Increasing Dividends: Evaluating Dividend Strength Using This Metric

Includes: CLX, EMR, ETN, GE, KO, MCD
by: Clayton Rulli

Dividends are a fantastic benefit of owning stocks. In fact, the significant impact of dividends on the total return of stocks over time is something to be respected. From 1926 to 2005, over 40 percent of total return of stocks was derived from dividends alone, according to Ibbotson Associates and Standard & Poor's index service 2005. But will this long term performance contribution continue? Some seem to think so since companies have been increasing payouts to shareholders feverishly as of lately. For example, dividends paid in Q2 2012 totaled an incredible $12 billion, setting what is believed to be a new record in aggregate dollars for U.S. domestic listed common stocks.

In addition to the contribution dividends make to total return, they also provide security, since a high dividend rate can sometimes reduce or slow the chances of a big drop in share price, as long as investors feel the dividend payout is still secure. This is sometimes referred to as the "trampoline effect", since dividend yields increase as a stock price goes down, which entices investors to buy to capture this increasing yield.

It is obvious that dividends are an important attribute in most portfolios. Not only are a large portion of gains derived from them, but they also make a portfolio more resilient. In addition, holding a stock long term that raises the dividend consistently is like riding the gravy train to profits, as not only is the trampoline effect increased, but Y.O.I. or yield on investment is as well. But how can investors measure dividend stocks?

Simple minded investors often mistakenly invest in companies simply with the highest yields and lowest PE's, ignoring other important metrics which more effectively measure not only the health of a dividend, but also the rate at which it increases. By focusing on a unique combination of critical statistics such as: years of consecutive dividend increases, long term compound quarterly dividend growth rate (CQDGR), payout ratio, and estimated EPS growth rate, investors can effectively compare companies in a given sector. I value the unique CQDGR calculation because it measures the rate at which consecutive increases were actually raised. By using this metric we can better differentiate companies that increase their payouts at a faster rate from those that do not. I will also go back a decade to include dividend's resiliency during the market decline of 2009.

I have selected several stocks in two sectors in which I am looking to gain exposure, so we can better examine their dividend strength. The companies with stronger results in this beginning stage analysis will most likely earn candidacy for a continued examination of the company.

Sector: Consumer, Non Cyclical-

Stock Current Yield P/E Ratio Current Payout Ratio Estimated EPS Growth 2013 Last 40 Quarters, CQDGR Consecutive Annual Dividend Increases
Coca-Cola (NYSE:KO) 2.75% 19.33x 52% 9% 2.37% 50 Years
McDonald's (NYSE:MCD) 3.55% 16.33x 58% 9% 3.01% 35 Years
Clorox (NYSE:CLX) 3.55% 17.55x 62% 4% 2.71% 35 Years


It seems KO has the longest streak of consecutive annual dividend increases, however MCD has the highest compound quarterly dividend growth rate over the past 10 years. In addition, a 9% expected EPS growth rate for 2013 was also impressive. MCD's history of not only increasing dividends-- but doing so at a pleasing rate-- ranked this company first in this analysis, while CLX was a close second.

Sector: Industrial Technology-

Stock Current Yield P/E Ratio Current Payout Ratio Estimated EPS Growth 2013 Last 40 Quarters, CQDGR Consecutive Annual Dividend Increases
General Electric (NYSE:GE) 3.2% 15.67x 46% 14% -.14% 2 Years
Emerson Electric (NYSE:EMR) 3.34% 14.6x 49% 9% 1.75% 55 Years
Eaton (NYSE:ETN) 3.37% 10.8x 35% 8% 3.15% 2 Years


GE's dividend seems rather weak by these results. Perhaps due to GE's financial business, the company showed weakness in not only maintaining the dividend but also increasing it over the past decade. I was lucky enough to buy some GE at a very low price and am still long, however, as per this analysis I do not expect big things from the dividend department on this stock. In contrast, EMR showed a consistent 55 year history of increasing dividends, however the rate at which the company increased wasn't impressive. ETN seemed to be the most attractive dividend payer of these three. The 2 years of consecutive increases could fool some investors into thinking it's weak- however the CQDGR metric over the past 10 years shows ETN has been a formidable increaser of dividend payouts to shareholders.


The CQDGR metric is something dividend investors should consider, as it gives effective clarity to the overall dividend growth of the company. While more common metrics like EPS growth, PE ratio, and consecutive dividend increases are helpful, evaluating the actual rate at which dividends are increased is something worth considering when comparing dividend companies.

Disclosure: I am long KO, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have owned ETN in the past year, and may initiate long positions in any of the stocks mentioned.