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Dividend Aristocrats And A Fundamental Principle Of Dividend Growth Investing

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Includes: ABBV, ABT, ADM, ADP, AFL, APD, BCR, BDX, BEN, BF.B, CAH, CB, CINF, CL, CLX, CTAS, CVX, DOV, ECL, ED, EMR, FDO, GPC, GWW, HCP, HRL, ITW, JNJ, KMB, KO, LEG, LOW, MCD, MDT, MKC, MMM, NUE, PEP, PG, PNR, PPG, SHW, SIAL, SPGI, SWK, SYY, T, TGT, TROW, VFC, WMT, XOM
by: Brian Ditchek
Summary

The total return performance and dividend growth rates of dividend aristocrats over a 25-year period are reviewed.

The review suggests a fundamental principle of dividend growth investing that relates total returns to dividend growth rates which can be a useful guide for dividend growth investors.

The average total return of the dividend aristocrats is also shown to significantly exceed the total returns of the S&P 500 over this time period.

Investing in a group of high dividend growth rate stocks is likely to generate S&P 500 beating returns.

For dividend growth stocks, what is the relationship between dividend growth rates and total return? During the long period of building a nest egg rather than the period in retirement when investors may withdraw their dividend income, is it better to seek stocks with higher dividend yields or higher dividend growth rates? The answers to these questions are of fundamental importance to investors and it is important to seek validated answers.

It is reasonable to assume that stocks that grow dividends faster tend to yield higher total returns. Companies that consistently over time announce large increases in their dividends usually do so because their earnings are also increasing at a high rate. Of course, some increases can just be because of increases in the payout ratio, but over extended periods of time it is usually related to significant increases in earnings. Though the theory that stocks that grow dividends at a faster rate have higher total returns seems logical, I have not seen articles that support the theory with data.

A Review of Dividend Aristocrat Performance

Dividend aristocrats, stocks that have increased their dividends for each of the last 25 years or more, provide a large group of stocks amenable to seeking the answers to these questions. In this article, I will report on a review of the total return and average dividend growth rates for the past 25 years for dividend aristocrat equities. The review provides clear and, I believe, convincing evidence that higher total returns are obtained with stocks with higher dividend growth rates.

According to Sure Dividend, there are 53 dividend aristocrats. All are S&P 500 stocks. (Sure Dividend lists 54 stocks on his website, but has assured me in the comments section of a recent article I wrote on consumer staple dividend aristocrats, that one of the 54 was removed because it fell off the S&P 500 this year, leaving 53 stocks. I have used Ycharts to determine the total return percent of each stock over the 25-year period and Yahoo Finance to determine the 1990 dividend and the 2014 dividend to get the ratio of the two, which I call the dividend multiple, DM. In going through each stock, I found 4 of the 53 did not have adequate information in these sources and were not included (these are: ABBV, CVX, WBA and CTAS). That left 49 stocks to report on, which is sufficient to draw conclusions and spot trends. The dividend multiple or ratio of the 2014 dividend to the 1990 dividend varied over a wide range for these stocks, from ED at the low end, which had a DM of 1.38 (which corresponds to an average annual dividend increase % of 1.35%) to CAH at the high end, which had a DM of 100.42 (which corresponds to an average annual dividend increase % of 21.17%).

The tables below shows the information on each of the 49 dividend aristocrats, listed in order of increasing DM. For each stock, the table shows the total return % as a total return multiple (TRM) over the 25-year period. The TRM is used to make it compatible with the DM. For example, if as in the case of ED, the total return % is 827.8%, then the TRM is 8.28. Carrying that a step further, if an initial investment at the beginning of 1990 of $10,000 was made in ED, then the final value at the end of 2014 was $92,780, which is the sum of the initial $10,000 investment plus the $82,780 return. The tables also show the 1990 dividend, the 2014 dividend, the dividend multiple and for completion the stock's current dividend yield (CDY) and the 1990 dividend yield (1990 DY) which is based on the 1990 dividend and the end of year price (source Yahoo Finance).

To help in establishing the trends and reducing the scatter, I divided the 49 stocks into 7 groups of 7. Each group of 7 is in order of increasing DMs. The first group has the lowest 7 DMs, the next group has the next highest level of DMs, and so on, until the last group of the highest DMs. The last row of each table shows the average TRM, DM and dividend yields for each group. Using these averages helps to reduce the stock to stock variations within each group, which are significant, and to clarify the trends on total return versus dividend increase rates.

