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Here are some interesting historical facts. From 1983 to 1984, Coca Cola (NYSE:KO) only raised its dividend by 2.9%. Over the past 10 years, Coke has raised its dividend by 10.0%. From 1997 to 1998, Colgate-Palmolive (NYSE:CL) only raised its dividend by 3.77%. Over the past ten years, the company has raised its dividend by 12.1%. From 2001 through 2003, Becton Dickinson (NYSE:BDX) failed to raise its dividend by more than 3% in any of those three years. Over the past ten years, the firm has raised its dividend by 14.8%. With Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ) recently announcing dividend raises of 7.0%, there has been some murmuring that the classical dividend blue chip stocks might be losing their magic touch.

If you have that concern, there are three things that it might help to take into consideration:

  1. First of all, the idea that the blueblood dividend growth names (such as those mentioned above) tend to deliver 9-10% annual dividend growth is not necessarily in jeopardy. For a while, I had this idea that these dividend growth stocks would mostly offer dividend growth neatly in the 8-12% range (say, 12% in good years, 8% or so in leaner ones), but that was a dumb premise for me to assume. Procter & Gamble raised its dividend by less than 1% in 1987, and then raised it by 3.7% the next year before granting investors an increase of over 17% in 1989. Pepsi (NYSE:PEP) raised its dividend by less than 4% in 2000, 2001, and 2002 before raising its dividend by 25% in both 2004 and 2005. Kimberly Clark (NYSE:KMB) raised its dividend by under 3% from 1994 to 1996 before delivering double digit dividend growth from 2003 to 2005. These things do not move in a neat and tidy fashion.
  2. If you own a fifteen to twenty stock portfolio, achieving the 9-10% annual dividend growth ought to still be quite doable in the aggregate, since different companies do the heavy lifting in different years. For instance, McDonalds (NYSE:MCD) would have dragged down your dividend growth in 2001 and 2002 by offering investors dividend increases in the 4% range. But guess what? It gave investors a 50% dividend increase year-over-year in 2007, and a 26% increase in 2009. And did you hear about Exxon's (NYSE:XOM) recent 21% dividend hike? How about Emerson Electric's (NYSE:EMR) 16% dividend hike? And then there was Target's 30% dividend raise in the past year, plus Lockheed Martin's 23% hike in 2011. My point is that even if you believe that the anchor stocks like Pepsi, Johnson & Johnson, and Procter & Gamble are in a new normal of 7% or so dividend growth, you can still get it up to 8-10% if you hold a couple of McDonalds, Exxon, Emerson, Target, or Lockheed-type dividend growth stock during their "heavy lifting" dividend growth years. Exxon had been one of those 7% annual raise dividend growth stocks (in fact, that's exactly what its dividend growth rate was from 2002 until the start of 2012) until giving investors a 21% raise this year-your job as an investor concerned with dividend growth rates is to successfully own a few of these in your portfolio each year.
  3. That last sentence I wrote wasn't meant to be read tongue in cheek. It's decently possible to pick stocks that will give you over 11-12% annual dividend growth for the next five years. Becton Dickinson has delivered an almost 20% annual dividend growth rate compounded since 2003. Wal-Mart (NYSE:WMT) has given investors 19.10% since then. In the case of Walgreen (NYSE:WAG), the company has grown dividends by 22% on a compounded basis since 2003. For IBM (NYSE:IBM), the compound growth rate since then is over 20% as well. Those kinds of records ought to provide fertile soil for further research-if you look at companies that have been paying rising dividends for over twenty to thirty years, and they have been raising them by 15% annually over the past ten years, and the payout ratio has not accelerated and you don't expect any big headwinds to the general business model, you've probably found a good spot to search for the kind of companies that can spike up the overall dividend growth rate of your dividend portfolio.

The way I see it, dividend growth investors have three lines of defense. The first is that the 7.0% raise of Procter & Gamble and Johnson & Johnson is not an indication of a new normal, but rather, just one of the years of lower than average dividend growth that have appeared throughout the histories of many classical dividend growth firms. The second line of defense is that you will organically own a dividend growth stock like McDonalds, Exxon, Becton Dickinson, Target, or Emerson that is going through one of its heavy lifting growth rate years to bolster the growth rate for your portfolio in the aggregate. And the last line of defense is by doing diligent research and adding "Dividend Challengers and Contenders" that have been raising their dividends by 15-20% over the past decade, and hope that even if that rate declines, it will still be in the 10-13% range. And if that fails and we have to deal with 7% dividend growth from our portfolio? Boo hoo, we only double our dividend purchasing power by twice the rate of inflation annually.

Source: 3 Lines Of Defense Against The Decline Of Dividends