Dividend Growth: What Helps & Hurts Investors

Introduction
Dissecting Dividend Payers
Ranking Models Pick Winners
Conclusions
Exhibit A
Exhibit B
Appendix

In our first dividend white paper in January, The Dividend Deception: Understanding the Consequences of Cash Returns¹, we found that high dividend payers are at record high valuations, which has driven dividend yields to near record lows. We found that balance sheet quality and ROEs of high dividend payers are near record lows while margins and payout ratios are near record highs. For these reasons we suggested clients use a great deal of care when selecting names from the high-dividend universe of companies. In our second dividend white paper, The Dividend Deception Part II: A Call for Active Management¹, we compared the top quartile of dividend payers with the middle 50%. In doing so we found that the middle 50% of dividend payers looked more attractive than the top quartile on valuation, balance sheet quality, earnings quality, cash/price and ROE. The middle 50% also appeared to have more sustainable EBITDA margins and payout ratios. Instead of focusing solely on dividend yield, we encouraged clients to evaluate the risk-reward profile of dividend paying stocks and to leverage our Core Models to help with stock selection as they have added significant outperformance within each of the dividend groups. We also felt that the “bubble” among the highest dividend stocks gave active managers who operate with a dividend mandate a significant opportunity to drive risk-adjusted returns through careful stock selection.

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Clients have taken significant interest in these last two dividend papers but have followed up with questions about how to think about historical growth in dividends and what this implies about the attractiveness of specific stocks. Therefore, we are following up with this white paper which investigates changes in dividends and their implications. As part of this research, we divided dividend paying companies into six groups: Reducers, Maintainers, Initiators, Low Increasers, Mid Increasers and High Increasers. As the names would suggest, the reducers group includes all companies that had reduced their dividend over the last three years while the maintainers group had kept their dividends flat or roughly flat (i.e., dividend increased less than 5% over the last three years). The initiators are companies that just started paying a dividend. The Increasers include all companies that increased their dividend over the last three years by more than 5%.² We further break up this group into the bottom, middle and top third of companies based on their increase in dividend over the last three years as a percent of the original stock price three years ago.³ This paper will focus mainly on analyzing these dividend change groups.

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ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

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Disclaimer

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