Dividend Champions

For the dividend investor, Dividend Champions are an essential part of the portfolio, and solve the primary problem with investing in dividend stocks.

Dividends are a distribution of profits, where a company’s board of directors decides to give its current shareholders cash from the company’s profits. They offer the investor, often quarterly, cash in proportion to the number of shares owned. This helps with the issue of risk associated with owning the stock, as the investor receives cash in lieu of hopeful results at a later time.

In researching why some argue against including companies that offer a dividend within one’s portfolio there are a number of recurring issues. For instance, some say that there may be a tendency for the investor to chase high dividend yields. I will explain below the risk of looking only at that single aspect of a company and for now note that proper diligence always needs to be performed by any prudent investor.

It was also noted that companies that pay dividends are not usually high-growth leaders. High growth companies normally retain their earnings so that they can be reinvested back into the company, so their profits are better used that way. Of course, there are exceptions, like Microsoft and Apple, but generally speaking companies that offer a reasonable dividend offer what are considered to be value stocks.

The reason to not invest in companies that offer a dividend

There is one legitimate reason to not purchase companies for the dividend and that is that dividends are not guaranteed. One might see that a company has offered a specific dividend in the past but that dividend can be cut or even discontinued. There are numerous examples of this problem.

General Motors was a reliable company for many years, but in the mid-2000s they hit a snag. As the price of the stock fell, the dividend yield shot up to 10%, which sounded like a very attractive offering. After all, making an easy 10% on one’s investment is an attractive possibility. However, as oftentimes is the case, this was not something that could last long, and in 2006 the dividend was cut in half. Two years later the dividend was suspended completely.

Imagine regularly going to an amusement park where a particular ride is the big attraction, one that you ride each time you visit. Then the park announces that they have removed the ride. With your favorite ride no longer available, not only will you probably decide to go somewhere else, but that will also be the case with many people. So with fewer people going to the park, less revenue is collected, more rides may close, and the cycle could continue until the park closes.

The same sort of thing can happen with companies that cut their dividend. Since the dividend is part of the calculation one makes when evaluating a stock, if the dividend is cut or removed then there is more reason for people to sell, less reason for people to buy, and a certain drop in the value of the stock.

As dividends are not certain, the risk factor that the dividend may be cut makes the dividend less attractive. This risk factor needs to be taken into consideration when evaluating a company, so that 2.5% dividend yield one might be counting on could get cut in half, or worse.

The solution to the problem of investing for the dividend

Although past performance is not surety of the future, a long history of positive dividend growth can give one confidence that there is a greater chance that the performance will be retained. A company that has offered a dividend for only a few years cannot give us certainty as to what might happen to the dividend in the future.

A company that has not only maintained a dividend but has also increased it every year for at least 25 years can give one confidence that this is something that is more likely than not to happen far into the future. The only question is how to find these companies.

Back in 2007 Dave Fish began to offer a spreadsheet that listed companies that met this criteria and called them Dividend Champions. With his passing in 2018 the task was given to Justin Law, who now maintains the list. Over the years the list has expanded to include not only companies that have increased their dividend for at least 25 years, but also Contenders (10 to 24 years) and Challengers (5 to 9 years). Each list also comes with a wealth of statistics for each company.

We are at a point in time where the past 25 years have experienced the Dot-com Bubble and the 2008 Stock Market Crash. Both were major events that placed a huge burden on companies and especially with the latter, there was every reason for a company to at least not increase their dividend. However, the Dividend Champions in today’s list continued to raise their dividend even throughout these crises. That fact can give one increased confidence that these champions will continue to increase their dividend in years to come.

An alternative to Dividend Champions are the Dividend Aristocrats, which are limited to members of the S&P 500 index. This is a list of companies that are filtered to include only the 500 largest companies in the United States stock market.

Dividend Champions are limited to companies in the United States, but over the years others have decided that companies outside the country should also be noticed so The DRiP Investing Resource Center includes:

  • Canadian Dividend All-Star List
  • European Dividend Champions
  • Eurozone Dividend Champions

Dividend Champions solve the primary concern of buying companies with dividends by offering a list of those that have not only maintained, but increased, their dividend for at least 25 straight years (more than 25 companies have a streak of at least 50 years!). With this history of dividend increases, Dividend Champions reduce the risk to the dividend investor associated with maintaining the dividend.