Thursday, September 17, 2015

Metric: Dividend Growth Rate

Another important metric I look for is Dividend Growth. This is a key component in DGI investing. 

Without it, then I might as well invest in bonds. (Okay - maybe not.) However, when we get Dividend Yield and Growth together, we get the engine of DGI investing. Add compounding with reinvestment and you’ll have a very powerful and yet simple strategy for investing.

Let’s see some simple Dividend Growth examples.
In the following examples, I used the following assumptions:

Annual Investment
80,000.00
Yield
3.50%
Dividend Growth
6%, 8%, 10%
Dividends
2,800.00


$80k is high, but it’s based on my first year’s investment numbers. I don't know if I can continuously invest at this level - but let's just use it as an example. The yield is my target yield. You can change the parameters accordingly in my example spreadsheet.


1) 6% Dividend Growth


Year
Dividends
Dividends Growth
1
2,800.00
2,800.00
2
5,600.00
5,768.00
3
8,400.00
8,914.08
4
11,200.00
12,248.92
5
14,000.00
15,783.86
6
16,800.00
19,530.89
7
19,600.00
23,502.75
8
22,400.00
27,712.91
9
25,200.00
32,175.68
10
28,000.00
36,906.23
11
30,800.00
41,920.60
12
33,600.00
47,235.84
13
36,400.00
52,869.99
14
39,200.00
58,842.18
15
42,000.00
65,172.72




2) 8% Dividend Growth


Year
Dividends
Dividends Growth
1
2,800.00
2,800.00
2
5,600.00
5,824.00
3
8,400.00
9,089.92
4
11,200.00
12,617.11
5
14,000.00
16,426.48
6
16,800.00
20,540.60
7
19,600.00
24,983.85
8
22,400.00
29,782.56
9
25,200.00
34,965.16
10
28,000.00
40,562.37
11
30,800.00
46,607.36
12
33,600.00
53,135.95
13
36,400.00
60,186.83
14
39,200.00
67,801.78
15
42,000.00
76,025.92




2) 8% Dividend Growth



Year
Dividends
Dividends Growth
1
2,800.00
2,800.00
2
5,600.00
5,880.00
3
8,400.00
9,268.00
4
11,200.00
12,994.80
5
14,000.00
17,094.28
6
16,800.00
21,603.71
7
19,600.00
26,564.08
8
22,400.00
32,020.49
9
25,200.00
38,022.54
10
28,000.00
44,624.79
11
30,800.00
51,887.27
12
33,600.00
59,875.99
13
36,400.00
68,663.59
14
39,200.00
78,329.95
15
42,000.00
88,962.95




Observations


Obviously, the higher the Dividend Growth rate, the better. But, it is clear that the longer you wait, the better the results. The key is to be patient.


Also, I did not show the power of compounding & reinvestments - see my previous experiments.


The kicker is the annual investment required to get the desired dividend yield and the resulting growth.


Year
Annual Investment Total
1
80,000.00
2
160,000.00
3
240,000.00
4
320,000.00
5
400,000.00
6
480,000.00
7
560,000.00
8
640,000.00
9
720,000.00
10
800,000.00
11
880,000.00
12
960,000.00
13
1,040,000.00
14
1,120,000.00
15
1,200,000.00


These are huge numbers to invest in the market.


Spreadsheet Example




How to Use this Metric?


I use a simple threshold of 5% for 5 years CAGR Dividend Growth rate. For more mature companies, a slower dividend growth rate is okay.

On the other hand, I am wary of companies with very high dividend growth. For companies with few years of continuous dividend growth, this is normally okay. Ultimately, the dividend growth is dependent on earnings growth. If these numbers are not consistent, then more digging is required.I normally look at several indicators - Payout ratio, years and dividend growth to check if the dividend growth is valid.


Chowder Rule


In addition, I use both the dividend yield and dividend growth - also known as the Chowder Rule. The Chowder Rule is used to identify the total return potential of companies. Please read from Mr Chowder himself:




My criteria is 12% for regular companies, and 8% for utilities (and Pseudo-Utilities - e.g. T, VZ etc).


How to get the 5yr Dividend Growth Metric?


The 5yr Dividend Growth Metric is available on several sites. Gurufocus, CSI Market. David Fish’s CCC list also provides this metric.


Google Sheets Web Scraping


1) CSI Market Method


=substitute(index(importhtml("http://csimarket.com/stocks/Dividends.php?code="&A1, "table"),3,2),"%","")/100


2) Guru Focus Method


=index ( importhtml("http://www.gurufocus.com/dividend/"&A1&"", "table", 2), 2,5)


Conclusion


Again, the dividend growth is just one metric. You will need to look at several metrics in conjunction to make the appropriate judgement.


That’s it for now. My plan for the Metrics articles is to eventually show how it relates with my criteria table so that anyone can build their own criteria list (using google sheets) based on their own strategy.


Let me know what you think of the Dividend Growth metric.


D4s

4 comments:

  1. Nice illustration on the power of dividend growth D4s! Thanks for sharing! Love seeing the red lines start growing exponentially the longer the time invested!

    ReplyDelete
  2. Adam, thanks for your comments. All you need is time :)
    D4s

    ReplyDelete
  3. Nice write up and great example of how important time is. Let's hope for the higher 8% growth ;)

    ReplyDelete
    Replies
    1. Dividend Chimp,
      Time and patience. If you have these, everything else should be relatively simple.
      D4s

      Delete