Do Dividends Grow At The Same Rate As Prices?

by: David Van Knapp

It is commonly stated that price growth and dividend growth rates are roughly equal, since they theoretically both come from the same source: Growing earnings. Let's test that hypothesis on some actual stocks.

For the list of stocks, I decided to use "The Most Common Stocks for Dividend Growth Investors." I looked up their 5-year price increases and their 5-year dividend increases for the period 2007 through 2011. The results are shown in the following table. Please note:

  • The percentage changes are totals for the five-year period, not annualized.
  • The five-year period for prices covers the final price on the last day of trading in 2006 to the final price on the last day of trading in 2011.
  • The five-year period for dividends covers the total "regular" dividends paid in 2006 to the total paid in 2011.
  • I left out Altria (NYSE:MO) and Philip Morris (NYSE:PM) because the spin-offs in 2007 and 2008 distort Altria's dividend figures and leave Philip Morris with an insufficient history.
 

 

Stock

Ticker

Price 12/29/2006

Price 12/30/2011

Total

Price % Increase

Dividend Paid in 2006

Dividend Paid in 2011

Total

Div. % Increase

3M

(NYSE:MMM)

77.93

81.73

4.9%

1.84

2.20

19.6%

Abbott Laboratories

(NYSE:ABT)

48.71

56.23

15.4%

1.16

1.88

62.1%

AFLAC

(NYSE:AFL)

46.00

43.26

-6.0%

0.55

1.23

123%

AT&T

(NYSE:T)

35.75

30.24

-15.4%

1.33

1.72

29.3%

Automatic Data Processing

(NASDAQ:ADP)

49.25

54.01

9.7%

0.74

1.44

94.6%

Becton Dickinson

(NYSE:BDX)

70.15

74.72

6.5%

0.86

1.68

95.3%

Chevron

(NYSE:CVX)

73.53

106.40

44.7%

2.01

3.09

53.7%

Chubb

(NYSE:CB)

52.91

69.22

30.8%

0.965

1.54

59.6%

Cincinnati Financial

(NASDAQ:CINF)

45.31

30.46

-32.8%

1.31

1.6025

22.3%

Clorox

(NYSE:CLX)

64.15

66.56

3.8%

1.16

2.30

98.3%

Coca-Cola

(NYSE:KO)

48.25

69.97

45.0%

1.24

1.88

51.6%

Colgate-Palmolive

(NYSE:CL)

65.24

92.39

41.6%

1.25

2.27

81.6%

Emerson Electric

(NYSE:EMR)

44.09

46.59

5.7%

0.93

1.435

54.3%

Exelon

(NYSE:EXC)

61.89

43.37

-30.0%

1.60

2.10

31%

ExxonMobil

(NYSE:XOM)

76.63

84.76

10.6%

1.28

1.85

44.5%

Hasbro

(NASDAQ:HAS)

27.25

31.89

17.0%

0.45

1.15

156%

Intel

(NASDAQ:INTC)

20.25

24.25

19.8%

0.40

0.7824

95.6%

Johnson & Johnson

(NYSE:JNJ)

66.02

65.58

-0.7%

1.445

2.25

55.7%

Kimberly Clark

(NYSE:KMB)

67.95

73.56

8.3%

1.92

2.76

43.8%

Leggett & Platt

(NYSE:LEG)

23.90

23.04

-3.6%

0.66

1.09

65.1%

Lockheed Martin

(NYSE:LMT)

92.07

80.90

-12.1%

1.25

3.25

160%

McDonald's

(NYSE:MCD)

44.33

100.33

126%

1.00

2.53

153%

Medtronic

(NYSE:MDT)

53.51

38.25

-28.5%

0.4125

0.935

127%

Microsoft

(NASDAQ:MSFT)

29.86

25.96

-13.1%

0.37

0.68

83.8%

Paychex

(NASDAQ:PAYX)

39.54

30.11

-23.8%

0.69

1.25

81.2%

PepsiCo

(NYSE:PEP)

62.55

66.35

6.1%

1.12

1.99

77.7%

Pfizer

(NYSE:PFE)

25.90

21.64

-16.4%

0.96

0.80

-16.7%

Procter & Gamble

(NYSE:PG)

