A Brief History Of Dividend Growth Investing

by: Minutemen


Over the the years, Seeking Alpha has gained a robust and intelligent group of authors, subscribers and regular commenters regarding dividend growth investing, or DGI.

Although investment in dividend-paying stocks has a demonstrated record of success, the investment strategy has its fair share of detractors who frequently criticize the approach.

One frequent and faulty assertion is that DGI is a "recent fad." However, this assertion has no basis in reality.

The purpose of this article is to provide readers with a background on the history of dividend-paying stocks and the evolution of dividend growth investing.


Dividend growth investing (DGI) involves careful screening and investing in the stocks of quality companies that have an established record of growing their dividend regularly over time and whose corporate management is committed to continued dividend growth. Despite the long track record and demonstrable success of investing in dividend-paying stocks, DGI has frequently been criticized by various commenters on Seeking Alpha and elsewhere as a "recent fad."

This article takes a brief tour of the history of dividend-paying stocks and the evolution of dividend growth investing. What the record reveals is that intelligent investors can trace the roots of DGI back to the first publicly traded stock in 1602, through the intelligent investment approach of Benjamin Graham, and into the modern era with the help of SA contributors such as David Van Knapp and others.

Timeline Source: Created by Minutemen

I. Background

The Intelligent Dividend Growth Investing Strategy

The actual practice and strategy of dividend growth investing can be quite varied among individual investors, but at its core, dividend growth investors seek high-quality companies that are capable of growing profits for extended periods of time and that pay shareholders sustainable dividends that are regularly increased on an annual basis.

Dividend growth investors are not traders or speculators seeking to profit from the market's regular price fluctuations. Rather, they are investors who prefer to build wealth over time by buying and holding a diverse portfolio of high-quality companies and allowing the dividends paid out by such companies to compound over time. The compounding of dividends can occur either by reinvestment of the dividends back into the company that paid the dividend or by accumulating dividend payments in a brokerage account and, subsequently, investing into other dividend-paying companies. Dividend investment vehicles could include individual stocks, mutual funds, ETFs, REITs, MLPs, BDCs, or any combination thereof.

A common goal of many intelligent DGIs is to accumulate a sufficient income stream from the compounding effect of dividend growth and reinvestment over many years so that the cash flow generated from dividend payments serves as the primary or major source of income in retirement. What's more, many quality dividend stocks typically increase their payments annually and at rates that exceed inflation.

Increasing Popularity of Dividend Growth Investing

Seeking Alpha has a robust and knowledgeably group of self-directed investors who utilize DGI as their primary investment strategy for building financial wealth and for generating a regularly increasing stream of dividend income. However, SA also has a steady supply of DGI detractors who regularly voice criticism in the comments section of DGI articles. The vast majority of such criticism is either based on misunderstanding of the investment goals of DGI practitioners, or is based on various myths that have been well debunked on SA by authors such as David Van Knapp and others.

Of the criticisms of DGI, some of the more frequent and erroneous comments that I see come from commenters who claim that it is a recent "fad," the latest investing "craze," or is somehow not worthy of consideration by "serious" investors. While it may be true that DGI has become more popular in recent years, particularly after the Great Recession of 2008-2009, this is likely correlated with the concomitant rise in the number of self-directed investors, which has resulted from the ease and low costs associated with the digital age.

For example, according to Aite Group, close to a quarter of adults with access to the internet, or about 54 million adults, are now self-directed investors, a trend that has changed dramatically since 1995 and continues to trend upward.

A Google Trends analysis on the internet search terms "dividend growth investing" and "dividend growth investor" from 2004 to present (the broadest time frame available) shows that peak Google searches on these terms occurred in the early 2000s but were very sporadic. More sustained but lower volume Google searches on these terms occurred from the mid-2000s to present day.

A similar Google Trends analysis on the terms "dividend stocks," "growth stocks," "value stocks," and "momentum stocks" showed a relatively similar clustering between dividend and value stock search terms from 2004 through about 2008 or so, with a separation and increasing frequency of "dividend stock" searches from 2008 to present. Searches on "momentum stocks" lagged far behind the other three categories.

Although the recent evidence indicates that dividend growth investing has become a popular strategy among self-directed investors, this fact in no way diminishes the investment strategy or success that DGI can yield. But how does one measure success of one investing approach versus another, particularly if the investing goals are different? While the purpose of this article is not to argue the merits of one investing strategy versus another, various analyses do indicate that investing in stocks that pay dividends, particularly those that regularly grow those dividends, has led to greater total return performance over time and is thus an intelligent investment strategy.

