Thursday, July 30, 2009

What is your preference - Aristocrats or Achievers?

In general, for any dividend growth investor, the list of dividend aristocrats is favorite hunting ground. This list includes companies from S&P500 index that have been raising dividends consecutively for last 25 years. These are mature companies that have time and again shown they can perform in all economic cycles. Their management’s have consistently shown that they care about common shareholders dividends and believe in increasing at least to little more than inflation.

  • I view dividend aristocrats as the grand old daddy’s of the dividend companies. As they age, it becomes harder to sustain with their dividend growth momentum. The likelihood of their ability to grow dividend will continue to diminish.
  • We need to put past dividend growth in the context of US economy. The growth for majority of the existing dividend aristocrats came along with the growth in US economy. As the US economy flattered for whatever reason, the sustainability of the dividends became harder.

It is difficult to completely ignore above two issues in the backdrop of continued shrinking of the aristocrat’s list.

Before you get up in arms, by no means I am attempting to say the list has lost its meaning. In short term, the shrinking is obvious observation due to economic issues which could be short term effect (only time will tell). Contrarily, it is good that dividend cutters and suspenders are booted off the list.

On a longer term, the dividend aristocrat’s list will keep churning. The existing ones are continuing to raise the bar for themselves and provide returns to their shareholders. There will be additions and there will be deletions. It is part of the economic cycle.

Investors like you and me keep using examples like had we invested in so and so company in 198x or 199x, we would have had so much return. The key question here is; are we willing to invest in companies that have still not completed 25 years of dividend growth? All dividend aristocrats were at that stage at some point in time.

It is for this reason I view dividend achiever as potential opportunities. Dividend achievers are list of companies that have consecutively raised dividends for last ten years. (1) At some point in future, it is highly likely that some these dividend achievers will get into aristocrat list; and (2) These dividend achievers have shown their ability of grow dividends in recent times when US economy is on roller coaster ride. Investors can expect companies on this list to provide dividends for relatively longer term.

Mergent’s US Broad Dividend Achievers Index provides list of companies that have been raising dividends for last ten years. These are US companies that are traded on any of three US stock exchanges. In addition, these companies stock’s average daily cash volume exceeds $500,000 per day in November and December prior to reconstitution.

The chart below shows US Broad Dividend Achievers index performance relative to S&P500 (using baseline investment of $10,000). Over the past 10 years, the dividend achievers index outperforms S&P500 by approximately 17%. This index consists of 282 companies with dividend yield of 3.27%. The last five year average dividend growth has been 12.34%.


For enterprising dividend growth investors, this index not only provides increased number of companies, but also more potential opportunities. Since this index is for dividend growers, does it make sense to invest in ETF (e.g. PFM) that is based on this index? If yes, then should we expect increased dividends year over year? What are you think?

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.


2 comments:

  1. DT,

    That's a great article on DAch vs DAr. I have been wondering what percentage of dividend achievers essentially become dividend aristocrats.

    Your comment about DAr resembling the past growth of the US economy is right on the money. Of course by focusing on Div Ach you could be focusing on shorter term trends. Some companies like Lehman raised distributions only for 10 years before going bust, while others like AIG or FNM never really made it to the elite D Ar list.

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  2. DGI,

    You are right about DAch focusing on short term trend. That's a downside. On the other hand DAr are also on same boat! That's where individual's due diligence and continuous monitoring comes into play. Regarding % of DAch becoming DAr is good one. I will look into it.

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