Like everyone else, I’m excited when a stock I hold increases the dividend. Dividend increases in recent years have been very strong. TD Bank (TSX: TD), for instance, has raised its dividend from $1.12 per share in 2002 to $2.36 per share today, a compounded annual rate of more than 12% per annum. The joy of dividend growth experienced by TD Bank’s shareholders is hardly unique – other companies have raised dividends significantly in recent years. Will the good times last or is the party going to end sometime? Does the historical record support the prevalent notion that dividends significantly outpace inflation over the long term?
I’m currently reading Triumph of the Optimists by Elroy Dimson, Paul Marsh and Mike Staunton. The authors look at 101 years of global investment returns from 1900 to 2000 in sixteen major markets, including Canada. Researching dividend growth over that time frame, the authors note:
US real dividends fluctuated greatly in the first half of the last century, but made little headway so that by 1949 they had just kept pace with inflation. For the next twenty-one years they grew quite strongly, but thereafter fluctuated with no clear trend. $1 of dividend income received in 1900 grew, after adjusting for inflation, to $1.78 by 2000, an annualized (geometric mean) real dividend growth rate of 0.58 percent. The arithmetic mean annual growth rate was 1 percent higher than this at 1.57 percent, reflecting the high volatility of annual growth rates, which had a standard deviation of 14.3 percent.
The US experience is hardly unique. In the UK, dividends grew at a real rate of 0.40% per year and 0.3% in Canada over the same time period. In fact, out of the sixteen countries examined, just seven countries (Sweden, South Africa, Australia and Switzerland were the others) posted positive real dividend growth. The authors rightly conclude that “real dividend growth has been rather lower than is often assumed”.