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Tue. May. 20, 2008

The Power of 5/15 in Dividend Investing *

As a kid I loved math. Unlike classic literature where I had to correctly interpret symbolism that I rarely ever noticed, math was one of the few subjects that had a definitive answer – it was either right or wrong. I took great comfort in that. Dividend investing takes advantage of certain undeniable math principles.

If you have examined one of my stock analyses, you may have noticed the metric “Rolling 4-yr Div. > 15%“. This calculation determines if a company’s dividends grew on average in excess of 15% for each consecutive 4-year period, within the last 10 years of history. For example, if on average dividends grew 15% or more for the periods 2005-2008 and 2004-2007 and 2003-2006 and so on to 1997-2000, then this test is true. The reason I like this metric is it identifies companies that consistently increase dividends. Another way of stating this is that if you held this company for any 4-year period over the last 10 years, you would have averaged a 15% dividend growth rate during the time you held the stock.

Contrast the above example with a company that grew its dividends at 1% per year for nine years, then sold some land in year 10 and paid a special dividend that resulted in a 140% year-over-year dividend increase. This company’s average 10-year dividend growth rate is 15% [(140 + 9)/10]. Both companies would have a 15% 10-year average dividend growth rate. However, based on history the first company is more likely to raise its dividend by 15% in the future.

Ok, so why is 15% relevant? The power of 5/15, of coarse! Dividends will double every 5 years if they grow by 15% per year. Taking this undeniable math principle into consideration, it often makes sense to purchase a stock with a lower yield but with a higher growth rate. Here are few companies that I own that have the power of 5/15 working for them: Royal Bank of Canada (RY), Paychex Inc (PAYX), McDonald’s (MCD), Sysco Corp (SYY) and AFLAC Inc (AFL).

Do you have the power of 5/15 working for you?

At the time of this writing I owned shares in RY, PAYX, MCD, SYY and AFL.

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5 Responses to “The Power of 5/15 in Dividend Investing *”

  1. DIB says:

    @D4L, right on brother. Consistent slow growth. I’m all about it.

  2. Blake says:

    Cool post! I like your distinction between the one time large increases and the steady growers. It’s hard to go wrong with steady eddy companies that just keep growing their dividend!

  3. TheLocoMono says:

    That is a terrific post. I never looked at dividend growth that way. I am a big fan of the Rule of 72 so it was refreshing to see the 5/15 used in an investment strategy.

  4. Randy says:

    what do you think about CAG? it has a 5% return, price is cheap and about a year or so ago they had that peanut butter recall and shut down the plant for several months that they are just over coming all that so along with a nice div stock price should climb and there should be div increase also

  5. Dividends4Life says:

    Randy: CAG's dividend history would make me shy away from it. Its 2008 dividend was flat with 2007, it decreased in 2007 from 2006, and 2003 is showing up in the S&P report as NA.

    Best Wishes,
    D4L