Visualizing Dividend Growth Rates

Includes: ABT, EXC, HAS, MO, PFE, PM, T, VZ
by: Analytical Chemist

Subscribers to dividend growth investing need solid information on annual dividend increases. David van Knapp compiled an excellent list of common stocks held by dividend growth investors and dividend changes for each stock since 2007. I immediately thought of the powerful message that could be conveyed via visuals, and asked for permission to use the data in his article. After receiving permission, I made the following graphs that show a small but noticeable decline in dividend growth rates for this group of stocks.

This selection of stocks was based on van Knapp's survey "The Most Common Stocks Held by Dividend Growth Investors." The yield and dividend increases are from David Fish's Dividend Champions and Robert Allen Schwartz's The stocks are intended to be a list of the stocks most commonly held by dividend growth investors, and are not necessarily considered dividend growth stocks. Indeed, Pfizer (PFE) is on the list even though it cut its dividend in 2009 with its acquisition of Wyeth. Since that time, however, Pfizer has increased its dividend in 2010, 2011, and 2012. Pfizer appears to be well on its way to restoring its status as a dividend growth stock. There are also stocks included that had years without a dividend increase, even if the dividend was never cut. Exelon (EXC), for example, increased its dividend in 2008 and 2009 but kept its payment constant in 2010 and 2011. The overwhelming majority of the list, however, increased dividends in each of the 6 years shown, although 2012 is incomplete.

click to enlarge images

The first chart simply plots all the data from David van Knapp's chart. The percentage change in dividend is shown for each stock for each year from 2007-2011. Companies that have reported a dividend increase for 2012 are shown as well. Each company has its own differently colored line, although the sheer number of companies makes identifying each individual points difficult. In general, however, it is easy to see wide variation in dividend growth, and there is considerable change for each company on a year-to-year basis. The range of dividend increases appears to be similar for the years 2007, 2008, 2009, and 2011. At first glance, 2010 appears to show reduced dividend increases, but this may simply be an instance of one point-Philip Morris' (PM) 45% increase in 2009-skewing the visual. While Philip Morris did increase its quarterly payment from 54 cents at the end of 2008 to 58 cents in 2009, the 45% increase is also due to the payment of 4 dividend payments in 2009 compared to just 3 in 2008. That itself is due to Philip Morris International's split from the Altria Group (MO) in 2008.

Company splits present a larger issue in dividend growth investing: plenty of investors who follow a dividend growth strategy restrict themselves to only investing companies who have increased dividends for 5, 10, or more consecutive years. When a company splits in two, dividend growth investors may keep one, both, or neither company. This is important for one company on the list moving forward, as Abbott Labs (ABT) has announced plans to separate into two distinct companies this year. One company (to be called AbbVie) will focus on research-based pharmaceuticals, and the other, retaining the Abbott name, will be a diversified medical products company. Although the company has announced that the total dividend of the combined companies will equal the current dividend, it has given no guidance on dividend growth policies or philosophy. Personally, I believe that both parts of the company will continue dividend growth, although the rate is hard to predict, as I think the split was designed to unlock shareholder value.

The next chart shows the same data in a more comprehensible way via a box and whisker plot. The black vertical bars show the minimum, maximum, and complete range of dividend changes each year. The text and blue lines between years show the median dividend increase of the 39 companies. An arithmetic mean would overweight Pfizer's dividend cut, and many dividend growth investors sell stock when companies announce dividend reductions. The blue boxes show the range of the middle 50% of the dividend changes. The lower boundary of the box shows the 25th percentile and the upper boundary of the box shows the 75th percentile dividend change.

The box and whisker plot shows that there is considerable variability in dividend changes among the companies in the sample. Half of the dividend increases, however, are in a relatively narrow range, and the size of the range has decreased in each of the past 5 years. The middle 50% dividend increases were 9% to 20% in 2007, 11% to 19% in 2008, 5% to 14% in 2009, 4% to 10% in 2010, and 6% to 12% in 2011. There is a noticeable if small decrease in the dividend increases from 2007 and 2008 compared to 2009-2011. So far 2012 looks to be more like the 2009-2011 era than 2007-2008.

The first derivative (rate of change) of dividends is quite volatile. Another way to compare dividend growth is to plot the relative dividend over time. In the next chart I assigned each stock's 2006 dividend as 100 and plotted each year's dividend. The chart can then be read: each point is the then-current dividend expressed as a percentage of 2006's dividend. Since only Pfizer decreased its dividend in this survey, Pfizer is the only company with points below 100.

This chart does a better job of showing that dividends increase, and the volatility isn't quite so high as the plot of the change in dividends. It is still messy, however, and so I also used a box and whisker plot to present this data.

Again, the black diamonds show the minimum and maximum dividends compared to each stock's 2006 dividend. The box shows the 25th-75th percentile values for each year, and the median is plotted as the blue line. As with stock returns, small differences in percentage increases can add up to large total percentage differences over time. Here we see that even in 5 years, there are large differences among the 25th percentile dividend increases (up about 50% over 5 years), 75th percentile dividend increases (up ~100% over 5 years), and the maximum relative change in dividends (Hasbro (HAS) increased its dividend a cumulative 229% in 6 years, counting its 2012 dividend declarations).

My conclusions, then, are somewhat different from David van Knapp's. The distribution of dividend increases was lower in the 2009-2011 period than in the 2007-2008 period. The median dividend increase reflects this change as well. The magnitude of the difference, however, is relatively small. Van Knapp looked at the relation between dividend yield and dividend increase and did not observe a significant correlation. Another possibility is a correlation between dividend payout ratio, as high-payout ratio stocks like AT&T (T) and Verizon (VZ) show below-average dividend increases in this sample. Payout ratios based on net earnings can be misleading, however, so considerable care would be required in designing a study to answer that question. Overall, the last 5 years have seen tremendous changes in the economic outlook and stock market performance, and relative to that changing backdrop the dividend growth stocks studied here show remarkably consistent dividend growth.

Disclosure: I am long ABT, XOM, INTC.

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