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Thursday, July 11, 2019

Dividend Achievers versus Dividend Contenders & Champions

When I started my journey of Dividend Growth Investing at the end of last decade, I focused on the list of Dividend Aristocrats and the list of Dividend Achievers. The dividend aristocrats list focuses on companies which have managed to increased dividends for 25 years in a row.

The dividend achiever list on the other hand includes companies which have managed to increase dividends every year for at least a decade. The Nasdaq Dividend Achievers™ is composite of companies with a history of increasing dividend payouts. This select group of companies is committed to enhancing shareholder value through the return of capital to shareholders.

A newer list, which I have argued to be more comprehensive is the list of dividend champions, contenders and challengers, which used to be maintained by the late David Fish. If you group the list of dividend champions and contenders, you end up with a list of companies which have managed to grow dividends annually for at least a decade. You can obtain the list from DripInvesting here.

I compared the list of dividend achievers with the list of dividend champions and contenders in order to see the differences between these two groups of securities.

As of the end of June 2019, there were 263 dividend achievers. You can obtain the list of dividend achievers from this website.

In comparison, there were 233 dividend contenders and 136 dividend champions on the CCC list. That is a total of 369 companies which have managed to boost dividends for at least ten consecutive years.

I went ahead and did a quick reconciliation between the two lists, in order to identify the reasons behind the changes.

In the first review I did, I focused on the companies on the dividend achievers list, which were not listed as either dividend champions or dividend contenders.

I found out three differences, where companies were listed on the dividend achievers list, but not on the list of dividend champions and contenders.

The first two were Abbott Laboratories and ITT Industries with a 6 and 7 year track record of annual dividend increases. Abbott Laboratories was kept out, because the 2013 split into Abbott and Abbvie was viewed as a dividend cut, which it wasn’t. An investor in legacy Abbott would have received shares of new Abbott and Abbvie. Their annual dividend income would have kept going up every year since the split in 2013. Therefore, the late Dave Fish should have kept Abbott on the list, the same way Altria was kept on the list after its split into Altria, Phillip Morris International and Kraft Foods.

ITT industries is another company that had a lot of spin-offs and splits in the business over the past decade. In 2011, ITT spun off its defense businesses into a company named Exelis, and its water technology business into a company named Xylem Inc. Collective ITT, Xylem and ITT Exelis post-spin dividends were immediately equal to pre-spin ITT quarterly dividend. However, it turned out that dividends per share in 2010 and 2011 were exactly the same and hadn’t moved. Therefore, I agree with late Dave Fish’s assessment that the company be kept out of the dividend contenders list. I disagree with the dividend achievers list assessment that they kept the stock in the list.

The third difference is a timing one – the dividend achievers list includes L3 Harris (LHX), which is created as a result of the merger between Harris (HRS) and L3 (LLL). This is a timing variance, which will be corrected by the time the next CCC list is uploaded.

The second review I did focused on companies on the CCC list ( dividend champions and contenders), but not on the list of dividend achievers. There were a total of 109 companies missing from the list of dividend achievers. You can download the list of differences from this link.

47 of the companies on the companies had a streak of exactly ten years. Therefore, it is fair to assume that these companies are not on the list of dividend achievers because they just achieved their ten year track record. The list of dividend achievers is updated once per year, while the list of dividend contenders is updated once per month. I would view this difference as a timing difference.

For the other 62 companies however, I am unable to determine why they would be excluded from the list of dividend achievers.

It is quite possible that they are excluded because these companies are not actively traded enough, or traded on the Over-The-Counter, not on NYSE or Nasdaq. Why would this matter at all? This is because index funds must be able to sell and buy shares quickly and at high volume, in order to accommodate inflows and outflows from investors, while following their index. If the index consists of thinly traded companies, an index fund would have a tough time following these companies. Therefore, it is easier to excluded these companies from the get-go. This is where your opportunity to review this companies comes to play of course. I wouldn’t be surprised if a portfolio of these 62 companies will do better than a portfolio of the 263 dividend achievers over the next decade. Let’s revisit in 2029, shall we?

As a long-term buy and hold investor, I do not care about trading volume, because I do not plan to jump in and out of stocks. I hope to find a quality company at an attractive price, with a record of annual dividend increases, which can manage to grow earnings over time. One such company I invested in 2010 was Hingham Institution for Savings (HIFS). Because the bank is thinly traded, it was excluded from the list of dividend achievers. This is unfortunate, because the company is one of the best performing investments I have had in my investment career.

The other reason for a few of the differences is the fact that the CCC list includes a few foreign companies, such as Thomson Reuters (TRI), Canadian National Railways (CNI), Enbridge (ENB), HDFC Bank Limited (HDB). It would make sense that these should be part of the Canadian Dividend Achievers and International Dividend Achievers Indices, not an index that is focused on US companies. The overly narrow focus of indices can be a blessing and a curse of course. My focus is on companies, whose profits can support annual growth in dividends per share, and their reliability in tough times. It does not matter to me if a company is US based, Foreign based, and whether it fits into a narrowly defined artificially created bucket such as mid-cap, small-cap, large-cap etc. Most indices focus on a narrow slice of a population, for better or worse.

While I disagree with the exclusion of so many companies from the dividend achievers index, I do agree that dividends matter.

Why Dividends Matter (source)

Companies that pay regular dividends tend to be in better financial health and produce sustained earnings and revenue growth.

Dividends help identify well-managed companies; every dividend declaration represents a promise by management and a vote of confidence by the board of directors in the company's leadership.

Companies that consistently raise their dividend payouts also raise the bar on their own performance expectations.

Shares of dividend-paying companies possess built-in value that makes them generally more resilient in down markets, with solid appreciation potential during earnings-driven market upturns — with less price volatility.

Relevant Articles:

S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
- 2019 List of Dividend Aristocrats Revealed
2019 Dividend Champions List
Why do I like the Dividend Aristocrats?