Does Dividend Growth Rate Or Yield Vs. Historical Average Yield Indicate Value?

Includes: CVX, INTC, MSFT, NTC, T
by: Richard Shaw

We searched for a relationship between Street Consensus 1-year target stock prices for dividend stocks, and some key yield and dividend attributes, but found none. Negative study findings are sometimes as important as positive findings. They might help steer away from assumptions that may not be helpful.

In this case, it tends to steer us away from average analyst projections. We hope we are not being too hard headed about our dividend related valuation assumptions.

The tests were to see if there is a relationship between the level of yield, or the ratio of the current yield to the multi-year average yield, or the multi-year dividend growth rate and the Street Consensus year ahead target price change. We found none.

The results have not yet altered our view that dividend stocks with higher dividend growth rates and dividend stocks with yields well above their historical yields are better values than dividend stocks with low growth rates, or with yields well below their historical averages.

Tests Performed

We performed three tests:

  1. target price change vs. trailing yield
  2. target price change vs. trailing yield / 5-year average trailing yield
  3. target price change vs. 5-year dividend growth rate

Dividend Stock Selection For the Study

We used the 469 stocks maintained by David Fish as having at least 5 years of continuous dividend payments and dividend increases (download his list here) as our universe. We obtained the consensus 1-year target price for each of those companies, and calculated the effective price change expectation. We also obtained the 5-year dividend growth rate for those stocks, as well as the trailing yield and the 5-year average trailing yield.

For the first test, we eliminated those stocks for which there was (1) no analyst target price, (2) effective price changes of +/- 30%, or (3) trailing yield greater than 10%. That reduced the list to 405 stocks.

For the second and third tests, we began with the 405 stocks from the first test, and reduced the list further by eliminating those that had (1) 5-year dividend growth rates over 30%, (2) a ratio of trailing yield to the 5-year average trailing yield of 2.0 or more, (3) no 5-year dividend growth rate in the database we used as a source, or (4) no 5-year average trailing yield in the database. That reduced the list to 349 stocks.

For all of the tests, we had a large sample of dividend stocks with consistent payment and growth histories, adequate data, and no extreme values.

Test #1: Target Price Change versus Trailing Yield

This shows no functional relationship between year ahead Street Consensus target price change and the level of trailing yield. It is obvious from visual inspection, but also by the linear regression trend line, which is virtually flat.

Test #2: Target Price Change versus Ratio of Trailing Yield to 5-Year Average Trailing Yield

We really expected something from this test under the mean reversion principle. While individual stocks might have higher than average yields due to price declines, a population of hundreds of the best dividend payers in an up market would not have yields below their historical average for that reason.

We have long believed that a quality company with a strong dividend history is a potential value when the yield is above its average (that the price may be temporarily depressed, and be likely to recover to restore an average yield level).

This test was intended to examine that idea.

Visually, this scatter diagram does not suggest any relationship. The linear regression trend line suggests a mild relationship, but the "R-squared" (statistical reliability measure) is far too low for the trend line to be reliable.

Test #3: Target Price Change versus 5-Year Dividend Growth Rate

We also expected something from this test. We think it is logical that on average a company with a higher long-term dividend growth rate should be more valuable than one with a lower dividend growth rate (if trailing yields are fairly close). Once again, individual stocks could easily deviate from that idea due to any number of other factors. However, a large population of quality companies with strong dividend growth histories should wash out the problems with single company analysis on a single dimension.

This test also found no statistical relationship.


Maybe we are just hard headed, but Tests #2 and #3 have not dispelled our confidence in dividend growth rates and the ratio of trailing yield to historical average yield as a partial indicator of potential value.

Unfortunately, the evidence in these studies has not steered us away from the key valuation assumptions we had before the study - glad we did it though.

Value and expected price change are not the same thing. Overvalued stocks can remain so for extended periods, and undervalued stocks can do the same, However, we think quality, dividend payment and increase consistency over a long time and yields greater than the historical average all create some margin of safety in the dividend stock selection process.

Our bias, pending further information, suggests that the problem is with the average analyst forecast - that the average analyst is more of a trend follower and extrapolator than a fundamental value researcher.

How do you interpret this data?

Download The Data File

If you would like to have the complete data file for these tests, you are welcome to them at our site, where we distribute our monthly "Rational Risk Equity Income Investor." Use this link to opt into our email system - then click the link in the verification email you receive and access the Excel file download.

Here are a few screen shots from the data file that might be interesting to you.

Trailing yield, target price change and the sum of the two for the most heavily traded of the stocks

5-Year Dividend Growth Rate and Target Price Change For Highest Dividend Growth Rate Stocks

Lowest Ratio of Trailing Yield to Average Yield, And Target Price Change

Highest Ratio of Trailing Yield to Average Yield, And Target Price Change

Of the stocks in these last tables, we own MSFT, INTC, T, INTC, CVX.

Disclosure: QVM has positions in MSFT, INTC, T, JNJ, CVX as of the creation date of this article (February 14, 2013). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.