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Dividend Champions Update, Part 1: History Improved

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The Dividend Champions spreadsheet has been updated through 7/30/10

During the past month, I have been working on significant changes to improve the Dividend Champions listing, and those include expansion of the Contenders tab and the additional of a new group of companies with 14 or fewer years of dividend growth. Because there is much to discuss, I will do this in two parts. Part 1 (below) will focus on the main Champions listing and the accompanying DivHistory tab. In Part 2, I'll focus on the Contenders and the new “Challengers” listing.

Improved DivHistory Calculations

A couple of months ago, I added the tab that lists dividends paid by year for the 100 Dividend Champions. I followed that up by inserting columns that showed the average percentage increase in the dividend for the latest 5- and 10-year periods and created a ratio to show Acceleration/Deceleration (or A/D) using those two numbers. The problem with using such averages is that they don't properly express the rate of growth in the dividend. A much better method is to calculate the Compound Annual Growth Rate, or CAGR, for the periods involved. Fortunately, I had some help in accomplishing this task, and would like to acknowledge the contributions of Robert Schwartz (“notbob” on Seeking Alpha) and SA user TLassen, who guided me to the proper Excel formula. Once I had the proper CAGR calculations, I was able to confirm their accuracy b y comparing them to Mr. Schwartz's results.

There are two main problems with “annualized” numbers. First, they tend to overstate rates of change and, second, the degree of overstatement increases over time. The result is that, no matter how well intentioned, using such figures is bound to lead one astray. So replacing the averages that I had been showing with CAGRs was a major step in the direction of accuracy and relevance.

I was surprised initially by the magnitude of the change and a couple of examples demonstrate how distorted the annualized numbers can be. Under the old format, AFLAC (NYSE:AFL) had 5- and 10-year average percentage changes in the dividend of 38.9% and 67.2%, respectively, resulting in an A/D ratio of 0.579, which suggests that the rate of dividend increases was slowing. But using CAGRs, the 5- and 10-year changes were 24.1% and 22.7%, respectively, resulting in an A/D ratio of 1.064 and properly showing that the company had, in fact, been increasing the percentage of its increases. Likewise, the old numbers for Air Products & Chemicals (NYSE:APD) were 12.7%, 15.4%, and 0.829, respectively, whereas the new numbers are 10.4%, 9.7%, and 1.062. Like AFLAC, the company had stepped up its rate of dividend increase rather than slowing it.

Since the A/D ratio is still somewhat new, it remains to be seen what its significance may be, or how it will be useful to investors. My initial idea is that numbers close to 1 demonstrate a level of consistency that is desirable in a dividend stock, but that there is a certain degree of “drag” that makes it natural for the ratio to slip below 1. (Increases of the same currency amount each year would automatically be a smaller percentage.) The main problem with consistency is that a company can be consistently stingy, so I think the A/D ratio has to used in conjunction with the CAGRs, which can highlight a company's generosity. I think that these items bear further discussion in the future.

Composite Averages Added to Champions Tab

A second change this month involves the averages that have been posted at the bottom of the Champions tab showing the number of companies and average length of streak, price, yield, and the percent of the latest increases. Previously, I had shown the current month along with the previous month and a year earlier, for comparison purposes. Beginning with the 7/30 update, I am showing all previous month-end figures. (See below for a modified version.) I think this will give us a better picture of the overall trends for Dividend Champions. As you can see, my listings began with 139 companies and has dipped below 100 in total until recently. (Because of some later additions, the highest number of Champions would have exceeded 140.) Because the roster of companies has not remained constant, the comparisons are not exact, but they do give us a good picture of this “universe.” While the average streak has consistently grown longer, the average price has fluctuated between \$29.80 (near the 2009 lows) and \$49.53 (near April's highs). Likewise, the average yield has fluctuated between 2.90% (near the April highs) and 4.93% (near the 2009 lows). What's most striking, though, is the decline in the average percentage of the dividend increases, which has fallen from nearly 11% to just over 5%, although it has recently shown a slight improvement. The obvious reasons begin with the dividend cuts and eliminations that reduced the number of companies listed and end with the fact that many companies have recently been more conservative because of the recession. The trend bears watching, but I am optimistic that will have reversed itself soon.

 Years Price Yield %Inc. Averages for 100 companies at 6/30/10 38.4 44.27 3.26 5.37 Averages for 100 companies at 5/28/10 38.3 46.36 3.13 5.16 Averages for 99 companies at 4/30/10 38.2 49.53 2.90 5.19 Averages for 99 companies at 3/31/10 38.1 48.10 2.98 5.15 Averages for 98 companies at 2/26/10 38.0 46.06 3.10 5.10 Averages for 98 companies at 1/29/10 37.8 44.87 3.14 7.11 Averages for 98 companies at 12/31/09 37.7 45.79 3.05 7.05 Averages for 97 companies at 11/30/09 37.6 45.14 3.11 7.18 Averages for 98 companies at 10/30/09 37.4 43.46 3.21 7.60 Averages for 104 companies at 9/30/09 37.1 42.64 3.22 7.49 Averages for 107 companies at 8/31/09 37.0 40.63 3.30 7.79 Averages for 109 companies at 7/31/09 36.9 39.50 3.39 8.37 Averages for 109 companies at 6/30/09 36.9 36.80 3.64 8.35 Averages for 109 companies at 5/29/09 36.8 36.52 3.66 8.68 Averages for 112 companies at 4/30/09 36.7 35.82 3.79 8.63 Averages for 116 companies at 3/31/09 36.4 32.30 4.36 8.74 Averages for 120 companies at 2/27/09 36.4 29.80 4.93 8.77 Averages for 125 companies at 1/30/09 36.1 32.75 4.57 9.30 Averages for 128 companies at 12/31/08 35.9 35.71 3.92 9.59 Averages for 128 companies at 11/28/08 35.9 35.58 3.94 9.91 Averages for 126 companies at 10/31/08 35.8 37.58 3.68 10.36 Averages for 131 companies at 9/30/08 35.6 43.72 3.17 10.50 Averages for 132 companies at 8/29/08 35.6 44.88 3.23 10.85 Averages for 132 companies at 7/31/08 35.5 43.96 3.32 10.67 Averages for 133 companies at 6/30/08 35.4 42.80 3.53 10.52 Averages for 135 companies at 5/30/08 35.4 46.49 3.06 9.18 Averages for 135 companies at 4/30/08 35.3 45.89 3.02 9.92 Averages for 135 companies at 3/31/08 35.2 44.41 3.09 10.06 Averages for 136 companies at 2/29/08 35.2 43.72 3.13 10.15 Averages for 136 companies at 1/31/08 34.9 44.54 2.97 10.21 Averages for 139 companies at 12/25/07 34.5 N/A N/A 10.23

Final Word

A third, less significant change for this update is that I plan to post the spreadsheet in alphabetically order. Previously, it had been presorted in descending order by the length of the streak. Although this may have served to impress people, I now think that using the information (and switching between tabs) is easier if it is left in alphabetical order. I plan to continue to post the PDF version in the old format, pending any feedback. For those who lack a spreadsheet program, the excellent Open Office suite is available on the same web page as the Dividend Champions.

Disclosure: Author owns AFL among 28 of 100 Dividend Champions
Stocks: AFL, APD