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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? / including... More
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  • Is Dividend Growth Investing Robust? (28 April 2012) 4 comments
    Apr 28, 2012 6:02 PM

    I think that dividend growth (NYSE:DG) investing is solid income strategy but there are at least 2 caveats:

    1. some companies cut or even omit dividends;
    2. dividend growth rate for a company declines with time (due to a company life cycle - see e.g.

    In this note I investigate it robustness to 2 factors outlined above.

    Academic studies (see results review in show that in average about 3% of companies with stable or growing (during previous 5-7 years) dividends cut them. Of course, more payers reduced or omitted dividends during ~1930 and ~ 2008 depressions but 3% seems reasonable number.

    Long history of actively managed index S&P500 (which populated with new growing companies and dumped out from badly performed companies) shows that average dividend change rate (DCR) is about +5%.

    I mimic both factors for passive portfolio in a simple exercise. I presume that absolutely passive DG investor ("buy-and forget" type of behavior) forms portfolio with initial average 3% yield on cost (YoC). The portfolio has DCR = 5% during 1st year of investing and then DCR gradually decreases (to less than 1.5% after 50 years) but always positive, for sake of simplicity I just increase yield on 0.15% annually. These numbers are at least very modest for any realistic DG portfolio but I presume zero inflation in this example. Analysis of David Fish Dividend CCC list (fig. 1) shows that DCR decreases with time of an average company's dividend payments.

    (click to enlarge)


    I assume worst and almost worst case scenarios:

    1) investor loses all money invested in a company that cut or suspend dividends, i.e. the company's stock is delisted immediately.

    2) investor loses 50% of money invested in company that cut or suspend dividends and uses the second half for purchase stock of another company with positive DCR.

    I'd like to point that it is NOT always wise to sell stock because a company cut dividends (see "Don't panic if dividends were cut" in my instablog but many DG investors consider such event as sell trigger. So number of "dividend cows" in portfolio of such investors decreases with time.

    Results are shown in fig. 2 plotted from numbers in the table (fig. 3).


    (click to enlarge)


    Even in the 2nd almost worst case DG investor will see income increase in the first 30 years after the passive portfolio formation from remaining dividend growth companies with decaying positive DCRs. Not so fast DCR decay or smaller average loss of stock price after dividend cut lead to longer period of DG investment robustness.

    Added 17 Jan 2014:

    Prof. B. Cornell in 2012 Working Paper "Dividend-Price Ratios and Stock Returns: Another Look at History" shows that, ex-post, long-run real dividend growth never changes - it mirrors long-run real GDP

    (click to enlarge)

    growth at about 3% per year in USA (see picture above). So economy probably an important factor for DGI.

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  • greenmachine33
    , contributor
    Comments (43) | Send Message


    Thank you and amen for an article on DGI investing with some real numbers for once! So many bloggers have conjecture, sweeping generalizations or some feel-good remarks such as "It went up, therefore it must be good".


    Now my quesitons on your numbers:


    Please clarify what you are assuming for YOC for the re-buys after 50% loss on cutters (essentially the re-buy price). I think it is 3% but not sure. Have you tried to adjust for cyclical nature of the market, over 50 years there have been times when YOC averaged 5% and times it was 1.5%.


    Please also clarify you dividend re-invest strategy. Or is this a no re-invest strategy?


    Lastly, do you have any companion data of the bonds for the same companies? Is there any data on subsequent bond defaults for dividend cutters?


    Your growth (DCR) of +5% seems a little low, a lot of people are striving for around 10%. Please explain where you got 5%.
    28 Apr 2012, 07:06 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4471) | Send Message
    Author’s reply » greenmachine33,
    Thank you for comment.
    I try to do example as simple as possible: numbers are probably on low side, real numbers can be better, YoC for re-buys is the same as current portfolio yield, I didn't try to adjust for cyclical nature of the market, etc.... My goal was to see if curve has maximum.
    I took +5% as average DCR for S&P500 during 1926-2006 from "A Random Walk Down Wall Street" by Burton G. Malkiel (2007 edition), it is just a low side number.
    28 Apr 2012, 08:51 PM Reply Like
  • greenmachine33
    , contributor
    Comments (43) | Send Message
    OK, so you are re-buying assuming at 3%.


    I checked your numbers I think they are slightly incorrect in fig 3. Not sure why.


    For 50% reinvest cutters, year 2 should be 0.3147. For 100% loss on cutters, it should be 3.10200


    For the 50% case, the 50% cutting shares (3*50%=1.5) should be reinvested at 3%, not 3.3%. Then each year it grows at by +0.15%. Really it should be 3.0%*(1.005)^N*97 + 3.0%*(1.005)*(N-1)*1.5 and so on for each year but you chose to simplify it. Next year you addd the N-2 term and so on. I haven't spent time to try and make a clean mathematical formula for the series, i just use repetitve formulas in Excel.


    But even with your simpler 3.15%, 3.3% etc the numbers seem to be off. My calc shows the income is a tad lower than you do, so the maximum will be earlier in time. You should re-run it and see what you get.


    You raise an excellent point by pursuing this line of thinking that you have to add in "cutters" similar to how defaults are considered for bonds. Bonds also "season" meaning default rate increases over time. I have some work done that shows that it often takes between 10-20 years for a DG stock to outperform bond rates prevalent at the time. If we put the two together, if the maximum is before the crossover year, the stock may never outperform the bond.


    Cutter rates are similar to defaults in bonds, they have to be factored in. I think you have to actively cull the portfolio of potential cutters to consistently outperform bonds.
    29 Apr 2012, 04:42 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4471) | Send Message
    Author’s reply » GM33
    I didn't check Excel, my task was quite simple - to see in what range curve has extremum - near 5 or near 50 years. Because reality is more complex and I cannot predict DCR. I specially post numbers (not only curve) so any reader can find weak points in the estimation. I think answer for oversimplified simulations "about couple dozen years" is good enough.
    I agree that portfolio management is a must.
    29 Apr 2012, 06:58 PM Reply Like
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