The chart below illustrates the average annual total returns of S&P 500 stocks from 1972 through 2014 based on dividend policy. The data indicate that the collection of stocks that initiated a new dividend or raised their existing dividends had greater total returns on average than all other categories. The second best-performing class was the collection of "All Dividend-Paying Stocks" (inclusive of any stock that paid a dividend). The group of dividend-paying stocks that did not increase their dividends performed only slightly worse than a portfolio of equal-weighted S&P 500 stocks. Non-dividend stocks and those that either cut or eliminated their dividends performed the poorest on average over the time frame analyzed.

Source: Ned Davis Research, Inc. (2015)

Of course, it goes without saying that past performance is not an indicator of future performance, and despite the outperformance of dividend growth stocks, investors still need to be mindful of quality and valuation. It should also be reiterated here that many DGIs are not interested in outperforming the stock market or any other index. A primary goal of many DGIs is to generate a reliable and annually increasing income stream from high-quality dividend stocks. Let's turn our attention now to the origins of dividends and dividend-paying stocks, which has quite a lengthy and storied history.

II. Origins of Dividend Growth Investing

The First Publicly Traded Company in 1602 Paid Dividends for 180 Consecutive Years

The Dutch East India company was the very first permanently organized and publicly traded company to issue common stock, as well as the first public company to pay a dividend. Known in Dutch as the Vereenigde Oost-Indische Compagnie, or the VOC, the company was established in 1602 by Dutch statesman Johan van Oldenbarnevelt and existed for nearly 200 years before it became nationalized in 1800 by the Dutch government during the Fourth Anglo-Dutch War and the French invasion of the Netherlands.

As described in the 1997 article "The Evolution of Corporate Dividend Policy" by George Frankfurter and Bob Wood, the VOC was formed from the banding together of various merchants in order to hedge against the risk of any privately owned venture from failing. This allowed hundreds of ships to be funded concurrently by hundreds of different investors to minimize risk of capital loss (sounds a lot like the first index fund!). The VOC later became the first multinational company when it established headquarters in Asia.

The VOC is notable for many achievements, including being the first multinational corporation to exist, and it still holds the record for being the largest corporation by market capitalization in the world (see chart below). It is considered by many to be the most successful corporation in history and is notable for paying an average annual dividend of 18% of capital for most of its existence.

Source of VOC Logo: Wikipedia

The success of the VOC is truly staggering. As the chart below shows, the peak market cap of the VOC (using current U.S. dollars) simply dwarfs those of modern corporate behemoths like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and International Business Machines (NYSE:IBM), as well as other historically successful companies such as Standard Oil (which was broken into smaller behemoths, including Exxon Mobile (NYSE:XOM) and Chevron (NYSE:CVX)).

Source: Zero Hedge, 2015

The next chart below shows the stock price history of the VOC from its initial public offering in 1602 to its eventual demise on December 31, 1799. Although the stock averaged around 400 guilder over its history, there were many fluctuations as the stock reacted to both the Dutch and global economies that the shipping trade was reliant upon.

Source: Business Insider

Once the VOC had established its charter, it issued permanent shares to raise capital for outfitting a fleet of ships and paid regular dividends to shareholders annually for 180 consecutive years. The dividend averaged around 18% of capital over the course of the company's 200-year existence. But since the average stock price of the VOC was around 400 guilder per share, the actual dividend yield was in the 5-7% range. The chart below provides a sample of the annual dividend as a proportion of capital that was paid from 1605 to 1728. No dividends were paid after 1782.

Source: Chart Created by the Author from Data Available Through Business Insider

Although the dividend return to shareholders as a proportion of capital was quite high over the VOC's history, the annual dividends themselves were highly variable in terms of content. They ranged from return of capital, cash and various commodities such as cloves and produce that varied from year to year. This was not pleasing to many shareholders and led to future dividend-paying companies, such as the Bank of England, the East India Company and the South Sea Company, to pay only cash dividends during the 1700s.

The table below lists the various types of dividend payments that investors received from the VOC in the years corresponding to the chart above.

Source: Table Created by the Author from Data Available Through Business Insider

Impact of the VOC on Other Publicly Traded Companies

The success of the VOC soon led to the formation of hundreds of other successful joint stock ventures and to the realization of the importance of generous dividends as a means of satisfying investors. Importantly, it also led to the advent of corporate dividend policies to ensure that dividends were only paid from profits (rather than as return of capital) and to protect against capital impairment from excess dividend distributions. Thus, a sound dividend policy became an important consideration for both corporate management and investors very early in the history of public corporations.

