DGI Lesson 2: Dividend Growth

In Lesson 1, we learned what a dividend is. It is a distribution (usually of cash) that a company makes to its shareholders.

But beyond merely paying a dividend, the strategy of dividend growth investing requires a second element: Dividend growth.

Many companies increase their dividends every year. These “dividend growth” companies form the foundation of dividend growth investing. If you are following that strategy, these are the companies you want to own.

When I wrote the first edition of this Lesson in 2013, I highlighted 5 stocks to illustrate dividend growth. I owned all 5 then and still own them today.

They remain as good illustrations of dividend growth stocks.

All 5 companies have continued to grow their dividends since the 2013 article. Their current dividend growth streaks are shown in the table.

If you are new to dividend growth investing, you might be surprised by how long some companies have been increasing their dividends every year. Johnson and Johnson’s streak has hit 55 years. It began in 1963, when JFK was president.

Whether a company is a dividend growth company is a function of whether it has a history of raising its dividend. As I see it, there are only two requirements to call a company a dividend-growth company:

  • It pays a dividend
  • It raises the dividend regularly

The dividend can be large or small, and its rate of growth may be fast or slow. Indeed, that’s the central point of this lesson. Dividend growth stocks do not need to sell at a particular price, have a certain yield or dividend growth rate, or be famous names. They simply need to have a regular rising dividend.

Whether a company pays or raises a dividend is a matter of corporate policy, not of how its stock is doing in the market. A stock’s price may go up or down, and that will have nothing to do with the company’s dividend policy. Thus, dividends and dividend growth are independent from the market.

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

This is the dividend chart of a great dividend growth stock, Johnson & Johnson. The chart shows the past 10 years of dividend growth, and as we saw earlier, its dividend has been raised each year for 55 years altogether.

Normally, when you look up a stock, you get a price chart. Everyone assumes that investors are interested in prices. But dividend growth investors are interested in dividends.

Here’s the same chart with J&J’s price superimposed.

You will notice that J&J’s price has wandered all over the place over the past 10 years. From 2010 to 2012, its price was flat. Not so its dividend. The company raised the dividend each year.

Dividends tend to be much less volatile than prices. Price is determined by the market, dividends are determined by company policy. J&J’s policy is to raise its dividend every year, and that is reflected in the blue line on the chart. Whatever traders are thinking when J&J’s price plunges or shoots upward has nothing to do with the company’s dividend.

How do you find dividend growth companies? One of the best sources is right here on Daily Trade Alert: David Fish’s Dividend Champions, Contenders and Challengers, a comprehensive research document that is updated every month.

If we look at that document, we find (as of the end of January, 2018):

  • 118 companies have increased their dividends for 25 straight years or more (Champions)
  • 218 companies have streaks of 10 to 24 years (Contenders)
  • 508 companies have streaks of 5-9 years (Challengers)

That’s a total of 844 companies that have raised their dividends for at least 5 consecutive years. Isn’t that amazing?

The 5-year lower cutoff that David Fish uses on his “CCC” document 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.

Key Takeaways from This Lesson:

  1. The only requirements to be a “dividend growth” stock are that a company pays a dividend and grows it each year.
  2. Dividends are determined by company policy and are therefore independent from the market. A company’s dividend can go up while its price is going down. Indeed, that often happens.
  3. Dividends tend to be more stable than prices.
  4. Many companies increase their dividends every year. As of early 2018, over 800 companies traded in the USA have increased their dividends for more than 5 years straight. More than 100 companies have done it for 25 years or more.

Dave Van Knapp