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The Dividend Champions spreadsheet and PDF have been updated through 8/31/12, and are available at http://dripinvesting.org/Tools/Tools.asp Note that all references to Champions mean companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of five to nine years. "CCC" refers to the universe of Champions, Contenders, and Challengers.

Opportunity Comes in Many Sizes

In a recent Seeking Alpha article, which can be found here: http://seekingalpha.com/article/876031-can-dividend-growth-investing-be-reconciled-with-modern-portfolio-theory, fellow author David Van Knapp discussed the sometimes contentious debate between proponents of Dividend Growth Investing (or DGI) and advocates of Modern Portfolio Theory (or MPT). His article was an excellent attempt to reconcile the two camps, which may not be mutually exclusive. This article is not intended to further the "big picture" discussion of Mr. Van Knapp's fine piece of writing, but rather to focus on a specific aspect of the broader issue. One problem he alluded to was the fact that misconceptions often lead to biases. For example, there seems to be a general notion among some commenters that Dividend Growth Investing is too heavily focused on Large-Capitalization stocks, an idea that often prompts the criticism that investing in Dividend Growth companies is bound to lead to problems down the road, as these "mature" companies stop growing earnings sufficiently to fuel future dividend increases. Some go so far as to argue that companies only pay dividends in the first place because they have run out of ideas for investing capital into new growth opportunities.

No doubt one reason for the Large-Cap misconception is that many DGI articles do focus on familiar companies that are widely held and/or considered for new investments. Some of the largest companies in America are even referred to as Mega-Caps, generally defined as having market values of more than $100 billion. These include ExxonMobil (NYSE:XOM), Wal-Mart (NYSE:WMT), AT&T (NYSE:T), Coca-Cola (NYSE:KO), International Business Machines (NYSE:IBM), Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), and Philip Morris International (NYSE:PM). As often as these names come up in articles on Seeking Alpha (and elsewhere), it's easy to see why some people might think that DG investors have a narrow focus on large companies. And that doesn't even begin to scratch the surface when you consider that the typical definition of "Large-Cap" begins with a "mere" $10 billion of market value. That broader group runs the gamut from Dover (NYSE:DOV), Kimberly-Clark (NYSE:KMB), 3M (NYSE:MMM), McDonald's (NYSE:MCD), and Caterpillar (NYSE:CAT) to the likes of Nike (NYSE:NKE), Norfolk Southern (NYSE:NSC), General Mills (NYSE:GIS), Lockheed Martin (NYSE:LMT), and Costco Wholesale (NASDAQ:COST). But don't mistake frequency of media mentions for a definitive universe of an entire investing strategy.

The True Picture

To get a better idea of the companies that make up the Dividend Growth universe, I sorted the listings of Champions, Contenders, and Challengers and came up with a picture that might surprise a few people. Whereas some would insist that most DGI stocks are Large-Caps, that segment of the 471 CCC companies is, in fact, the smallest in number! If you examine the tables below, you'll see that Large- and Mega-Cap stocks comprise only 29.3% of the companies, whereas Mid-Caps account for 35.24% of the companies and Small-, Micro-, and Nano-Caps contribute the remaining 35.45%.

Composition of Dividend Champions, Contenders, and Challengers

by Market Capitalization - at 9/20/2012

Type

Range *

Champions

Contenders

Challengers

All

Mega-Cap

$100 billion+

9

6

6

21

Large-Cap

$10-100 bill.

32

39

46

117

Mid-Cap

$2-10 billion

35

63

68

166

Small-Cap

$300mill-$2bill.

24

38

52

114

Micro-Cap

$50-300 million

5

24

14

43

Nano-Cap

Under $50 mill.

0

6

4

10

All CCC

Companies

105

176

190

471

*Range Definitions per Investopedia

By Percentage:

Type

Range *

Champions

Contenders

Challengers

All

Mega-Cap

$100 billion+

8.57

3.41

3.16

4.46

Large-Cap

$10-100 bill.

30.48

22.16

24.21

24.84

Mid-Cap

$2-10 billion

33.33

35.80

35.79

35.24

Small-Cap

$300mill-$2bill.

22.86

21.59

27.37

24.20

Micro-Cap

$50-300 million

4.76

13.64

7.37

9.13

Nano-Cap

Under $50 mill.

0.00

3.41

2.11

2.12

All CCC

Companies

100.00

100.00

100.00

100.00

*Range Definitions per Investopedia

Although it's true that about 39% of the Champions are Large- or Mega-Caps, less than 28% of the Contenders and Challengers -- with streaks of five to 24 years of increases -- have market caps of $10 billion or more. So there is some correlation between longer streaks and large size, but that seems logical, since both conditions suggest growth over many years, in fact, decades. There may also be some correlation between globalization and large capitalization, since the Mega- and Large-Caps include such companies as BHP Billiton (NYSE:BBL), Unilever (NYSE:UL), NTT DoCoMo (NYSE:DCM), China Mobile (NYSE:CHL), Novartis (NYSE:NVS), Accenture (NYSE:ACN), and AstraZeneca (NYSE:AZN), in addition to the many U.S. multinationals.

Let's Get Small(er)

So who are these mystery companies that non-Dividend Growth Investors seem to think don't exist? Some of them may, indeed, be somewhat obscure, but many are familiar names that apparently aren't as big as many believe they are. The Mid-Caps include companies such as Hormel Foods (NYSE:HRL), McCormick (NYSE:MKC), Tiffany (NYSE:TIF), National Retail Properties (NYSE:NNN), Realty Income Corp. (NYSE:O), Airgas (NYSE:ARG), AmerisourceBergen (NYSE:ABC), Darden Restaurants (NYSE:DRI), AmeriGas Partners LP (NYSE:APU), and Ryder System (NYSE:R). In other words, a highly diversified array of companies in every industrial sector. The same is true for the 157 Small-, Micro-, and Nano-Caps, which include companies like Universal Corp. (NYSE:UVV), W.P. Carey (NYSE:WPC), BancFirst OK (NASDAQ:BANF), York Water Company (NASDAQ:YORW), Holly Energy Partners LP (NYSE:HEP), Bob Evans Farms (NASDAQ:BOBE), and McGrath Rentcorp. (NASDAQ:MGRC). These are growing companies, and many more like them offer shareholders an increasing payout year after year. Whether a Dividend Growth Investor is mainly interested in high yield or rapidly growing dividends, there is a plethora of companies in all sectors that fit the bill and can more than adequately diversify any portfolio.

Conclusion

Clearly, the false impression that most DGI stocks are Large-Caps or primarily Consumer Products companies is used as grounds for dismissing an entire investment approach that has worked for many years and many investors. It's easy to see that Dividend Growth investors can find what they are looking for, whether it's small, niche operators or foreign powerhouses. Let's not allow misconceptions to foster unfair biases, whether or not we agree with a particular investment strategy.

Source: The Dividend-Growth Large-Cap Fallacy