Dividend Growth and Earnings Per Share versus Total Return

This post originally appeared on The Div-Net one week ago.

Ever since I started analyzing stocks on my blog, I have been gathering information about several stocks in my data folders. I wanted to check what was the relationship between the ten year dividend growth rate and the ten year total return of the stocks that I previously covered on my blog. This is not a comprehensive list and the sample is biased as it mostly contains dividend aristocrats that I believed were priced attractively at the time (although most recently I have been writing about stocks that weren’t priced attractively). The average annual total return, eps and dividend growth for the 1998-2007 period were 8.8%, 9.9% and 10.5% respectively.

From that list I managed to select only the stocks which delivered at least a ten percent average annual EPS and dividend increases. A 10% increase in dividends double your annual dividend income after seven years. There were fifteen stocks that fit this list. The average total return was 10.46% for this group, with average dividend growth at 14% versus the 13.4% average EPS growth over the 1998-2007 period.

How did slower dividend growers perform over the past decade? I then screened for stocks which had EPS and dividend growth at less than ten percent. This screen produced thirteen candidates. The average total return was 8.35% for this group, with average dividend growth at 5.75% versus the 4.80% average EPS growth over the 1998-2007 period.

It’s interesting to note that stocks in the 46 company sample that merely raised their dividends by 10% on average over the past ten years achieved an average annual total return of 8.60%, which was slightly lower when compared to the 9.10% total return of stocks which had an annual dividend growth rate of less than 10% per annum.

The stocks that delivered at least a ten percent eps growth outperformed the rest of the group by over 2.4%. Companies that delivered an EPS growth which was higher than 10% per annum produced a total return of 10.2% versus 7.70% for the companies that produced EPS growth which was less than ten percent.

To summarize in order to be successful at dividend investing, the astute investor should not just check the dividend growth rate in isolation, but check the overall fundamental picture of the company in order to ensure that the dividend growth rate is covered by the growth in earnings per share.

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- My Dividend Growth Plan - Strategy
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