Dividend Aristocrats: Yesterday's Concept

by: Torsten Tiedt

Summary

"Dividend Aristocrats" is a popular indicator to find companies with reliable profit and dividend growth.

Yet, a substantial number of Dividend Aristocrats with poor performance exist while others even lost their title.

Relying on profit-stability and profit-increase is a much better indicator to find dividend stocks with a good performance.

The concept of Dividend Aristocrats should be abandoned.

The concept of Dividend Aristocrats is very popular. Yet, a company's dividend history is not directly related to long-term profit growth. Dividends may be increasing for years although profit growth is continuously declining. This is even more true in countries like the US where stakeholders exercise a considerable amount of pressure over management to increase its dividends.

Hence, the number of years a company has been increasing its dividends doesn't necessarily give you the right answer to the question if the stock is a good investment. In "How Metrics Make Investors Pay Part I", I showed that the long-term performance of any stock depends on the long-term profit growth of the underlying company. Furthermore, I proved that most metrics such as the price-earnings-ratio and titles like "Dividend Aristocrat" are either misleading or only indirectly related to long-term profit growth. In a second article, I argued that profit growth consists of two components: profit increase and profit stability. Both components can be quantified separately. Used in combination, they explain long-term capital gains better than any other metric(s). Finally, I showed that long-term profit growth tends to persist.

Analysing the long-term profit growth of Dividend Aristocrats reveals that a substantial number of Dividend Aristocrats with both low profit growth and low performance exist.

General Setup And Challenges

The following analyses are based on 88 current US-Dividend Aristocrats available in the shared database of DividendStocks.Cash and Aktienfinder.Net. In total, 4 analyses over a period of 10 years were made. Depending on profit growth, they differ based on operating cash flow per share (OCF) or based on earnings per share (EPS) or if dividend payments are considered or not. All analyses suffer from the following drawbacks I am aware of:

  1. Adjustments related to stock splits lead to less dividends for the years before the split had taken place. This mostly concerns stocks with higher profit growth. The expected result is a final yield which is probably too low for the analyses taking cumulated dividends into account.
  2. Former Dividend Aristocrats are not considered. According to the Historical Dividend Aristocrats List, about 15 Dividend Aristocrats have been losing their title since 2008 which is partly related to the impact of the Financial Crisis. The elimination of the probably worst performing Dividend Aristocrats favours overall performance of the remaining Aristocrats in all analyses.

Keep these points in mind when looking at the numbers below.

Dividend Aristocrats Profit Growth Analysed By OCF/No Dividends

Capital Gains % (CAGR)

Profit Increase (CAGR OCF)

0 - -0.5

> 0 - 0.5

> 0.5 - 0.7

> 0.7

Total Avg.

Total no.

Profit Stability (OCF)

Avg.

#

Avg.

#

Avg.

#

Avg.

#

Avg. #

<= 0%

5.4%

2

4.2%

4

1.7%

5

5.2%

3

3.7%

14

> 0% - 5%

3.2%

4

5.0%

3

7.8%

23

6.9%

30

> 5% - 10%

6.2%

4

6.3%

3

11.1%

29

10.1%

36

> 10% - 20%

-0.7%

1

2.3%

1

15.1%

4

10.3%

6

> 20%

9.6%

1

13.9%

1

11.7%

2

Total

3.3%

3

4.5%

12

4.2%

13

9.8%

60

8.1%

88

10-year performance OCF without dividends

The overall performance of all 88 Dividend Aristocrats measured by capital gains without dividends is 8.1% per year (CAGR). This exactly matches the performance of the S&P 500 within the same period. Since dividend investors are rather conservative, Dividend Aristocrats in total performed remarkably well. Yet, this number doesn't reveal how capital gains are distributed among these stocks.

Hence, the table above clusters Dividend Aristocrats along the axis of profit-stability and profit-increase describing profit growth. Because the stock price highly correlates to profit growth, these groups perform very differently. Groups with high profit yield above-average capital gains (green cells) and vice versa (red cells).

Poorly Performing Dividend Aristocrats: A Threat To Any Investor

In total, 53 out of 88 (60%) Dividend Aristocrats are contained within groups performing below 8.1% (red cells). Nevertheless, the group's performance is based on averages and looking at the performance of each stock returns better numbers with "only" 44 Dividend Aristocrats - exactly 50% - performing below the average of 8.1%. This looks like a perfect match of equal distribution in favour of Dividend Aristocrats' reliability.

Yet, a substantial number of Dividend Aristocrats with a considerable low performance remains. 19 stocks (22%) remain in clusters with an average performance of 5% or below. This time, considering each stock in isolation makes things worse with 26 stocks (30%) performing below 5% and 7 stocks (8%) having suffered capital losses within the last 10 years. Please remember that former Dividend Aristocrats which have lost their title within the last 10 years are not considered.

Analysis Based On 10-year Performance OCF With Cumulated Dividends

Capital Gains % (CAGR)

Profit Increase (CAGR OCF)

0 - -0.5

> 0 - 0.5

> 0.5 - 0.7

> 0.7

Total Avg.

Total no.

Profit Stability (OCF)

Avg.

#

Avg.

#

Avg.

#

Avg.

