Road To Financial Independence: Dissecting Dividends Into Their Components

Includes: CSCO, DIS, JPM, MO, PEB, TOT
by: Stefan Redlich

Feedback from the community triggered me to come up with a different way to look at my dividend journey.

Y/Y changes in dividends will be broken down into organic dividend growth and growth from new purchases to provide a more accurate picture.

The computation is not perfect yet, but it is good enough to help assess the January performance from a different angle.

Following up on a previous article where I outlined my dividend portfolio and its performance in January where I stated "22% Y/Y growth in January," I received valuable feedback claiming that this is actually a misleading title.

Despite lots of visualizations, the article did not really help readers to understand my journey, and I have to agree. Given that I am not a "buy-once-and-hold-forever" investor, but instead, buy stocks every month, anything but a higher dividend income on a Y/Y basis would be a huge disappointment, as a lot of that growth could obviously originate from new purchases of dividend stocks.

I can fully relate to that feedback, but the crux is that my broker does not give me such statistics, and it also does not look as if this is going to change anytime soon. Thus, I decided to give it a shot and see if I can calculate something insightful and accurate enough on my own, and I am very happy to be able to share the results now, as they are very interesting.

Dividend Income: What happened on the dividend side?

In the above-mentioned previous article, I stated that "My income from 22 corporations amounted to $206 in dividends, up 22% Y/Y and flat sequentially." It turned out that back then, my broker did not show me a dividend payment from Walt Disney (DIS), which puts actual dividends at $209, representing 23.5% Y/Y growth.

With the new way to look at dividend growth, where I calculated net dividends in USD bottom-up rather than converting the dividends I have received in EUR back into USD, I ended up with $213 in net dividends. This is very close to the initially reported value, but in fact, also 100% accurate, as it does not fall victim to FX differences.

Based on that new calculation, I was now able to calculate how many dividends I would have had received without dividend growth and without any new purchases. This also allowed me to calculate the impact of organic dividend growth and separate it from "dividend growth" purely coming from new purchases.

In total, the result looks as follows:

The reported dividend growth reported at the top line of $43.5 actually breaks down as follows:

  • $29 in dividends originate from new purchases over the last year.
  • $18.5 in dividends originate from organic dividend growth of the existing shares held a year ago.

Now, if you do the math, that adds up to $47.5 and exceeds the top line delta of $39.5 by $4. What happened is that I also received dividends from stocks in January 2018 that I did no longer hold in January 2019 - for instance, Total (TOT).

To better illustrate how that calculation works, let's use the example of Cisco Systems (CSCO), one of my largest holdings which both enjoyed organic dividend growth and dividend growth originating from new purchases:

  • Number of shares eligible for January 2018 dividend: 83.19
  • Number of shares eligible for January 2019 dividend: 98.19
  • Dividend per share: $0.29 January 2018; $0.33 January 2019

This then leads to the following results using a 15% tax rate:

  • Net dividends January 2018: 83.19 * 0.29 * 0.85 = $20.51
  • Net dividends January 2019: 98.19 * 0.33 * 0.85 = $27.54

So, I purchased 15 shares in the meantime, which add 15 * 0.33 * 0.85 = $4.21 in net dividends to the tally.

Without any organic dividend growth from Cisco, I would have received 98.19 * 0.29 * 0.85 = $24.20 in net dividends.

Without any new purchases but with organic dividend growth from Cisco, I would have received 83.19 * 0.33 * 0.85 = $23.33 in net dividends.

The delta between actual net dividends in January 2019 of $27.54 and actual net dividends in January 2018 of $20.51 amounts to $7.03, of which $4.21 originates from new purchases and $2.82 from organic dividend growth of existing shares.

Expressed in %, this results in:

  • 13.8% organic dividend growth = ($23.33/$20.51) - 1, which is in line with Cisco's dividend hike of 13.8% declared in early April 2018.
  • 20.52% is dividend growth due to the purchase of 15 shares during the year.
  • 34.3% is the overall dividend growth Y/Y = ($27.54/$20.51) - 1.

The calculations are actually quite simple, but automating them so that I don't have to do them manually in Excel was a real challenge, though I am very happy with the result. Now that this example has helped to illustrate the mechanics, let's take a look at the overall Dividend Dashboard I came up with.

The upper section has already been described above, whereas the lower section breaks down every single dividend from stocks that I had also owned a year into the three dividend growth components: organic dividend growth, dividend growth related to new purchase and total dividend growth per stock.

Here, we can also easily retrieve the metrics for Cisco I outlined above:

We can also see that, for instance, net dividends from Altria (MO), despite stellar organic dividend growth, came in virtually unchanged as I trimmed my position during the year. And finally, the graphic at the bottom ranks each stock by organic dividend growth, and we can easily see that JPMorgan (JPM), with its monstrous dividend hike, easily tops that list, whereas Pebblebrook Hotel Trust (PEB) has slashed its dividend substantially and ranks lowest.

What is missing in the table, though, are those dividends from stocks I had not received a dividend from in January 2018, as for those it is mathematically not possible to calculate any growth rates. I am planning to show them in a different way soon.

I am very grateful for the feedback I received, as it really helped me to take these updates to the next level and provide more insight both to my readers and to myself. With this added transparency, I can't wait to see how things will look as the year unfolds.

What do you think about this new model?

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Disclosure: I am/we are long ALL STOCKS MENTIONED. 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.