64.27

66.71

3.8%

1.21

2.0568

70.0%

Raytheon

(NYSE:RTN)

52.80

48.38

-8.4%

0.94

1.665

77.1%

Southern

(NYSE:SO)

36.86

46.29

25.6%

1.535

1.8725

22.0%

Sysco

(NYSE:SYY)

36.76

29.33

-20.2%

0.68

1.04

52.9%

Target

(NYSE:TGT)

57.05

51.22

-10.2%

0.44

1.10

150%

United Technologies

(NYSE:UTX)

62.52

73.09

16.9%

1.015

1.865

83.7%

Verizon

(NYSE:VZ)

37.24

40.12

7.7%

1.62

1.9625

21.1%

Walgreen

(WAG)

45.89

33.06

-28.0%

0.285

0.80

181%

Wal-Mart

(NYSE:WMT)

46.18

59.76

29.4%

0.6525

1.3975

114%

Waste Management

(NYSE:WM)

36.77

32.71

-11.0%

0.88

1.36

54.5%

Click to enlarge

(Sources: Historical prices from BigCharts Historical Quote tool. Dividends by year from Robert Alan Schwartz's tessellation.com's "dividend growth company information" web site. Exelon dividends from Yahoo Finance.)

Analysis

As you can see, for this sample of stocks over the five-year time frame, the relationship between stock prices and dividends appears almost random. But we need to dig deeper. Almost all of these stocks are consistent dividend raisers, and they raised their dividends through the Great Depression of 2007-2009. Stock prices, of course, did not trace a steady course during the five years studied here. Almost all stock prices were affected in one way or another by the market crash in 2008, including the prices of dividend raising stocks.

In addition, as they always do, individual company issues impacted the prices of individual stocks in addition to the general market trends. I see these factors as overlaying each other, like wave theory. For example, one company may have been impacted by negative issues affecting it as an individual company as well as the general market crash of 2008. Such a company probably suffered a larger price decline than the market. On the other hand, a different company may have had very positive individual factors that helped it stand up better to the crash. So the data here is probably unusually affected by the five-year period that I selected.

Here are the most extreme examples of differences between price performance and dividend performance:

  1. AFLAC: Price dropped 6%, dividends increased 123%
  2. Lockheed Martin: Price dropped 12%, dividends increased 160%
  3. Medtronic: Price dropped 29%, dividends increased 127%
  4. Walgreen: Price dropped 28%, dividends increased 181%

On the other hand, some stocks did have prices and dividends that moved at about the same rate:

  1. Chevron: Price increased 45%, dividends increased 54%
  2. Coca-Cola: Price increased 45%, dividend increased 52%
  3. McDonald's: Price increased 126%, dividends increased 153%
  4. Southern: Price increased 26%, dividends increased 22%

Interestingly, Southern is the only example of a company whose price performed better over this five-year period than its dividends. Every other company's dividend growth was greater than its price growth.

I do not conclude from this study that the underlying hypothesis-that price growth and dividend growth move roughly in tandem because both are based on earnings-is incorrect. As has often been observed, if the hypothesis were not at least approximately correct, we would have dividend growth companies that would eventually reach astronomical current yields (like 20%), and we do not see this. I believe that the hypothesis is roughly correct over long time periods. The five years studied here was an unusual time period.

On the other hand, I do draw the conclusion that price change and dividend change are often uncoupled and widely divergent. Although both prices and dividends over long time-frames are correlated to earnings, the fact is that they are determined by different mechanisms. The companies themselves determine dividends, while the market determines prices. Company decisions in this regard tend to be much smoother and probably less emotional than market decisions. Over a short time-frame such as the five years covered in this study, especially when a market crash is included, we can see that dividend performance is much smoother than price performance.

One final note: These stocks are widely held by dividend growth investors. That means that lots of people have analyzed them and selected them precisely for their good dividend performance. The positive dividend performances for these stocks are probably far more pronounced than would be the case for a randomly chosen set of stocks.

Disclosure: I am long MMM, ABT, AFL, T, CVX, HAS, INTC, JNJ, KMB, MCD, PEP, PG.