Indeed, in the early days of the U.S., there were more than 20 dividend-paying banks in operation by 1793, with an average dividend yield of around 8.6% annually. Interestingly, the Bank of North America merged with the Philadelphia Bank in 1863, and Wells Fargo (NYSE:WFC) adopted and still operates today under its original National Bank Charter No. 1.

Stock certificate for $100 worth of shares in the Bank of North America. Source: Encyclopedia of Greater Philadelphia

By the dawn of the 19th century, according to Frankfurter and Wood, price quotes for stocks began to appear in various U.S. newspapers, while railroad stocks were equated with a solid reputation for their sound dividends by the 1840s. Notable among the railroads, of course, is Union Pacific (NYSE:UNP), which was incorporated in 1862 and has paid dividends on its common stock for 117 consecutive years.

The U.S. Civil War was associated with a rise in textile mills whose companies paid regular dividends annually, with the dividend yield for all U.S. textile companies averaging 8% per year until the beginning of the 20th century. And by the early 1900s, stocks began to be available to the less affluent in the U.S., with the number of retail shareholders increasing dramatically. Unfortunately, investors of that time bid up shares during the "speculative mania" of March 1928, as both novice and experienced investors believed stock prices would increase indefinitely (which was very reminiscent of the 1990s tech bubble boom and the 2000s housing boom).

Of course, those investors were at a disadvantage, as the book on intelligent investing was yet to be written. In the next section, I will turn to the great grandfather of dividend growth investing, and the person who literally wrote the book on being an intelligent investor, Benjamin Graham.

Benjamin Graham's The Intelligent Investor (4 editions published 1949-1972)

While the term "dividend growth investing" may have only recently come into popular use, the concept of investing in high-quality companies with established dividend track records has been around for quite a long time. Indeed, what would be readily recognizable to today's DGI was outlined long ago in legendary value investor and economist Benjamin Graham's 1949 book, The Intelligent Investor. Warren Buffett first read this book in 1950 and referred to it as "by far the best book on investing ever written." In 2003, Buffett again referred to Graham's book as "my favorite book on investing" in his annual letter to shareholders.

In the book, Graham describes two types of investors: the "Enterprising" investor and the "Defensive" investor, each of which is attributed different investing goals. The Defensive investor (or passive investor), according to Graham, places an emphasis on "the avoidance of serious mistakes, losses" and the freedom from the need for making frequent decisions. In contrast, Graham views Enterprising investors (active or aggressive) as those who are "willing to devote time and care to the selection of securities that are both sound and more attractive than the average," and whose goal is "to obtain better than average investment results."

While useful distinctions, neither of these two definitions describe today's dividend growth investor per se, as some traits of both of these investing types defined by Graham are common to many DGIs on Seeking Alpha. That is, while many DGIs prefer to passively hold their stocks for many years or decades, they are not completely passive in doing so and routinely and carefully evaluate the companies they invest in and monitor those companies over time, and may make changes as conditions dictate (e.g., making decisions on whether to hold or sell if a company freezes or suspends a dividend, etc.).

But in contrast to Graham's Enterprising investor, many DGIs are not interested in obtaining better-than-average results or in "beating the market." Rather, as I stated previously, a primary goal for many DGIs is to invest in dividend-paying stocks to either obtain current income that is increased annually or to invest in dividend-paying stocks for future income. The primary goal of DGI is not share price increases or capital gains, but the income generated from quality dividend stocks.

Although Graham's dichotomy of the Defensive and Enterprising investor does not accurately describe today's DGI, he does outline in Chapter 5, "Rules for the Common-Stock Component," a section entitled, "The Defensive Investor and Common Stocks," which can be viewed as a fairly accurate description of what many would agree is a sound strategy for dividend growth investing. Here, Graham states in quite simple terms:

The selection of common stocks for the portfolio of the defensive investor should be a relatively simple matter. Here we would suggest four rules to be followed:

1. There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.

2. Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.

3. Each company should have a long record of continuous dividend payments.

4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last twelve-month period. But such a restriction would eliminate nearly all the strongest and most popular companies from the portfolio. In particular, it would ban virtually the entire category of "growth stocks," which have for some years past been the favorites of both speculators and institutional investors."

