Variability of dividend growth rates

The regularity of the amount and payment deadlines of dividends is one of the reasons which explains the interest of investors in this type of investment.. A portfolio of carefully selected, dividend-paying, quality stocks should indeed be able to provide a stable flow fresh money to investors. Moreover, this flow should also grow over time. Unfortunately, the rate of distribution growth can vary greatly depending on a variety of factors, such as corporate policy and the overall state of the economy to name a few.

Companies are not required to increase dividends at the same rate every year. They may not even grow them, or even lower them, or even eliminate them altogether! This is true even for companies that have managed to build a long history of consecutive increases (like CenturyLink).

Every year, the board of directors meets to determine the company's short-term outlook and shape longer-term strategic plans. Once this is done, it proposes to its shareholders to allocate a certain portion of the profit to the payment of the dividend. The evolution of the micro- and macro-economic outlook thus explains the variability of dividend growth, its decrease or even its elimination. This is particularly true when we look at the growth of distributions of certain dividend aristocrats, such as PepsiCo (PEP), McDonald (MCD) and 3M (MMM).

Over the past decade, PepsiCo (PEP) has managed to increase its distributions at a rate of 13.30% per year. The rate at which annual dividends have increased has gone from a low of 3.50% in 2002 to a high of 20.54% in 2007. Between 1998 and 2002, PepsiCo's distributions increased by 4% per year, then by 5.10% in 2003, before returning to double-digit growth. The company has increased its payouts for 41 years in a row and currently offers a yield of 3.10%.

Over the past decade, McDonald (MCD) has managed to increase its dividends by 27,40% per year. The rate at which annual distributions have been increased has ranged from a low of 4,40% in 2002 to a high of 70,20% in 2003! Between 2000 and 2002, McDonald's distributions increased by less than 5% per year. The company has increased its dividend for 35 consecutive years and currently offers a yield of 2,90%.

3M (MMM) has had a ten-year period with an average dividend growth rate of 6.20% per year. The company's distribution growth has ranged from a low of 2% in 2009 to a high of 16.70% in 2005. The company is part of the very small circle of about a dozen companies worldwide that have managed to increase their dividend for more than half a century. The slowdown in distribution growth has led to a decrease in the payout ratio, which increases the chances of higher dividend growth in the future. The company has increased its payouts for 54 years in a row and currently offers a yield of 2.70%.

Generally, good years are followed by slow years and vice versa.. Future dividend growth will depend on the long-term success of the company. The company must be able to generate enough profits to grow and pay a higher dividend to its loyal shareholders over the long term.