DGI Lesson 2: Dividend Growth

In Lesson 1, we learned what a dividend is. But beyond a mere dividend, clearly dividend growth investing requires a second element: Dividend growth.

Many companies increase their dividends every year. These are “dividend growth” companies. They are the companies you want to own if you’re following a dividend growth strategy.

The following table shows a selection of 5 dividend growth companies, all of which I own. Dividend growth investing is not about obscure companies. All of these are available on American exchanges for anyone to purchase.

Many dividend growth companies are well-known names, what many would call “blue chip” companies. AT&T, Chevron, and Johnson & Johnson from the table certainly fall into this category.

Most people also know about Hasbro, the toy maker, although they may not think of it as a blue-chip stock. A sample of other blue-chip companies with lengthy streaks of increasing their dividends would include Coca-Cola (KO; 51-year streak); ExxonMobil (XOM; 30 years); Kimberly-Clark (KMB; 41 years); and McDonald’s (MCD; 36 years).

Stock prices are not an indicator of whether a stock is a dividend growth stock.

In the sample above, we see stock prices ranging from $36 to $118 per share.

Probably the highest-priced stock around, Warren Buffett’s Berkshire Hathaway “class A” shares, with a recent price of $155,250 per share, pays no dividend at all.

There’s just no relationship between price and dividend growth investing.

That brings us to the most important point of this lesson. Whether a company is a dividend growth company is a function of corporate policy and practice, not the market. That’s not only the central point of this lesson, it’s one of the most important concepts in dividend growth investing period.

Dividends are discretionary. A company may pay a dividend, or it may not. There is no legal requirement to do so for most corporations. As we saw last time, a company’s management will propose the payment of a dividend to its board of directors. If the board approves, the dividend is announced and a payment schedule is set up.

The same independence from the market applies to dividend increases. How much to pay (if anything), and whether to increase the amount from last time, are decided by the company’s management and board, not by the market.

The companies we’re interested in as dividend growth investors are companies that have adopted a policy of increasing their dividend every year. Such a company’s dividend history will look something like this.

This is the dividend (not price) chart of a great dividend growth stock, Johnson & Johnson. The shaded area in the middle is the Great Recession of late-2007 to mid-2009.

How did J&J manage to grow its dividend every year straight through such a severe economic downturn? Simply because it was determined to do so, and it had the financial capability to do it.

The best dividend growth companies have what I call a managed dividend policy. In other words, the annual growth in the dividend is a goal that they shoot for. It’s not an accident. They realize that the annual dividend increases are important to their shareholders, and so they do everything they can to keep those streaks alive.

There are lots of such companies trading on American exchanges. Using a source document called the U.S Dividend Champions (produced by The DRiP Investing Resource Center), we discover that:

  • 105 companies have increased their dividends for 25 straight years or more
  • 201 companies have streaks of 10 to 24 years
  • 164 companies have streaks of 5-9 years

That’s a total of 470 companies that have raised their dividends for at least 5 consecutive years. Since 5 years takes you back through the Great Recession, that means they all kept up their streaks during the worst economic downturn since the Great Depression.

Isn’t that amazing?

The 5-year lower cutoff is important to me, because it’s the minimum streak that I require to invest in a dividend growth stock. Next time, I will explain why.

Dave Van Knapp
Author of Top 40 Dividend Growth Stocks