Although the term "dividend growth investor" was never used by Graham, the four rules he outlined are DGI in a nutshell, and I think nearly every DGI on SA would clearly agree with and relate to these simple rules. A fair summary of Graham's rules for the current DGI would be simply to build a diverse portfolio consisting of well-established, high-quality companies that have a track record of continuous dividend payments and that can be purchased for a fair price (and preferably purchased with a margin of safety).

It is noteworthy that for the Defensive investor, Graham clearly recommends avoiding growth stocks, which is something that many DGIs can relate to. Growth stocks, or stocks of younger, fast-growing companies that do not pay a dividend, are anathema to many dividend growth investors. Graham indicated several risks for growth stocks, including the typical high valuation that those stocks receive, as well as the certainty that the high rates of growth are not sustainable, and when such growth slows, these growth stocks are more vulnerable to greater share price loss than more moderate and stable growth companies that pay dividends.

III. Decline of Dividend Growth Investing

As we've seen, the term "dividend growth investing" is a fairly recent one, although dividend-paying corporations have been around for centuries. Indeed, prior to and through the mid-20th century, dividends were the primary reason people invested in stocks, while capital gains were viewed as more of a bonus to dividend payments. Indeed, because financial information about corporations was fairly difficult to obtain for individual investors, a history of dividends used to be the primary method by which stocks were valued.

Although more so-called growth stocks, which did not pay dividends, began to emerge after 1929 or so, nearly 95% of stocks in the S&P 500 were paying dividends up until about 1980. After about 1980 or so, there began to be a decrease in the number of dividend-paying stocks, as dividends were taxed at a higher rate than capital gains from 1980 to 1987. This decrease in dividend stocks leveled out between 1987-1997, when dividends and capital gains were taxed at identical rates. However, as the chart below illustrates, there was a major decline in the percentage of dividend-paying stocks after 1997, which was the direct result of the Taxpayer Relief Act of 1997, which again saw dividends being taxed at higher rates than capital gains.

Source: Business Insider

Among other tax exemptions, the Taxpayer Relief Act of 1997 reduced the capital gains rate from 28% to 20%, while the 15% bracket was lowered to 10%. In addition, the Act established Roth IRAs, whose holdings were permanently exempted from capital gains. However, the Act left dividend tax rates unchanged, which resulted in issues of non-dividend paying stocks being more attractive to many investors. It wasn't until the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003 that tax rates for both dividends and capital gains were set equal to each other as they had previously been from 1986-1997.

A second major factor that led to the decline in popularity of dividend-paying stocks was the rapid increase in the number of public offerings of technology and internet-oriented companies in the 1990s, the vast majority of which eschewed any dividends. The chart below illustrates the dramatic rise in IPO offerings in the 1990s, which peaked just before the tech bubble burst in March 2000.

Source: Business Insider

Investors during the tech IPO era were caught up in the frenzy of disregarding sound investing fundamentals, such as actual earnings and valuation metrics, and were all too happy to throw money after the latest tech IPO offerings, many of which were losing money and/or paid no dividends. Many investors during that time viewed blue-chip, dividend-paying companies as stodgy and antiquated, and instead, investors chased after capital gains, for which there seemed to be an unlimited supply of growth.

Indeed, it was just one month before the tech bubble burst in March 2000 that Jim Cramer famously made one of his worst market calls of all time (he made other huge blunders as well). On February 29, Cramer advised investors to forget everything they know about investing fundamentals and to abandon the old-fashioned ways of Benjamin Graham and David Dodd, when he proclaimed:

You have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can't make money for you anymore, and that is all that matters. We don't use price-to-earnings multiples anymore at [his hedge fund]. If we talk about price-to-book, we have already gone astray. If we use any of what Graham and Dodd teach us, we wouldn't have a dime under management.

- Jim Cramer, February 29, 2000

Needless to say, the "old-fashioned ways" of Graham and Dodd are still just as relevant today as they were in 1949 or 1999. Had investors of that time heeded the words of Graham instead of those of Cramer, they would have suffered far fewer losses than those chasing after growth. The above quote from Jim Cramer should be taken as clear evidence for intelligent investors to completely ignore anything he has to say about investing and to stick with tried and true advice from the likes of Benjamin Graham.

IV. Renaissance of Dividend Growth Investing

A Return to Quality

From the brief history provided above, we can see that investing in dividend-paying stocks was the primary method of investing for several centuries. The dividend investing approach is thus far removed from being a recent fad. In fact, it wasn't until the mid-20th century that so-called growth stocks began to gain a foothold with some investors. In that historical light, it is more appropriate to view other investing strategies, such as growth or momentum investing, as the more faddish investment strategies, as those approaches came along several centuries after the dividend investing approach.

