4 Things to Look for When Studying a Stock's Dividend History
How to Find a Company's Dividend History and Why It Matters
Study after study, decade after decade, research has shown that, as a group, the stocks of companies that pay dividends tend to outperform the stocks of companies that don't pay dividends over the long-term. There are many reasons for this relative outperformance; e.g., companies that pay dividends tend to have higher quality accounting earnings, meaning the figures reported in the Form 10-K filing more accurately match what a reasonable finance professional might consider the "true" economic numbers.
Still, translating academic theory into real world portfolio management can be a challenge. New investors often want to know what they should be looking for when analyzing a company's dividend history. (As used in this article, the term "dividend history" is simply shorthand for the historical record of dividends paid by a stock, including the dividend rate per share, the date the dividend was paid, the amount and timing of any dividend increases, etc.)
While the topic is far more expansive than a single article could ever cover, there are generally four signs in a company's dividend history that bode well. This is particularly true if the stock is part of a diversified basket of stocks with similar characteristics and doesn't matter if an investor or his or her financial advisor or asset management company follows a high dividend yield strategy or a dividend growth strategy.
It is important that you understand why each matters, and how they are connected to each other, when deciding which dividend stocks you want to hold. These signs are:
1. A Dividend History That Includes Maintaining or Increasing a Dividend Through Multiple Business Cycles
It isn't unusual for a company's board of directors to decide that a business has been successful enough that a new dividend payout policy is in order, declaring a distribution to shareholders. What is unusual is a company that has proven itself capable of paying a steady dividend, or, better yet, increasing its dividend per share, over the course of multiple business cycles.
In case it's been awhile since your last economics class, a business cycle is the rise and fall of economic activity that occurs over time. In economic theory, a business cycle consists of four phases:
- Expansion: The time during which an economy grows as demand increases;
- Peak: The top of an expansion cycle at which point the economy begins to contract;
- Contraction: Growth declines and the economy weakens; and
- Trough: The bottom of a contraction cycle at which point the economy begins to grow, again.
A firm's capability to maintain or increase its dividend rate during periods of declining economic growth are usually seen as an indication of either, or some combination, of a resilient business model, a strong balance sheet, prudent management, and/or some other competitive advantage.
2. A Dividend History That Shows the Company Is Both Able and Willing to Increase the Dividend at a Rate Comfortably in Excess of the Rate of Inflation
From time to time, you might see a particular stock referred to as having a "progressive dividend policy". This means that the board of directors and management have committed to increasing the dividend on a regular basis; that it is a strategic priority and one by which they will measure their success. Of course, progressive dividend policies are only good so long as they ultimately lead to an increase in shareholder wealth. Companies with progressive dividend policies have been forced to cut their dividends in the past as it, alone, is no guarantee of success.
The most royal of blue chip stocks fall into this category. They are known as "Dividend Aristocrats". To make the cut, a company must have increased its dividend for 25 or more consecutive years without fail, plus meet specific size and liquidity requirements. At present, there are only 51 companies that wear the crown. They include businesses such as Archer-Daniels-Midland, Brown-Forman, Colgate-Palmolive, Clorox, The Coca-Cola Company, Hormel Foods, Kimberly-Clark, McCormick & Company, PepsiCo, Procter & Gamble, Sysco Corporation, Wal-Mart, Walgreens Boots Alliance, Emerson Electric, 3M, W.W.
Grainger, Abbott Laboratories, AbbVie, Becton, Dickinson & Company, Johnson & Johnson, Medtronic, Genuine Parts Company, Lowe's, McDonald's Corporation, Target, Aflac, Franklin Resources, S&P Global, T. Rowe Price, Air Products and Chemicals, Sherwin-Williams, Chevron, ExxonMobil, Automatic Data Processing, and AT&T.
You may have noticed that several of these companies are concentrated in specific sectors and industries. This is a well-known pattern. Historically, the best investments have tended to concentrated in clusters around particular areas of the economy. While there is no guarantee this will continue, it has held true for more than a century and is understandable given that many of these businesses offer products that have strong brand name recognition, are consumable, have pricing power, must be replenished, and enjoy significant consumer loyalty.
For example, if your favorite carbonated beverage is Coca-Cola, or you like brushing your teeth with Colgate toothpaste, you aren't likely to switch to a competitor to save a nickel or dime.
3. A Dividend History in Which Dividends Are Comfortably Covered By Both Reported Earnings and Cash Flow
In the end, you want sustainable dividends; dividends that continue flowing so you can use them to purchase other investments, pay your bills, bolster your savings, give to charity, or whatever else provides you with utility. For that to occur, it is axiomatic that the dividends must come from cash flow and earnings and are small enough, relative to those cash flow and earnings, that the business isn't starved of its reinvestment needs, doing damage to the competitive position down the road.
The best way to understand this concept is to picture two competing convenience store owners. We'll call them Winston and Charles.
