Is all dividend growth equal?

Dividend Family Guy recently asked about the stable score that I show when I compare stocks such as in my recent review of energy sector stocks. So this post is about answering that question.

My investing approach is aimed towards stable dividend income (aside from a few crazy stock picks in the last couple of years before I settled on that strategy). I have no illusion that I can beat the stock market in Total Return over the long term, but fortunately I don’t have to as I’m not planning to sell my dividend income stocks for capital gain after I retire.

This is why I don’t really show valuation in my reviews – my analogy for buying dividend stocks is like buying a house for renting out; I’m more interested in the rental income from the house and how rentable it is. The absolute price of the house only comes in indirectly when judging how long the rental income will take to pay back the initial cost of the house. Which, jumping back to stocks, is where dividend yield comes in.

Now despite being focused on dividend yield; the rules in my Charter limit my purchases to stocks with a dividend yield between 2% and 6%. Too low a yield and a stock doesn’t produce enough income; too high a yield and it’s too risky for me.

If a stock passes all criteria in my allowed screener then it’s a candidate for purchase. In choosing between them, I use several different measurements to reward stocks with good characteristics that I value. One of the measures I use is the stability of the dividend growth pattern which I usually shorten to simply “Stable”.

As an example I’ve plotted the dividends paid by XOM and COP since Q2 2005 in the graph below.

Dividend payments per quarter from Q2 2005 to Q2 2014 for Exxon Mobil (XOM) and ConocoPhillips (COP)
Dividend payments per quarter from Q2 2005 to Q2 2014 for Exxon Mobil (XOM) and ConocoPhillips (COP)

Assuming you had to pick either XOM or COP given this graph as input, which would you choose? They’re both increasing and reaching similar levels, right? Maybe you’d be inclined to go with the blue COP because it’s rising faster of late, or perhaps they’re both equally good and it doesn’t matter?

If you look closer at the orange XOM line, you’ll see that XOM increased its dividend payment every 2nd quarter of the year except for 2006. The amount of the increase changes from year to year, but the increase has always been consistent for the last 8 years. 2nd Quarter? It’s dividend increase time!

If you look at the blue COP line, you’ll notice that while it’s always increasing, COP came close to not increasing dividends at the end of 2009. There’s also some variability when it does increase dividends as it adopted a 5 quarter period between increases from 2011 through to 2013: Q2 in 2010, Q1 in 2011, Q3 in 2013, likely Q3 in 2014 but who knows, maybe it’s Q4 this year? (Actually, we do know as the increase to $0.73 went ex-dividend on 17th July; I’m just not showing it in this chart to compare equally to XOM.)

I value the boring, mechanical dividend increase pattern of XOM over the more volatile payment pattern of COP. It suggests to me that XOM’s management have a more planned and diligent approach to dividend payments. So all else being equal, I’d choose XOM.

My ‘Stable’ score is really just a measure of how consistent the dividend payments have been over the last 5 years, with 1 point earned for each year. So this value ranges from 0 (not consistent at all) to 5 (totally consistent) over the 5 years. XOM earns 5 points because it’s been entirely consistent for the last 5 years; COP earned 2 points because it’s been consistent for the last two years (since it will increase its dividend in Q3).

Normally in determining the value I just look over the historical dividend payments available at Yahoo Finance – see for example COP’s Dividend History and XOM’s Dividend History.

In summary, I find this assessment in looking over the dividend history useful since it shows the patterns behind the payments that aren’t apparent from the % growth numbers. A number of dividend paying stocks increase dividends every other year for example, but that still shows up as a yearly growth increase because of how the payments align. Overall it’s a fairly small factor in consideration of stocks but it can nudge me in one direction over another.

Thanks again to Dividend Family Guy for the question and if you haven’t already then I encourage you to check out his blog.


Quote of the Day

There is no comparison between that which is lost by not succeeding and that which is lost by not trying.

0 thoughts on “Is all dividend growth equal?”

    1. Hi DFG,

      You’re welcome! This attribute is just a personal preference of mine, but one day I should check which dividend champions have a stable vs. an irregular increase pattern.

      Thanks for stopping by!
      Best wishes,

    1. Hi DGJ,

      Yes, the David Fish spreadsheet is an amazing resource! I first realized that stocks can report a higher annual dividend without increasing dividends in a year from his spreadsheet.

      Thanks for stopping by and best wishes on your journey!

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