Through the 1950s and 1970s, Benjamin Graham continued to argue for the relevance of value investing in high-quality companies with a long history of dividends for the Defensive investor. However, Graham's intelligent advice for doing fundamental analysis and buying high-quality, dividend-paying stocks was largely thrown to the wayside with the 1990s tech bubble.

But because of the large capital gains losses in the high-flying tech stocks of the '90s, many investors learned the hard way that investing in companies that actually make a profit and that are willing to share some of that profit with shareholders via dividends is a much more intelligent way to invest and has the added benefit of allowing one to sleep well at night. Thus, the more recent popularity in DGI since the early 2000s may be more correctly viewed as a renaissance as intelligent investors return their sights to such important considerations as quality, valuation and stable corporate enterprises.

As the chart below illustrates, non-farm, non-financial publicly traded corporations have been substantially increasing their levels of cash and liquid assets since 2006. These assets are currently at record levels. However, at the same time, companies have been returning an increasingly large amount of those profit-driven assets to shareholders in the form of dividends.

Source: Santa Barbara Asset Management

While one may argue the valuations of individual stocks or the market as a whole at any particular point in time, the fact is that more companies are generating record cash reserves, and many are now passing these profits along to shareholders in the form of dividends. Since dividends account for a substantial amount of a dividend-paying stock's, and the overall market's, total return, an investment focus on quality companies (strong financial health) with a willingness to share profits with shareholders is a sound and intelligent investment strategy.

V. Conclusion

Seeking Alpha and the Intelligent Dividend Investing Legacy

In contrast to those critics who refer to dividend growth investing as a recent fad, this historical analysis reveals that investing in dividend-paying stocks has been well established for several centuries. Although the actual term "dividend growth investing" is a fairly recent one, the concept of investing in quality companies that pay regular and increasing dividends has been around far longer. While DGI can trace its historical roots back to 1602 with the first publicly traded stock, the modern concept of DGI with a focus on quality companies that have a sustained track record of regular dividend payments is more firmly rooted in Benjamin Graham's "The Intelligent Investor," first published in 1949.

More recently, Roxann Klugman's "The Dividend Growth Investment Strategy," published in 2001, is one of the first sources to refer to DGI, and Lowell Miller also described dividend growth investing in his 2006 book, "The Single Best Investment: Creating Wealth with Dividend Growth." Other recent references to dividend investing can be traced back to Moody's Investor Service, which created the first "Handbook of Dividend Achievers" in 1983, while Standard & Poor's has maintained its "Dividend Aristocrats Index" (25 or more years of consecutive dividend increases) since at least 1989. Although Moody's and S&P did not specifically refer to DGI, the concept and investing strategy of focusing on dividend-paying companies is clear.

Seeking Alpha's David Van Knapp, who is referred to by many on SA as "the godfather of DGI," began to develop his own bent toward DGI in 2007, as described in this SA interview, and he wrote a 2008 article on SA entitled, "Why Dividend Investors View Stocks Differently." As a community of intelligent dividend investors began to emerge on SA over the ensuing years, the site evolved to include its own (and now very popular) "Dividends & Income" section, which includes many notable and knowledgeable contributors, including the likes of Mike Nadel, Chowder, RoseNose, Sure Dividend, Bob Wells, Regarded Solutions and Chuck Carnevale, to name just a few. And of course, there is David Fish, who maintains the incredibly valuable U.S. Dividends Champions, Contenders and Challengers list.

Indeed, due to the ease of access to the collective wisdom of so many knowledgeable and self-directed investors on SA, the crowd-sourced website may well have done more to facilitate knowledge about dividend growth investing than any other source in world history. This increase in popularity of DGI does not imply that such crowd-sourcing has contributed to DGI as fad, as all investing styles are well represented on SA. Rather, what it conveys is that investment in dividend-paying companies has had a very long and successful history that has gained increased recognition as a viable investment strategy that simply works and meets the investment goals of those who utilize the approach.

And although this style of investment does not suit everyone's tastes and may occasionally fall out of favor during periods of stock market euphoria (i.e., the 1990s tech bubble), it is an approach that resonates with many intelligent investors, and which has paved a successful road to numerous happy and well-funded retirements (or soon-to-be retirees!).

Disclosure: I am/we are long CVX, UNP, WF.

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.