Look Beyond Typical Dividend Growth Screens for Investments

by Dividend Growth Investor | August 14, 2013 10:00 am

In my early days as a dividend growth investor, I focused exclusively on the list of dividend aristocrats[1]. It included 50 or so solid blue chips, each of which had managed to boost dividends for at least a quarter of a century. I liked the fact that this was a short list, which made screening for potential candidates for inclusion in my portfolio very easy.

As I kept digging however, I learned more about the historical changes in the S&P Dividend Aristocrats Index. I was very surprised to learn that some companies had been eliminated from the index, despite the fact that they kept increasing distributions. I also noticed that there were many companies which had raised dividends for over 25 years in a row, yet they were never included[2] in the index, for whatever strange reason.

Luckily, I had found the dividend champions lists[3], maintained by David Fish. While his list is as complete as possible, I would still advise income investors to get their hands dirty with as much information as possible, before eliminating an idea from their list for further research due to a low streak of consecutive dividend increases.

For example, I have noticed that a few companies were booted out of the Dividend Aristocrats index because of spin-offs or because they split into two or more separately traded companies.

Altria (MO[4]) was able to spin-off its Kraft Foods division in 2007. Shareholders in Altria received shares in Kraft for each share of Altria stock they held. In 2008, this was followed by the spin-off of Phillip Morris (PM[5]), which represented the international tobacco business of Altria Group.

Shareholders of the legacy Altria Group[6] received one share of Phillip Morris International  as well as a share of the new Altria which focused exclusively on the domestic cigarette business. The legacy Altria has managed to boost distributions for over 42 years in a row. After the two spin-offs however, the company was eliminated from the dividend aristocrats and the dividend achievers indexes.

However, shareholders who purchased Altria in early 2007, and went through the two spin-offs actually enjoyed increases in their total dividend incomes in every year since then. The growth in total dividend income was helped by annual dividend increases by Phillip Morris[7] and Altria in every year since 2008. Kraft Foods stopped boosting dividends in 2008 however, and maintained them flat for a period of 3 years, before the company itself split into two separately traded parts – Mondelez  (MDLZ[8]) and Kraft Foods (KRFT[9]).

In general, Altria should have never been removed from any of the lists of dividend growth stocks. I was positively surprised by the fact that Dave Fish had included the company in his list of Dividend Champions. The point of this story is that investors should not use a mechanical approach to screening for stocks, but utilize their knowledge in order to identify opportunities that others less knowledgeable investors might have missed.

In May 2012, ConocoPhillips (COP[10]) split into two separately traded companies: ConocoPhillips, which focused on Exploration and Production for Oil and Natural gas and Phillips 66 (PSX[11]), which focused on Refining and Marketing for crude and natural gas. The legacy ConocoPhillips company was paying a quarterly dividend of 66 cents per share, and had raised dividends since 2002.

On the surface, through June 2013 it seemed that the company had not raised distributions since the 20% boost payable in March 2011. Shareholders as of April 30, 2012 received one share of the new upstream focused ConocoPhillips  as well as half a share of the downstream focused Phillips 66.

However, although the new ConocoPhillips maintained its quarterly dividend of 66 cents per share, this was technically a dividend increase, since it was coming from a lower base. Some dividend investors didn’t see it that way however, and worried about the perceived “lack of dividend increase”. Most recently however, ConocoPhillips raised quarterly distributions[12] to 69 cents per share.

Abbott (ABT[13]) is another company that recently split into two separately traded[14] companies – Abbott (ABT) and Abbvie (ABBV[15]). It seems that as of this writing, the Dividend Aristocrats index has not removed both companies from its ranks.

However, I cannot find any mention in the Dividend Champions list. Dividend growth investors should keep both companies on their radars, and add to their portfolios under the right circumstances.

Full Disclosure: Long MO, PM, KRFT, MDLZ, COP, ABT, ABBV

  1. list of dividend aristocrats: http://www.dividendgrowthinvestor.com/2011/12/dividend-aristocrats-list-for-2012.html
  2. yet they were never included: http://www.dividendgrowthinvestor.com/2013/02/s-dividend-aristocrats-index-incomplete.html
  3. dividend champions lists: http://www.dividendgrowthinvestor.com/2011/02/dividend-champions-best-list-for.html
  4. MO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MO
  5. PM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PM
  6. legacy Altria Group: http://www.dividendgrowthinvestor.com/2011/08/altria-group-mo-high-dividend-growth.html
  7. by Phillip Morris: http://www.dividendgrowthinvestor.com/2012/08/philip-morris-international-pm-dividend.html
  8. MDLZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDLZ
  9. KRFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KRFT
  10. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  11. PSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSX
  12. raised quarterly distributions: http://www.dividendgrowthinvestor.com/2013/07/six-slow-steady-dividend-achievers.html
  13. ABT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABT
  14. ecently split into two separately traded: http://www.dividendgrowthinvestor.com/2013/02/should-dividend-investors-hold-on-to.html
  15. ABBV: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABBV

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