Dividend Growth Investing And S&P 500 Indexing

Includes: AAPL, JPM, WFC
by: Counterpoint

Hey, guess what? I think I might qualify as a dividend growth investor! I just finished my tax returns and noted that for the ninth year in the past ten (2009 being the exception), I reported a higher level of dividend income to the IRS than the previous year. In fact, my reported qualified dividend income for 2011 increased almost 19% over the 2010 level. As Chowder would say: "Ha!".

Well, it's sort of odd, of course, since individual dividend growth stocks are only a small part of my portfolio (about 5% of my equity holdings). Nonetheless, dividend growth just seems to be happening. I did some analysis and looked at my SPY holdings which comprise roughly 50% of my equity allocation. Morningstar data shows that dividends for SPY increased 14% from $2.26 per share in 2010 to $2.58 per share in 2011. This neatly exceeded, for example, the aggregate dividend increase for four dividend growth stalwarts PG, XOM, MCD and KO which saw dividends per share increase 9% from $7.65 per share in 2010 to $8.32 per share in 2011 (not that I would feel "bad" about a 9% increase other than it is less than a 14% increase).

So what is happening here? At the beginning of 2011, 373 companies in the S&P 500 paid a dividend, but by the end, 394 companies were on the list, an increase of 21 companies. The year 2011 saw the single largest increase in the number of dividend payers in any year as far back as at least 1980 (as far back the current provided S&P information goes. See here under "S&P 500 Monthly Performance Data"). These new payers, most coming from the technology and health care sectors, are causing the S&P 500 to collectively outperform the dividend growth of the dividend growth stalwarts within the index.

Given this trend, is it possible that the S&P 500 could be reverting to its early 1990's level of about 430 payers or even its early 1980's level of about 460 payers? Well consider this: In the first quarter of 2012, six additional companies within the index announced that they will commence paying dividends bringing the total to 400 including Apple (AAPL), the granddaddy of all stocks by market cap, which as we all know is going to start paying a dividend later this year. With Apple's announced $2.65 per share quarterly dividend, it will yield about 1.75% based on its current roughly $600 per share price. As Apple comprises 4.75% of the market cap of the S&P 500, this dividend alone will add 8 basis points (0.08%) to the overall yield of the S&P 500 or a roughly 4% increase in the total dividend just from this event.

In addition, based on the positive "stress test" results, a number of large financial institutions have been released to substantially increase their dividends. JPMorgan (JPM) just last month received clearance for a 20% increase in its dividend, but how about this. Wells Fargo (WFC) declared a special dividend $0.10 per share in March and nearly doubled its regular quarterly dividend from $0.12 to $0.22 per share. Together, these two stocks represent 2.74% of the S&P 500 index. Adding to this, US Bancorp announced a 56% increase and State Street a 33% increase in their respective dividends. While I have seen JPM mentioned by a few dividend growth investors as creeping back into their holdings, I have the sense that, by and large, financial institutions are still persona non grata in most.

So, while I anticipate some "mainstream" dividend growth adherents might disagree, from my viewpoint, investing a portion of your dividend growth portfolio in an S&P 500 index fund or ETF is not contrary to the goals of dividend growth investing. It has a dividend and this dividend is growing very nicely. I think it provides an effective way to catch a small piece of the currently unusually large number of companies are just commencing or recommencing dividend payments and/or are providing the significant dividend increases that often come early in the dividend payment life cycle. These are companies the typical dividend growth investor would not invest in individually due to the lack of a dividend history, but buying them in a group minimizes the impact of the off chance that one or two may cut their dividend. Granted, you likely will be duplicating some of your current holdings a bit, but with the large number and variety of companies commencing and reestablishing dividends as we (hopefully) continue through the early phase of the economic recovery, it may be a good component to consider adding into the mix for at least the next few years.

Disclosure: I am long SPY.