Many of us instinctively understand that things that have been around a long time are likely to be around a lot longer, and things that haven't, aren't. The 2,000 year old Roman Coliseum, for example, will outlast most, if not all, modern stadiums. The same goes for more intangible things like books, songs, movies, etc. Classics will continue to be classics, while the vast majority of newly-released stuff will quickly end up in the dustbin of history.
This life expectancy heuristic - or "Lindy Effect" as it's formally called - also applies to companies. Old companies statistically outlive young ones. That's because, unlike living organism, companies don't have expiration dates. They could, in theory, last forever. And some do indeed appear to be immortal. In Japan, for instance, there are companies that are well over 1,000 years old. But these are outliers. Most companies exit the corporate gene pool before the age of 10; only the strongest stand the test of time. This means that the longest-lasting survivors are also the ones "best fit" for future survival.
In short, the central idea here is that age is the ultimate measure of durability. The longest lasting companies are the most durable, and vice versa. The question and focus of this article is: Does this Lindy Effect also apply to dividend growth stocks? In other words, are past dividend increases a good indicator of future dividend increases? Some say no; others - particularly dividend growth investors (DGIs) - say yes. Who's right? The only way to objectively answer this question is to look at the statistics.
To do that, I analyzed the annual additions and deletions to and from the Dividend Aristocrats list. (For those unfamiliar with this list, it tracks S&P 500 companies with 25 or more consecutive years of dividend increases. Aristocrats that fail to keep this streak alive get booted off the list.) The table below clearly shows that the longer a company is on the list, the more likely it is to remain on the list. Let's rephrase that to make it even clearer: DGIs have it right - the longer a company has paid increasing dividends, the longer it can be expected to continue doing so.
Survival of the Fittest Dividend Aristocrat
Note: The initial survival probability would be significantly lower had we started with young dividend growth companies rather than well-established ones. The long-term trend would also be steeper than what is shown here.
Source: A North Investments, Standard & Poor's (S&P)
A common criticism of the Dividend Aristocrats list is that it suffers from something called "survivorship bias" because it only focuses on survivors and ignores the graveyard of former Aristocrats. This, the critics argue, can lull you into a false sense of security by convincing you that companies with long records of raising dividends will continue to raise them. It's a fair criticism, which is why throughout this article I use probabilistic words such as likely, expected, and predictable. It's to remind readers that there are no certainties in the investment world, just probabilities. That being said, the conclusion here remains unchanged: the longest-lasting Aristocrats have the most predictable dividend growth streams. If this wasn't true, the survival probability shown above wouldn't exhibit an upward trend.
Below I provide a list of the seven Aristocrats that have survived since the list was first published in 1989. Every single one of these companies has paid a consistently increasing dividend for over a half a century. Statistically speaking, these are among the most durable dividend growth stocks you can possibly buy.
|Johnson & Johnson||(NYSE:JNJ)||53|
|Procter & Gamble||(NYSE:PG)||59|
To conclude, DGIs have the right idea - past dividend increases are very a good indicator of future dividend increases. The key word here is "indicator." The Lindy Effect is just a probabilistic estimate. It only works over a large sample size, so diversification is extremely important. Spreading your bets across a large number of dividend growth stocks improves the predictability of your income stream.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.