Wednesday, August 14, 2013

Why Investors Should Look Beyond Typical Dividend Growth Screens

In my early days as a dividend growth investor, I focused exclusively on the list of dividend aristocrats. It included 50 or so solid blue chips, each of which had managed to boost dividends for at least a quarter of a century. I liked the fact that this was a short list, which made screening for potential candidates for inclusion in my portfolio very easy.

As I kept digging however, I learned more about the historical changes in the S&P Dividend Aristocrats Index. I was very surprised to learn that some companies had been eliminated from the index, despite the fact that they kept increasing distributions. I also noticed that there were many companies which had raised dividends for over 25 years in a row, yet they were never included in the index, for whatever strange reason. Luckily, I had found the dividend champions lists, maintained by David Fish. While his list is as complete as possible, I would still advise income investors to get their hands dirty with as much information as possible, before eliminating an idea from their list for further research due to a low streak of consecutive dividend increases.

For example, I have noticed that a few companies were booted out of the Dividend Aristocrats index because of spin-offs or because they split into two or more separately traded companies.

Altria Group (MO) was able to spin-off its Kraft Foods division in 2007. Shareholders in Altria received shares in Kraft for each share of Altria stock they held. In 2008, this was followed by the spin-off of Phillip Morris International (PM), which represented the international tobacco business of Altria Group.

Shareholders of the legacy Altria Group received one share of Phillip Morris International (PM) as well as a share of the new Altria Group (MO), which focused exclusively on the domestic cigarette business. The legacy Altria Group has managed to boost distributions for over 42 years in a row. After the two spin-offs however, the company was eliminated from the dividend aristocrats and the dividend achievers indexes.

However, shareholders who purchased Altria in early 2007, and went through the two spin-offs actually enjoyed increases in their total dividend incomes in every year since then. The growth in total dividend income was helped by annual dividend increases by Phillip Morris International (PM) and Altria Group (MO) in every year since 2008. Kraft Foods stopped boosting dividends in 2008 however, and maintained them flat for a period of 3 years, before the company itseld split into two separately traded parts – Mondelez International (MDLZ) and Kraft Foods Group (KRFT). In general, Altria Group (MO) should have never been removed from any of the lists of dividend growth stocks. I was positively surprised by the fact that Dave Fish had included the company in his list of Dividend Champions. The point of this story is that investors should not use a mechanical approach to screening for stocks, but utilize their knowledge in order to identify opportunities that others less knowledgeable investors might have missed.

In May 2012, ConocoPhillips split into two separately traded companies: ConocoPhillips (COP), which focused on Exploration and Production for Oil and Natural gas and Phillips 66 (PSX), which focused on Refining and Marketing for crude and natural gas. The legacy ConocoPhillips company was paying a quarterly dividend of 66 cents/share, and had raised dividends since 2002. On the surface, through June 2013 it seemed that the company had not raised distributions since the 20% boost payable in March 2011. Shareholders as of April 30, 2012 received one share of the new upstream focused ConocoPhillips (COP) as well as half a share of the downstream focused Phillips 66 (PSX). However, although the new ConocoPhillips maintained its quarterly dividend of 66 cents/share, this was technically a dividend increase, since it was coming from a lower base. Some dividend investors didn't see it that way however, and worried about the perceived "lack of dividend increase". Most recently however, ConocoPhillips raised quarterly distributions to 69 cents/share.

Abbott Laboratories is another company that recently split into two separately traded companies - Abbott (ABT) and Abbvie (ABBV). It seems that as of this writing, the Dividend Aristocrats index has not removed both companies from its ranks. However, I cannot find any mention in the Dividend Champions list. Dividend growth investors should keep both companies on their radars, and add to their portfolios under the right circumstances.

Full Disclosure: Long MO, PM, KRFT, MDLZ, COP, ABT, ABBV

Relevant Articles:

Check Out the complete Archive of Articles
S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
Dividend Aristocrats List
Dividend Champions - The Best List for Dividend Investors
Should dividend investors hold on to Abbott (ABT) and Abbvie (ABBV) following the split?


  1. ABT (and ABBV) are mentioned on the Change Tab of David's Spreadsheet showing ABT deleted after 40 years of dividends on 12/19/12.

