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Crush the Market (and the Pros) with Fast Dividend Boosters

You’ve all seen the new AT&T (T) commercials. A man in a suit poses a question to a table of four kindergarteners: “Which is better, faster or slower?”

The kids yell, “Faster!”

The commercial ends with the tagline, “It’s not complicated. Faster is better.”

Let’s apply this elementary principle to dividend investing…

We all know that dividend growers and initiators outperform the broader stock market with lower risk.

But which is better, faster dividend growth or slower dividend growth?

To answer this question, I’ll need to use a more complicated, quantitative technique.

Back in Time

A backtest is the process of replicating an investment strategy’s historical performance. It generates statistics that can help us determine if our investment approach is sound.

Now, the particular backtest I’m about to show you selects companies that boast one-year dividend growth that’s in the top 25% of all S&P 500 dividend growers. The components of the composite change and are rebalanced each quarter.

These ultra-fast dividend growers are then market-cap weighted, and the performance is tracked over the past 20 years.

The end result is a time series labeled Top Quartile Dividend Growth Composite.

The same process is then used to determine the set of companies with the slowest dividend growth over the past year. And that time series is called Bottom Quartile Dividend Growth Composite.


As you can see, the results are striking. Past performance is no guarantee of future results, but the data is extremely compelling.

Companies that are boosting their dividend payouts at the fastest rate not only outperformed the slowest dividend growers, but they crushed the overall market.

The Top Quartile Dividend Growth Composite has blasted 833% higher in the past 20 years. That’s more than double the S&P 500’s 393% advance.

It also handily bests most professional asset managers. The Fidelity Contrafund (FCNTX), a huge mutual fund with $109 billion in assets under management, has only appreciated 213%.

Here’s why this data is more important than ever right now…

No Need to Ratchet Up Risk

The bull market is now five years old, and many investors are worried that stocks have become too expensive. And some are concerned that current events are eerily reminiscent of the technology bubble.

Indeed, the 67% increase in the iShares Nasdaq Biotechnology Index (IBB) over the past year shows that speculation is back with a vengeance. The valuations and rise in popularity of social media stocks – think about Facebook’s (FB) ridiculous $19-billion offer for mobile messaging firm WhatsApp – should also raise some eyebrows.

But while many investment approaches that outperform the market often require taking on much higher risk, that’s not the case with the Top Quartile Dividend Growth Composite…

Dividend growth investors can take comfort in knowing that the fastest dividend growers outperformed the S&P 500 from 2001 to 2002, during the tech bubble collapse. And they also beat the S&P 500 on a percentage basis in 2008, the worst year for U.S. stocks since the 1930s.

Meanwhile, the Nasdaq has yet to eclipse its March 2000 high.

This goes to show just how dangerous it is to chase the hottest stocks. Stick with the dividend growers…

The Top Quartile Dividend Growth Composite currently includes stocks such as QUALCOMM (QCOM), Oracle (ORCL), CVS Caremark (CVS), Texas Instruments (TXN) and Hess Corp. (HES). These are all stocks that I’ve talked about in 2014 due to their dividend increase streaks or high profit margins.

Dividends & Income Daily will continue to profile the fastest dividend growth companies in order to help our readers outperform both the market and professional investment managers.

Faster dividend growth is better. It’s not complicated.

Safe (and high-yield) investing,

Alan Gula, CFA