James Jenckes'  Instablog

James Jenckes
Send Message
Born and raised in Arizona. Joined Air Force in the waning days of Vietnam War. Served 8 1/2 years stateside and in Alaska as a Radar and Satellite tracking technician. Afterward, I worked in the semi-conductor industry and computer maintenance industry for a short time. Later, I did some... More
  • Analyzing Dividend Growth Rate 0 comments
    May 11, 2014 11:13 PM | about stocks: AIQUF

    I would caution everyone in the Dividend Growth Kingdom to be careful when analyzing actual dividend growth rate. As most DGI'ers, I use the CCC (See articles by SA author David Fish) spread sheet to look for new prospects to add to my watch list. I find this list very useful for spotting stocks that pass the "Chowder Rule". However, IMHO, I would advise you to do further research into each stock that interests you. Here are a couple of things to lookout for.

    First, just because a particular stock shows a very high Dividend Growth Rate (DGR) doesn't mean it will continue to delivery that kind of growth rate into the future. Many of us rely on the "Chowder Rule" to guide us to our next stock pick. That rule was developed by SA author Chowder. The rule states before being considered a buy, a stock's Dividend Yield plus its 5 year DGR should exceed 12%. So, if stock XYZ's yield is 3% and DGR equals 9% then it meets the Chowder Rule. Ok, let's check out a real life example. Let's consider Air Gas (NYSE:AGR). Based on the CCC spread sheet (April 30th) its yield is 1.81% and the 5 year DGR is 28.8%. Wow, this looks pretty good. The yield plus DGR is almost 31%, almost 3 times the Chowder Rule. But here is the catch, according to Schwab data the 2010 dividend increase was 34%, the 2011 was 30%, the 2012 was 25%, and the 2013 was 21%. Do you see a pattern developing? Now we come to the 2014 increase that was announced last week and will take effect June 30, 2014. That increase is only about 15%. Not bad and still keeps you above the Chowder Rule. But, the point is that the DGR has been dropping off the past 5 years. If you used the 5 yr DGR listed in the CCC to make an assumption about your future dividends, then you might have a rude awakening a few years down the Dividend Growth Road. I hope no one will infer that I am making disparaging remarks about David Fish and the CCC Spread Sheet. The CCC list is an invaluable tool for all DGI'ers. We all must do our own due diligence when it comes to picking stocks for our portfolios.

    Secondly, the data you find at the major brokerage sites, also, needs to be closely analyzed. For example, on Fidelity the 1 year DGR for Air Gas is listed as 20% today. But doing the math with the old ($0.48) and new ($0.55) dividend rate will give you a 1 year DGR of 14.58%.

    Thirdly, for those of us who are in the distribution phase of investing, I believe you need to invest in stocks that are presently delivering a dividend yield near 3% with a DGR which can be expected to deliver about 15% DG annually. The reason for this is I want to see accumulated dividends for 10 years equal at least $2500. That's calculated on an initial investment of $5000. This will give me a Yield on Cost (YOC) of ~10% or greater at the end of 10 years. Of course, if you are investing in stocks with higher dividend rates you can reduce your DGR expectations somewhat. Bringing back the Air Gas example, if you calculate a 10 year accumulated dividend with a 1.81% yield and 28.8% DGR you get the following results - $3662 accumulated dividends and a ending YOC of 17.8%. Now, use the new dividend rate and DGR, you get the following results - accumulated dividends are equal to $2078 and ending YOC equals 7.1%. This can make a huge difference to someone counting on the first calculation.

    Of course the discussion is purely academic. No one can accurately predict what the payout of stock will be in 10 years. But, certainly the recent history of a stock's dividend performance can give us a clue to make a reasonable assumption about the direction of the DGR. I think we should be fairly conservative when calculating future stock dividend growth. In the case of Air Gas, after reviewing the most recent data I would have to assume that there would be future decreases in the DGR. So, to be conservative I may want to drop my DGR down a couple of points from the last increase. In this case I would make assumption going forward that the next increase might come in about 12 - 13%.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: AIQUF
Back To James Jenckes' Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.