Group 1:7 stocks with lowest level of DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

1

ED

Consolidated Edison

1.82

2.52

1.38

8.28

3.6

2.3

2

T

AT&T

0.68

1.84

2.71

5.04

5.7

2.9

3

HCP

HCP Inc

0.76

2.18

2.87

29.8

4.6

2.3

4

PPG

PPG Industries

0.82

2.62

3.20

22.5

1.2

1.7

5

SWK

Stanley Black & Decker

0.57

2.04

3.58

8.73

2.2

2.0

6

GPC

Genuine Parts

0.61

2.30

3.75

11.7

2.4

1.6

7

BCR

CR Bard

0.21

8.6

4.10

20.4

0.5

1.2

Group 1 averages

3.08

15.2

2.9

2.0

Group 2: 7 stocks in next highest level of DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

8

XOM

Exxon Mobil

0.62

2.7

4.37

14.5

3.2

1.2

9

MHFI

McGraw Hill Companies

0.27

1.20

4.44

22.5

1.3

0.5

10

MMM

3M Company

0.73

3.42

4.68

15.4

2.5

0.9

11

KMB

Kimberly Clark

0.65

3.22

4.94

13.2

3.1

0.8

12

EMR

Emerson Electric

0.29

1.76

6.01

10.8

3.3

0.8

13

CB

The Chubb Corp

0.33

2.00

6.06

14.1

2.0

0.6

14

BF.B

Brown Foreman Corp

0.19

1.18

6.26

18.7

1.4

0.3

Group 2 averages

5.25

15.6

2.4

0.73

Group 3: 7 stocks in next highest level of DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

15

PNR

Pentair Inc

0.15

1.1

7.50

9.54

2.1

0.6

16

CINF

Cincinnati Financial

0.22

1.76

7.89

13.8

3.4

0.3

17

CLX

Clorox

0.35

2.90

8.35

18.3

2.7

0.9

18

APD

Air Products and Chemicals

0.35

3.08

8.74

19.20

2.1

0.6

19

VFC

V.F. Corp

0.13

1.11

8.87

32.8

1.8

0.7

20

DOV

Dover Corp

0.16

1.55

9.82

13.7

2.3

0.4

21

ABT

Abott Laboratories

0.09

0.90

9.96

19.6

2.1

0.2

Group 3 averages

8.73

18.13

2.4

0.5

Group 4: 7 stocks in next highest level of DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

22

PG

Proctor and Gamble

0.23

2.31

10.96

17.3

3.0

0.3

23

SHW

The Sherman Williams Co

0.19

2.20

11.6

47.3

0.8

0.5

24

LEG

Leggett & Platt

0.11

1.22

11.62

22.5

2.8

0.4

25

KO

Coca Cola

0.1

1.22

12.20

13.3

2.9

0.2

26

HRL

Hormel Foods

0.07

0.80

12.31

18.3

1.9

0.3

27

MKC

McCormick & Co

0.12

1.51

12.58

18.8

2.2

0.5

28

CL

Colgate Palmolive

0.11

1.44

12.80

28.3

2.1

0.2

Group 4 averages

12.0

13.68

2.2

0.34

Group 5: 7 stocks with next highest level of DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

29

PEP

Pepsico

0.19

2.53

13.22

14.7

2.7

0.7

30

ECL

EcoLab Inc

0.08

1.16

13.79

41.1

1.3

0.4

31

FDO

Family Dollar Stores

0.067

0.96

14.34

64.1

1.6

0.6

32

GWW

W.W.Grainger

0.28

4.17

14.76

21.8

1.8

0.4

33

BDX

Becton Dickenson

0.14

2.24

16.25

25.0

1.7

0.2

34

JNJ

Johnson& Johnson

0.16

2.76

16.84

23.1

2.7

0.2

35

TGT

Target Corp

0.11

1.9

17.27

19.6

2.8

0.2

Group 5 averages

15.2

29.9

2.1

0.39

Group 6: 7 stocks with next highest level of DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

