Dividend Yield: How Much Bumpiness Is Acceptable?

In an article by Robert Allan Schwartz entitled How Bumpy Are Your Dividends? published on June 7, the author presented an example of two companies with the same initial dividend and ten years later the same final dividend. Because the initial and final dividends are identical, both have the same Dividend Compounded Annual Growth Rate (also known as a Dividend Growth Rate, or DGR) of about 17%. Mr. Schwartz makes the point that selecting the company with the “smoother” history of dividend increases provides a planning advantage for those who depend on dividends for meeting their retirement expenses. That seems logical. However, as a retiree with fixed expenses (or in some cases, expenses with an expected rate of increase), I want to know “will I have the funds to cover those expenses?” Or, from an investment perspective, “which dividend growth companies should I buy (or avoid) to maximize my yield while minimizing the likelihood of erratic dividends, so I can reasonably plan for my future expenses?” How to best maximize yield with dividend growth companies is, I believe a personal decision - one that depends on individual biases and perceptions of risk. For example, all else being equal, my “ultra-conservative” biases direct me away from companies with negative net cash (i.e. more debt than cash). To me, those companies represent a risk I am unwilling to accept for initial entry into my dividend growth portfolio. Other investors, with a better understanding of the circumstances, may find those companies acceptable. If maximizing yield is subject to personal biases, is there a general rule for minimizing the likelihood of erratic dividend payments? Will minimizing bumpiness minimize dividends? How much bumpiness must I accept for an acceptable dividend yield? I don't have a clairvoyant crystal ball. And I don't get next week's Wall Street Journal today. However, I do have access to David Fish's Dividend Champions spreadsheet of 449 companies that have a meaningful history of dividend increases. But I have to ask, “is the Champion spreadsheet a representative sample” and can we use it to better understand dividend bumpiness? If so, how? The spreadsheet is available here.... Read more