Two of Benjamin Graham’s value elements I’ve incorporated into my personal definition of intrinsic value are (1) the consistent payment of dividends and (2) consistent increases in dividend payments.
These elements are important to me for the following reasons:
a. Consistent dividend payments mean I can hold the stock throughout my retirement deriving income without selling shares.
b. Consistently increasing dividend payments mean the dividend income stream will offset inflation in whole or in part.
c. Consistently increasing dividend payments communicate that corporate management is managing cash flow and has confidence in the future of the business.
I’ve chosen two methods of measuring dividend consistency and increase. First, I record the current annual dividend payment and the annual payment from five years previous. I then compare the two as a ratio of current/prior and require the ratio be greater than 1.0; higher is better of course but I’ll assume an increase greater than the rate of revenue increase is unsustainable.
Second, there are two indexes that screen stock for these dividend characteristics. The Indxis Dividend Achievers are, “companies that have increased annual regular cash dividends for at least the past 10 consecutive years and have met specific liquidity screening criteria. Dividend Achievers are typically companies with strong cash reserves, a solid balance sheet and a proven record of consistent earnings growth.”
320 companies qualified for the January 2010 Dividend Achievers list from all over the world. The companies on the Achievers list get some form of “extra credit”
The S&P 500® Dividend Aristocrats has even more stringent criteria it, “measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.”
43 companies qualified for the most recent Dividend Aristocrats list and they get extra “extra” credit in my calculation.
Link to Other Topics in the Special Report: What Is Intrinsic Value?