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Ponzi-Like Dividend Champions?

"Ponzi scheme is a form of investment fraud. What occurs is the perpetrator of the fraud promises the victims a high return on their investment or dividends that cannot be acquired through legal and honest investments" [1].

We know that some companies earnings are object of fraud. I read in one book on investment (sorry I do not remember title) about cases of dividends fraud in circa 1928.

I hope such dividend fraud is in the history and never occurs nowadays but as Henry Louis Mencken said "HOPE: A pathological belief in the occurrence of the impossible" [2].

In order to pay dividends a company must have cash. A company has different ways to obtain cash: sell goods or service, issue debt or issue equity. Sometimes a company needs to borrow money to expand it business (although recent debt of KDN company took to pay special dividend seems me too strange). Sometimes a company needs to issue new shares (small fraction of already outstanding shares) to conduct stock option policy and attract good employers (almost mandatory in Silicon Valley).

I consider that the only the first way can be considered as a sign of good company health. So-called dividend champions (companies that consistently growth their dividends for several years) presumably sell more goods or services or charge their customers increasing price with time or at least increase payout ratio [3].

I was surprised that some dividend champions actively issue new equity (see table below, numbers from Mergent are rounded)

Ticker Company Industry Country #shares increase in 10 years
WPZ Williams Partners L.P. Specialty Chemicals USA 15
TWGP Tower Group Inc. Property & Casualty Insurance USA 8
NS NuStar Energy L.P. Oil & Gas Pipelines USA 7
SXL Sunoco Logistics Partners L.P. Oil & Gas Pipelines USA 6
SNH Senior Housing Properties Trust REIT - Residential USA 5
SJM The J. M. Smucker Company Processed & Packaged Goods USA 5
MMP Magellan Midstream Partners LP Oil & Gas Pipelines USA 5
GEL Genesis Energy LP Oil & Gas Pipelines USA 5
OHI Omega Healthcare Investors Inc. REIT - Healthcare Facilities USA 5
PB Prosperity Bancshares Inc. Regional - Southwest Banks USA 4
EEP Enbridge Energy Partners LP Oil & Gas Pipelines USA 4
DLR Digital Realty Trust Inc. REIT - Industrial USA 4
PAA Plains All American Pipeline LP Oil & Gas Pipelines USA 4
TOO Teekay Offshore Partners LP Shipping Bermuda 4
ALTE Alterra Capital Holdings Limited Property & Casualty Insurance Bermuda 3
ATO Atmos Energy Corporation Gas Utilities USA 3
NNN National Retail Properties, Inc. REIT - Diversified USA 3
SKT Tanger Factory Outlet Centers Inc. REIT - Retail USA 3

I do not have conformation that these companies use money they obtain via selling of new shares to pay dividends to old investors from the money paid by subsequent investors. But at historically average yield 5% sell of new shares provide enough money to pay increasing dividends to old and new investors for several years without generation of earnings from produced goods or services.

I noticed that last couple years some dividend champions also issued debt in forms of bonds, notes, preferred shares, etc… Unfortunately I don't know a good source that allows track such actions [4] but IMO investor should be aware of debt issues.

I think the case of very active equity dilution is even worse that opposite action of shares buybacks widely discussed in press (including my SA blog).

I do not know enough about companies listed in the table above to give any recommendation to anybody (and legally I have no such rights).


1. I use for definition. Wikipedia also gives a good description and history of Ponzi scheme I'd encourage to read.

2. BTW, I think this is the ideal definition of many investment approaches).

3. David Fish maintains comprehensive list of dividend champions.

4. I have access to Wall Street Journal and Lexis/Nexis but don't know how collect data without too much work. Help is welcome!

July 18-21, 2012