Sunday, March 17

Week 89 - Great Expectations from Dividend Aristocrats

Situation: Standard & Poors has made a point of highlighting any company that has raised its dividend annually over the past 25+ years by calling it a “Dividend Aristocrat.” Some of those stocks have a low dividend yield because the stock price rises faster than the dividend. Sherwin-Williams (SHW) is an example. Other companies raise their dividend faster than the stock price increases so as to keep attracting investors during a period when the company is struggling. Nucor (NUE) is an example. Nonetheless, all 40 Dividend Aristocrats in this week’s Table managed to continue increasing dividends during the Lehman Panic and currently have a dividend yield that is equal to or greater than that of the S&P 500 Index (VFINX). However, companies have not been screened for S&P stock ratings on the assumption that they’re all headed in that direction or have already arrived!

Most of us don’t have time to become knowledgeable about all 40 of these fine companies, so we need a couple of methods for selecting those that are best for our investment purposes:

Method #1: Focus on low-risk companies. Here at ITR, we define those as the companies that held up well during the Lehman Panic by losing less that 65% as much as the S&P 500 Index fund (VFINX), i.e., they lost no more than 29.6% of their value over that 18-month period (29.6% being 65% of the 45.6% lost by VFINX). We put those companies in the upper half of the Table

Method #2: Focus on companies that have a 20-yr total return that is at least as great as the total return one would expect from dividends paid. In other words, adding the current dividend yield to the average rate of dividend growth over the past 20 yrs is the expected total return, since dividends reflect earnings. The only way a stock can appreciate faster than its earnings/dividends grow is for stock traders to conclude that the company has improved its competitive advantage. Looking at the top half of the Table, we see that those companies are: Hormel Foods (HRL), Consolidated Edison (ED), Chubb (CB), Colgate-Palmolive (CL), Becton Dickinson (BDX), VF Corporation (VFC), Chevron (CVX) and Exxon Mobil (XOM).

Bottom Line: For a low-risk company that has increased its dividend payout for 25 yrs in a row, you can calculate your expected total return over the next 20 yrs by adding the current dividend yield to its historic rate of dividend growth--obtained by going to this Buyupside website. To obtain more information on the validity of this method, read “The Four Pillars of Investing” by William J. Bernstein (McGraw-Hill, 2002, New York, ISBN 0-07-138529-0). See Chapter 2, where he derives the “Gordon Equation...(Market Return = Dividend Yield + Dividend Growth).”

Risk Rating: 3

Full Disclosure: I own stock in HRL, BDX, CVX and XOM, and plan to buy stock in VFC.

Post questions and comments in the box below or send email to:

1 comment:

  1. I agree with all these three methods. First point is good and important for the investors that they should always focus on the companies with low-risk. By investing in such kind of companies they can protect themselves for the future market crises.



Thanks for visiting our blog! Leave comments and feedback here: