Oddly enough, the simple definition of a Dividend Champion being a company that has increased their annual dividend each of the past 25 years can be interpreted numerous ways. Should we care?
Introduction
I met Dave Fish on The Motley Fool message boards in the mid-1990s. At that time, The Fool had a live portfolio centered on dividend stocks, which made more sense to me than some of their other ideas. Many of their portfolios assumed that one could invest thousands of dollars at once – back then, I was fortunate to just cover my expenses – so I found having a strategy that allowed me to invest as little as $25 a month to be appealing.
When The Fool decided, during the Internet implosion, to restrict the message boards to paid visitors, I made the counter-decision to create a website where investors could discuss dividend companies and strategies. In February 2002, DRiPInvesting.org went live. Dave (aka dfish) was a prolific poster, offering thousands of posts helping others (out of curiosity, I counted over 5,000).
On Christmas 2007, Dave sent me a spreadsheet that contained the first listing of Dividend Champions and suggested that I place it on the Tools page of the website. Thus began the monthly posting of the spreadsheet that still exists today.
Sadly, Dave Fish passed in 2018. Updating the listing was picked up by Justin Law, a contributor to the SeekingAlpha website.
What is a Dividend Champion?
As a photographer who works extensively with the Bromoil photographic process, I regularly get asked what exactly it is, and I have both a short and long answer to the question. It is the same with Dividend Champions. The short answer is that a Dividend Champion is a company that has increased its annual dividend for the past 25 years.
That is a straightforward answer, and similar to my explanation of Bromoil (Bromoil is a photographic process where one creates a print on traditional photographic paper, removes the silver, and replaces it with lithographic ink by striking it repeatedly with a stiff, ink-charged brush), satisfies the questioner the majority of the time.
Both, however, require additional explanation once one begins to think about the answer. It is why there are, at times, differing opinions as to whether or not a company should belong to this select group. Below are some examples.
Complications
In mid-2020, the Fed decided to place a cap on dividends of large banks during the third quarter of the year, pending the results of stress tests. It put some dividend payouts at risk, jeopardizing the status of some Dividend Champions. A company may wish to continue increasing its dividend yet not be allowed to do so. In this situation, do we give a pass to companies caught in this situation?
A more common situation has to do with the case where one company splits from another. Take the example of AbbVie (a company I happen to own). In 2011 Abbott Laboratories spun off its pharmaceutical division to specialize in diversified products, like medical devices, diagnostic equipment, and nutrition products. As a result, Abbott dropped their dividend and AbbVie started theirs.
If one combines the dividends of Abbott and AbbVie, then that could be considered to represent 47 years of consecutive dividend growth. However, the strict numbers individually place each company with less than ten years of consecutive dividend growth. Should either or both companies be considered Dividend Champions?
A third situation involves companies like Calvin B. Taylor Bankshares. It is a small company that found itself prone to manipulation. They offered an excellent dividend but paid only once a year. This resulted in investors buying just before the ex-div date, then selling after the dividend distribution. The result was a stock more volatile than the company wished, so they decided to move to quarterly payments.
The 2018 dividend came to $0.99 per share. In 2019 the company offered three $0.25 distributions and one $0.31 distribution. In 2020, following a $0.31 payment, they reduced the next two to $0.26. It certainly sounded like a dividend cut to me, but in speaking with Dean Lewis, Chief Financial Officer, the plan was to offer a third payout of $0.26, then increase the final payout of the year to the point where the total for 2020 would be greater than 2019. The company was initially dropped from the Dividend Champions, but should this have been the case? (They were later added back.)
Interpretations
In researching Cardinal Health, I noticed that there were varying opinions on their actual dividend growth streak. These were not just random people in comments sections of articles offering their school of thought – these were knowledgeable authors.
For instance, Cory Cook, a SeekingAlpha author, wrote, “The real number is 15 years of raises due to the dividend payouts between 2001 and 2005. June 2001 through March 2003 (8 quarters) dividend stayed at $0.018 per quarter. Again, in June 2003 through March 2005 (8 quarters), the dividend stayed at $0.022 per quarter.”
Perhaps this will be the subject of a future article, but the bottom line is that there are numerous definitions of what “X years of dividend increases” actually means. It is reasonable for an individual to look through a company’s past dividends and question if it supports that individual’s definition.
Justin Law maintains a spreadsheet of Dividend Champions, and his notes state, “The initial goal was to identify companies that had increased their dividend in at least 25 consecutive years. But that definition was broadened to include additional companies that had paid higher dividends (without necessarily having increased the quarterly rate in every calendar year.”
This was unclear to me, so I asked him what “without necessarily having increased the quarterly rate in every calendar year” meant. Wouldn’t each company have increased the quarterly rate in every calendar year?
His response was, “This just means the list has some leniency for companies that might not increase their dividend every year. For example, if company XYZ increased its dividend in July 2019, but didn’t announce any increases in 2020, it would still pay out greater dividends in 2020 than 2019 due to the first two quarters being higher than the previous year. So the company would stay on the list through 2021, but if it kept the same dividend rate, it would then be removed for freezing its dividend.”
Possibly the best idea is to simply go with a mechanized approach, which is the case with the CCC spreadsheet, provided by Dividend Radar. The list is broker-grade and sourced from S&P Global, and uses an automated, rules-based approach, which greatly reduces errors and inaccuracies that result from manually curated lists. Their methodology is clearly defined, so there are no judgment calls to be made.
Finishing Up
So when one gets down to the nuts and bolts of things, defining a Dividend Champion is not as straightforward as one might think. Different people can have different reasonable opinions on this issue, so I have decided to go with the spreadsheet in the Tools section of the website. However, the bottom line is to find great companies with a long history of dividend increases, so almost any definition that is understood and followed should point you in the right direction.
