Nominal Dividend Growth

I was surprised when I investigated Dividend Growth Projections. I found that real dividend growth at Years 10 and 20 increases as the percentage earnings yield 100E10/P increases.

Dividend Growth Projections

Theory tells us that dividends should grow independent of price. Dividends come out of earnings. Real earnings, especially smoothed earnings, grow steadily. They correlate strongly with the GDP (Gross Domestic Product).

This time I looked at nominal dividends. That is, dividends without inflation adjustments.

The Equations

Here is the equation for the total percentage increase in nominal dividends at Year 10.

y = 2.3173x+43.009 plus and minus 80%.
R-squared = 0.02.

Here is the equation for the total percentage increase in nominal dividends at Year 20.

y = -6.6496x+227.63 plus 130% and minus 140%.
R-squared = 0.0473.

Here is the equation for the annualized percentage increase in nominal dividends at Year 10.

y = 0.159x+3.1384 plus 5% and minus 8%.
R-squared = 0.0173.

Here is the equation for the annualized percentage increase in nominal dividends at Year 20.

y = -0.1641x+6.1322 plus 2% and minus 4%.
R-squared = 0.0531.

My Assessment

The slopes are very shallow. R-squared is very small. Nominal dividend growth is virtually independent of price.

The two years with the highest valuations, 1921 and 1922, have an undue influence on the curve fitting process. After a decade of strong economic growth, dividends still improved slightly more than average at Year 10. By Year 20, after a decade in the Great Depression, dividend growth fell slightly below average.

I looked at the tables of dividend growth. There were several years during the Great Depression when nominal dividends showed a loss at Year 10. After the Great Depression, nominal dividends always grew by Year 10. As mentioned in my earlier article, real dividends fell in the late 1960s and early 1970s.

Conclusions

Nominal dividends have grown independent of valuations.

Dividend growth has not followed overall economic growth, which has been (relatively) stable in terms of real dollars.

Real dividends have grown more when valuations have been more favorable (bargain prices, lower P/E10, higher 100E10/P). The reasons appear to have been time specific. Dividend payments were too high to be sustained during the Great Depression. During the years of high inflation, dividend payments fell in terms of real dollars. They grew in terms of nominal dollars.

Have fun.

John Walter Russell
January 12, 2006