36

SIAL

Sigma-Aldrich Corp

0.05

0.92

18.40

22.5

0.7

0.09

37

BEN

Franklin Resources Inc

0.02

0.48

20.81

46.0

1.1

0.07

38

ITW

Illinois Tool Works

0.08

1.81

21.94

23.5

2.1

0.17

39

ADP

Automatic Data Processing Inc

0.07

1.69

25.19

24.5

2.3

0.13

40

ADM

Archer Daniels Midland

0.04

0.96

25.55

7.56

2.0

0.17

41

AFL

Aflac

0.04

1.50

34.08

36.7

2.7

0.23

42

MCD

McDonalds

0.09

3.28

38.59

15.5

3.7

0.29

Group 6 averages

26.4

25.2

2.09

0.16

Group 7: 7 stocks with the highest DMs

Ticker

Stock

1990 Div

2014 Div

DM

TRM

CDY

1990 DY

43

TROW

T.Rowe Price Group

0.04

1.76

45.79

71.9

2.2

0.16

44

SYY

Sysco Corp

0.03

1.17

46.8

11.5

3.0

0.08

45

NUE

Nucor Corp

0.03

1.48

49.4

20.2

3.4

0.05

46

MDT

Medtronic

0.024

1.20

50.29

45.3

1.7

0.03

47

LOW

Lowe's Companies

0.016

0.82

50.49

95.3

1.3

0.07

48

WMT

Walmart

0.035

1.92

54.86

18.6

2.2

0.12

49

CAH

Cardinal Health

0.013

1.33

103.4

35.6

1.6

0.05

Group 7 averages

57.3

42.6

2.2

0.08

A Fundamental Principle of Dividend Investing

By reviewing these tables, many conclusions may be drawn. For instance, by looking at the averages for DM and TRM, it should be clear that as the group averages for DM increase, so does TRM. The graph of the data, showing the average TRM and DM for each of the 7 groups shows clearly that the higher the DMs or the higher the average annual growth rate of the dividends, the higher the total returns.

I believe this graph reveals a fundamental principle of dividend growth investing. The principal may be stated as follows.

For a collection of stocks that grow dividends each year over an extended period of time, the higher the dividend growth rates the higher the total returns.

As individual stocks the rule clearly doesn't apply. There are many exceptions on an individual basis. Take ADM for example, which had a very high dividend growth multiple of just over 25, high enough to put it in group 6, but TRM was a low 7.56. But by collecting at least 7 stocks into a group, the impact of individual variances are reduced and the trend is clear.

It is also interesting to compare the total returns of these dividend aristocrats to that of the S&P 500 index. Though the S&P 500 definitely does not behave like a group of dividend aristocrats as there have been many dividend decreases over the years, if it were on this graph it would have the lowest DM and the lowest total return. For the S&P over the same time period, the TRM is 9.7 (average annual total return of 9.9%) and the DM is 1.9 (average annual growth rate of 2.7%). The source information for S&P 500 index can be found here. Thus compared to the S&P total return

  • Only 4 dividend aristocrats had a lower total return that the S&P 500 over the past 25 years
  • More than 90% of the dividend aristocrats beat the S&P 500 total returns
  • The average total return multiple for the 49 dividend aristocrats was 24.3, more than 2.5 times that of the S&P over this 25-year period
  • Every group of 7 stocks beat the S&P 500.

These observations make a strong argument for investing in dividend aristocrats.

Another observation is that the higher the dividend yield, the lower the total return. For instance the average group 1 yield is 2.9%, while in group 7, it is 2.2%. This is interesting in part because it is contrary to common thought on dividend investing. Sure Dividend's rule number 2 suggests that higher dividend yields lead to higher total returns, which I believe is generally true for all stocks those that don't raise dividends and those that do. But when focusing on dividend growth stocks, the opposite may be true.

As it is important to realize that each group of stocks has significant total return variations, I am including total return charts for the 7 lowest DM stocks and the 7 highest DM stocks. In group 1, the chart shows variations from a TRM of 5.04 to 29.8. The group 7 chart, shows variations in TRM from 15 to 95. In both cases the variations are wide but it is clear that the group 7, highest DM stocks, have higher average TRMs than the group 1 with the lowest DMs.

Conclusions and Implications for Investors

By reviewing the historical performance of 49 dividend aristocrats, it has been shown that these stocks strongly trend towards generating higher total returns when the dividend growth rates are higher. The basic principal derived from this; "for a collection of stocks that grow dividends each year over an extended period of time, the higher the dividend growth rates the higher the total returns," suggests that investors seeking high total returns for the long-term investments should own stocks that consistently grow dividends and grow them at a high rate. How many stocks should be in a "collection" is not clarified by this analysis. Individual stocks cannot be relied upon to follow this rule. However, with a large enough group of high dividend growth rate stocks, say at 7 or more, high total returns should be enjoyed.

I also believe that the rule can be generalized beyond dividend aristocrats to stocks with "long" records of dividend growth, say 10 years or more.

Of course, it is also true that looking at stocks with a past of high dividend growth rates, does not automatically mean that will continue. Investors trying to realize high total returns relative to the S&P should seek good quality stocks with a good history of a high rate of dividend growth (at least 8% per year) over at least a period of 10 years and then monitor the dividend growth. If the investor sees a stock's dividend growth rate slow down to an average of 5% or less for several years, sell and reinvest in a stock with a recent history of higher dividend growth rate. If dividend growth stops, sell the stock.

Disclaimer: The author has presented an analysis of dividend growth stocks. The article represents the author's opinion only and should not be construed as a recommendation to buy any stock or group of stocks. The author is not a certified financial planner. Readers should do their own analysis and make their own investment decisions and consider the use of a certified financial planner.

Disclosure: The author is long CL. PG, CLX, CVX, BF.B, T. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.