Winston regularly reinvests in his store. He is careful to never take more than 40 percent of the cash flow as a dividend. Instead, he installs and maintains attractive landscaping and signage. He upgrades his freezers and interior lighting. He offers beautiful display cases to showcase his doughnuts and baked goods. His staff always keeps the bathrooms clean. Charles, on the other hand, decides to use his convenience store as a cash generator to fund other investments. He takes nearly 90 percent of the cash flow out as a dividend, only repairing what is absolutely necessary.
Years down the road, his floor tiles are chipped and worn. His cabinets and display cases are scratched. Everything looks worn and tired.
It doesn't take a genius to figure out that, although Charles may live better than Winston for awhile, it is likely that Winston is going to have the last laugh. Over time, Winston's store is likely to attract more, and better, customers; to produce higher earnings than it otherwise would have produced, assuming the neighborhood isn't deteriorating or there isn't some other unique factor that must be taken into consideration. The reason: consumers like shopping in comfortable surroundings. In fact, it may even be possible for Winston to charge a few cents more for certain products than he otherwise could have charged, accelerating his payback cycle.
The point is that it's easy to be cheap; to cut costs constantly to fund dividends that ultimately dwindle as the core business is destroyed. There is perhaps no better embodiment of this in the stock market over the past decade or two than Sears and K-Mart.
4. A Dividend History That Is Funded From Operations, Not From Asset Sales or Increases in Long-Term Debt on the Balance Sheet
This concept is closely related to the last one but is important enough it needs to be written. There are times when a company is not able to comfortably fund its dividend from cash flow or operations and, instead of doing the responsible thing and cutting or suspending the dividend, it continues making dividend payments by relying upon proceeds from assets sales or borrowed money. This can go on for a surprisingly long time at some firms, particularly if things look good on the surface. Nevertheless, at some point, the bill comes due and the results can be anywhere from painful to catastrophic when it happens.
You sometimes see this occur in mining companies or, perhaps a better example, in financial institutions in the midst of a bubble and prior to the inevitable collapse when the "profits" booked aren't really profits at all.
Please understand that it isn't necessarily a bad thing for a company's debt to continue expanding at the same time the dividend is growing. In fact, for most prosperous businesses, that will be the case. If you have the time, go do a case study of Wal-Mart's historical annual reports, going back to Sam Walton's days at the helm. You'll see that the dividend history is not only one of rapid growth but that the debt loads increased rapidly, too. This was because Wal-Mart was so profitable Sam Walton was focused on opening new locations as quickly as he prudently could, knowing that the cost of debt capital was dwarfed by the economic returns generated once the discounter's doors opened and shoppers came streaming through the aisles.
One way you might be able to make this differentiation is to look at a company's balance sheet, particularly at the relative size of shareholder equity to debt. If the debt-to-equity ratio is still reasonable, or even better yet, falling, despite debt levels and dividends rising, that is usually a good sign because it means the company is increasing its net worth at a rate equal to, or in excess, of the rate at which it is borrowing money. It's also important to pay attention to the specifics of how that debt is funded because a company's capital structure matters, particularly from a risk management perspective.
Where to Find Dividend History
All of this information is great but it doesn't do much good if you don't know where you can find a company's dividend history. Here are a few places you might look.
- A Company's Annual Report or Form 10-K Filing: While this may not be particularly efficient when studying periods spanning more than a decade, it involves going directly to the source. In these documents, particularly a well-written, informative annual report, an investor can often find three, five, or ten year summary information about split-adjusted dividend per share rates.
- A Company's Investor Relations Website: Most, if not nearly all, publicly traded companies of decent size have a dedicated Investor Relations site. Particularly in cases where a company's board of directors and management are proud of the dividend record, it isn't unusual to find a dedicated dividend history page that includes a breakdown of the a stock's dividend going back decades. One illustration: at the time I wrote this article, The Coca-Cola Company made dividend information available online going back to 1970.
- An Investment Analysis Service: This is where a subscription service such as The Value Line Investment Survey shines. You can pull up the tear sheet on the business in a matter of seconds. Each tear sheet includes a simple-to-understand, split-adjusted per share dividend history going back more than 15 years for 1,800+ stocks. The tear sheet also includes other useful information such as the average dividend yield at which the stock traded for the year. Aside from Value Line, institutional investors, such as those running an asset management company, might also have access to much more expensive and expansive tools meant for professionals, such as a Bloomberg terminal, FactSet, S&P Capital IQ, or certain Morningstar data sets.
- A Free Online Portal or Financial Data Aggregator: There are several free online sites that provide charts and tables of a stock's dividend history. The length of dividend history available varies from site to site. Among the best remains Yahoo! Finance's dividend history listing. Sometimes, this data goes back further than the dividend history shown on a company's own website. For example, recall that The Coca-Cola Company's dividend history page on its Investor Relations site went back to 1970. If you pull up Coca-Cola's ticker symbol, KO, in Yahoo! Finance and request the historical dividend rate per share, you'll discover that it has Coke's dividend records going back to 1962.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.