#

Avg. #

<= 0%

7.97%

2

6.33%

4

3.87%

5

7.40%

3

5.91%

14

> 0% - 5%

5.11%

4

7.12%

3

9.72%

23

8.85%

30

> 5% - 10%

7.60%

4

9.11%

3

12.43%

29

11.62%

36

> 10% - 20%

3.39%

1

5.12%

1

16.49%

4

12.41%

6

> 20%

11.59%

1

14.78%

1

13.19%

2

Total

6.44%

3

6.34%

12

6.52%

13

11.45%

60

9.85%

88

10-year performance OCF with cumulated dividends

The next analysis is also based on OCF but takes cumulated dividends (without re-investments) into account. The results are similar. This time, the low-performing clusters comprise 53 Dividend Aristocrats representing 60% of the total of 88 stocks (same result as before). The number of stocks with lower than average performance is 46 (52% compared to 50% before). With dividends included, 14 Dividend Aristocrats still yield a CAGR lower than 5% (16% compared to 30% before) and only a single stock (Telephone & Data Systems - TDS) suffers slight losses (1% compared to 8% before).

The number of very poorly performing Dividend Aristocrats is reduced by the dividend payments. Yet, the chance to catch a low-performing stock in general remains about 50% and the chance to catch a very poorly performing stock below 5% is still 1:6. Equally important is the observation that profit growth and overall performance closely match.

These numbers pose a serious threat to any investor relying heavily on Dividend Aristocrats as selection criteria. Thus, it's a good idea to apply a mechanism to discard the low-performing Dividend Aristocrats.

Discarding Low-Performing Dividend Aristocrats

This can be done by respecting profit-stability and profit growth. By filtering on Dividend Aristocrats with a profit-stability of at least 0.7 (out of 1.0 max) and a profit growth of at least 5%, the low-performing stocks are easily discarded.

Discarding low performing Dividend Aristocrats by respecting profit growth

Dividend Aristocrats: A Concept To Be Abandoned

Going one step further, there is no need to consider Dividend Aristocrats after all. The major reason for why investors rely on this title is because they use it as an indicator for reliable dividend and profit growth. After all, a company with consecutive dividend increase of 25 years and more must have generated profits to finance dividend payments somehow. That's true. But why rely on this indicator any longer if a better possibility to detect reliable profit growth exists?

Furthermore, by lowering the number of years a company has been increasing its dividends, a much larger number of dividend stocks comes up. If profit growth is considered, this larger number of stocks will have a higher quality regarding both profit growth and performance.

Other Analysis, Same Results

Replacing OCF by EPS makes no difference. Clusters with single outliers can be explained by the fact that earnings are subject to extraordinary events and accounting issues which sometimes dilute the economic situation of a company. In any case, a substantial number of low-performing Dividend Aristocrats, as well as the explanation for poor performance, remains: missing long-term profit growth. Hence, there is no need to repeat similar numbers two more times.

You are invited to look at the analysis below based on EPS. Please write me a comment if you have any questions, remarks, or want to know some more details which might not be available in the aggregated data presented there.

Analysis Based On 10-year Performance EPS Without Dividends

Capital Gains % (CAGR)

Profit Increase (CAGR EPS)

0 - -0.5

> 0 - 0.5

> 0.5 - 0.7

> 0.7

Total Avg.

Total no.

Profit Stability (EPS)

Avg.

#

Avg.

#

Avg.

#

Avg.

#

Avg. #

<= 0%

2.8%

6

1.4%

2

10.0%

1

5.7%

3

3.9%

12

> 0% - 5%

0.9%

2

-1.3%

1

2.7%

1

6.1%

18

5.1%

22

> 5% - 10%

-5.0%

1

-0.7%

1

9.6%

31

8.8%

33

> 10% - 20%

4.7%

1

4.0%

1

7.9%

3

14.5%

15

12.5%

20

> 20%

7.7%

1

7.7%

1

Total

1.9%

10

1.0%

5

7.3%

5

9.6%

68

8.1%

88

10-year performance EPS without dividends

Analysis Based On 10-year Performance EPS With Cumulated Dividends

Capital Gains % (CAGR)

Profit Increase (CAGR EPS)

0 - -0.5

> 0 - 0.5

> 0.5 - 0.7

> 0.7

Total Avg.

Total no.

Profit Stability (EPS)

Avg.

#

Avg.

#

Avg.

#

Avg.

#

Avg. #

<= 0%

3.6%

2

4.9%

6

11.1%

1

7.3%

3

5.8%

12

> 0% - 5%

1.3%

1

4.5%

2

4.6%

1

8.1%

18

7.3%

22

> 5% - 10%

3.4%

1

-3.3%

1

11.2%

31

10.5%

33

> 10% - 20%

7.1%

1

7.3%

1

10.2%

3

15.7%

15

14.0%

20

> 20%

9.6%

1

9.6%

1

Total

3.8%

5

4.2%

10

9.3%

5

11.2%

68

9.9%

88

Analysis based on 10-year performance EPS with cumulated dividends

Conclusion: Dividend Aristocrats - Yesterday's Concept

Since the concept of Dividend Aristocrats doesn't respect profit growth, a substantial number of low-performing stocks carries this title. Like real aristocrats a long-time ago, Dividend Aristocrats create a caste excluding the potent and protecting the rotten until their castle finally collapses, burying credulous investors under their rubble.

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. I have no business relationship with any company whose stock is mentioned in this article.