  2. Yes, but this tab shows companies that were deleted because they cut dividends.

    The only reason ABT dividends are lower is because of the spin-off.

    Hence it should be on the dividend champions list.

  3. Good article.

    I always use screens purely as a starting point for research. It is important to always be asking, "WHY is this stock cheap", as well. Is there a lot of negative news related to a patent expiration on a drug? Have there been product recalls?

    I would agree that lists such as the Aristocrat and Champion lists are useful, while not comprehensive. Not only that, but they would miss early opportunities to invest such as grabbing one of the +50 year dividend growers while they had only six or seven years of growth.

  4. I think even more worth looking at are companies that may have froze their dividends for a year or so, but never cut them, or if they did, they reinstated them with a vengeance. There are quite a few companies out there that just had a bad year or two, but otherwise have 30-50 years of solid dividend growth. The fact that these companies reinstated the dividend to what it would have otherwise have been gives me faith in those companies.


  5. If you were retiring soon at the age of 65 with $1MM in liquid assets would you:

    Invest in dividend paying stocks or in mutual funds investing in dividend paying stocks?

    1. the mutual funds tend to have too many stocks, many of which do not meet my objectives... So far I navigate using individual stocks.

  6. Anon 12:54,

    IMO, two large obstacles to managing a portfolio of dividend stocks are:

    1) decline of mental fitness as one ages that is necessary to cull and/or purchase appropriate stocks

    2) inability and/or lack of interest of heirs, trustees, survivors etc. to manage a portfolio as designed to meet investment goals.

    This is especially difficult in taxable accounts. For that reason, I would be partial to low cost dividend paying mutual funds from Vanguard at an advanced age.

    As much as a dividend growth investing strategy appeals to me personally, I think in old age it would turn out to be disasterous for my survivors. But that's just me in my personal situation.

  7. Div Titan,

    I go back and forth on missing on the "next dividend king" versus buying a company which raised dividends by accident ( INTC could be that company.. so was almost Enron)

    I just focus on what I think is quality that can deliver.. Pretty subjective, I know.

    Anon from 12;18,

    This is an interesting viewpoint. I have not thought about it much, but a company like DIS or BA that has not cut dividends in years, might not be a bad investment for a dividend growth portfolio OVER TIME.. You might not get raises every year like clockwork, but over time you might expect to receive them..

    Anon from 12:54,

    I think the Anon from 6:27 pm answered the question beautifully. I like it when readers respond to each other an help each other. Now if readers can start submitting guest posts, I would not even have to check the site anymore.

    My opinion on the subject however, I am not interested in dividend etfs/funds. I believe that if I buy a diversified portfolio of 30 -40 dividend stocks from several sectors, and don't do anything I should be just fine. The dividends will be spent every year however.

    There was a mutual fund created in 1935, which never sold shares..

    So I think if you buy the JNJ, MCD, PG, KO, CVX, XOM, WMT of the world today, and hold on for 40 - 50 years, you should be fine.

  8. I had a question.. So when you suggest also doing some manual work when filter/screening for good stocks, and looking outside the Div Champions list by Dave Fish, how would you recommend I go about it? I'm new to the US stock environment (coming from India) and I'm not sure from where I could get a good way to filter for dividend stocks? Specifically:

    1) Are there sites where I can go and screen for stocks that have raised dividends each year for X years, have a payout ratio of X, etc? (both free and paid?)
    2) Are there sites where I can see which company has recently declared a dividend (or are US companies more predictable in that unless they mentioned a freeze or a cut, they do pay each quarter?)


  9. Good perspective. My reason for sticking with Dave Fish's list is that it contains all of the data I need for a large number of dividend growth stocks (500+) and it is updated every month. Sure I'm missing out on some opportunities (such as ABBV which do not fit the current definition for inclusion), but 500+ candidates are more than enough to construct an excellent DGI portfolio.

  10. Another class of reasons for not using screens is that the empirical and subjective criteria that could be used to predict dividend growth may not be reflected in the variables found in screens. For example, measures of the commitment to dividend growth, and other capital allocation variables are not represented in screens, but may be good predictors of dividend growth. It is possible that the variables that have the best predictive capability just do not exist in screens.


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