Wednesday, June 30, 2010

Benchmarking Dividend income

The investment returns of most fund managers are generally compared against a common benchmark. This provides for an objective evaluation of their performance over a period of time. A common benchmark for most mutual fund managers is the total returns of the S&P 500 index. This benchmark is also useful for comparison to dividend investors as well. For many long-term dividend investors however, income growth is very important as well. Thus having an increase or decrease in dividend incomes does not mean much, unless it is being compared to a common benchmark.

While there have been several dividend indexes such as the Dividend Aristocrats and the Dividend Achievers, which have dividend ETFs that provide accurate information on dividend and price returns, these have not been around as much as the broad S&P 500 index. In addition to that the S&P 500 is sector diversified, and most information is widely available. Because of that, I would consider the changes in annual dividend income of the S&P 500 index as an important barometer against which to benchmark your dividend income over time.

Over the past 32 years, S&P 500 dividends have grown by 5% per year on average.

Below you could find a complete breakdown of annual changes in reported dividends of the S&P 500 companies:

The top ten holdings of S&P 500 have an almost 19% weight in the index. All of them pay dividends except for Apple Computers (AAPL), although three of them have cut distributions over the past one year. It is expected in a dividend portfolio that even some of the best dividend stocks are susceptible to dividend cuts or eliminations. General Electric (GE) and Bank of America (BAC) are two such examples of former dividend aristocrats which had to cut distributions during the financial crisis of 2007-2009. Many income investors which had an allocation to financial stocks, suffered similar drops in dividend income in 2008 and 2009.

(Ten S&P 500 components with the highest weight in the index)

Other companies such as International Business Machines (IBM), Johnson & Johnson (JNJ), Procter & Gamble (PG), AT&T (T) and Exxon-Mobil (XOM) continue raising dividends, despite the broad economic slowdown. Because of their large size, the companies in the S&P 500 are representative for most dividend stocks commonly held by dividend investors.
International Business Machines (IBM) has raised dividends for 15 consecutive years and thus is a member of the Dividend Achievers index. Yield: 2% (analysis)

Johnson & Johnson (JNJ) has raised dividends for 48 years in a row. Yield: 3.70%(analysis)

Procter & Gamble (PG) has boosted distributions for 54 consecutive years. Yield: 3.20% (analysis)

AT&T (T) has increased dividend payments for 26 years in a row. Yield: 6.80% (analysis)

Exxon-Mobil (XOM) has a record of 28 consecutive annual dividend increases. Yield: 3% (analysis)

Full Disclosure: Long CVX, PG, JNJ and XOM

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