. For me, I use a combination of Dividend Growth investing, with a smattering of Growth Investing thrown in just for kicks. Whatever your style, keep at it. Learn all you can. Invest for the future.

As a final caveat, Kosnett gives us this unfortunate news:

"If there's one risk to a BHCG strategy, it's that the universe of suitable companies is relatively small.

Fund manager Cameron, for example, says he watches no more than 125 companies. Fortunately, nearly all the candidates are large and have a lot of cash and significant foreign exposure -- exactly the kind of stocks Kiplinger's believes are timely for the year ahead. You can find potential winners at U.S. Dividend Champions and Contenders, a free database."

Small, would seem to be a relative term. I have been using the U.S. Dividend Champion and Contenders data base for some time now. The list is maintained and offered by David Fish, a regular contributor at Seeking Alpha. At last count, there were:

102 Dividend Champions (companies that have increased their dividends for at least 25 consecutive years).

Here are some of the stocks that you will find on the Dividend Champion list. These have been great long-term investments.

Abbott Labs (NYSE:ABT), raised dividends 39 years and yields 3.5%
Coca Cola (KO), raised dividends 49 years and yields 2.8%
Johnson and Johnson (JNJ), raised dividends 49 years and yields 3.5%
McDonald's, raised dividends 35 years and yields 2.8%
Procter and Gamble (PG) raised dividends 55 years and yields 3.3%

146 Dividend Contenders (companies that have raised their dividends for at least 10 consecutive years)

These are also companies that meet the criteria for Dividend Growth investors. Here are some examples:

Chevron (CVX), raised dividends 24 years and yields 3.0%
ConocoPhillips (COP), raised dividends 11 years and yields 3.8%
Harris Corp (NYSE:HRS), raised dividends 10 years and yields 3.0%
Southern Company (NYSE:SO), raised dividends 10 years and yields 4%

200 Dividend Challengers (companies that have raised their dividends for at least 5 years)

Here are a few of my favorite companies in the Challenger list:

Darden Rest. (DRI), has raised dividends 7 years and yields 3.7%
HJ Heinz (HNZ), raised dividends 8 years and yields 3.7%
Hasbro (NASDAQ:HAS), raised dividends 8 years and yields 3.4%
Intel (INTC), raised dividends 8 years and yields 3.1%
Waste Management (NYSE:WM), raised dividends 9 years and yields 3.9%

These are only a few of the Dividend Growth companies that are part of the Champion, Contender and Challenger lists. There is quite a population of companies to choose from in these three categories.

Try not to get hung up in all the different practices that Dividend Growth investors seem to follow. Every DG investor is different. One does not speak for the many. Never, forget, however the underlying principles of DG investing as expressed above. Those sum up what I consider to be the core of the Dividend Growth Strategy.

Disclosure: I am long ABT, KO, CL, MCD, JNJ, PG, CVX, COP, HRS, HAS, INTC, WM.