The premise of dividend growth investing is not only finding a stock that can pay growing dividends but also offer stock appreciation for your portfolio over time.
Chowder, as identified on Seeking Alpha, defined that approach as double dipping. I very much like the concept of double dipping and it has been the basis of my stock selection approach.
It’s partly why I dropped the following blue chip stocks; Kimberley-Clark and Manulife. They simply failed to pass the Chowder Score.
What makes the Chowder Rule perfect for my stock selection process is that it fits really well with how I use Dividend Achievers with a 10% CAGR dividend growth over a 10 year period.
Another reason for liking the rule is that it is very simple in nature for anyone to understand. All you have to do is add 2 numbers together and then make a decision based on the investment goals you have.
What is the Chowder Rule?
The Chowder Rule simply tries to identify a high growth dividend stock by adding the current dividend yield and the 5-year CAGR dividend growth.
The rule is setup to surface the best total return dividend stock where you make money from dividend growth and stock appreciation.
High Quality Stock + High Current Yield + High Growth of Yield = High Total Return.
It’s just that simple and it embodies the two stock investing concepts below. He came up with the rule as a way to help him decide between buying a great company with a 1% dividend yield vs another great stock with 5% dividend yield and all the other yield in between.
There is a desire to receive dividend income but not to the sacrifice of the total return (dividend income vs total return). The rule helps put the two together and it leverages the CAGR dividend growth to establish a company’s growth.
The Chowder Score Formula
The simplest formula is the following as originally defined by Chowder on SeekingAlpha.
Current Yield + 5 Year Dividend Growth = Total Return.
After experimenting with the formula and my screeners, the version of the Chowder Score formula I am settling on is propriatary. Basically, it takes away anomalies on the upper end of dividend growth.
Getting the data to get the Chowder Score is not easy as the historical data you need is usually paid data. See below how Stock Rover can give you access to some Chowder Scores.
The good thing with Stock Rover is that you can make your own 10-year Chowder Rule using their formula system. It’s very flexible for that.
Dividend Yield Reflects Market Price By Investors
The rule takes into account the fact that if a stock performs well and is valued by investors, the dividend yield would stay relative and within a certain range.
If the stock was to be undervalued, the dividend yield would go up as the price would drop and if it was overvalued, the price would tend to go up and the dividend yield would go down. It’s just how the stock market reacts to the performance of a company.
Dividend Growth Reflects the Company’s Profitability
Using the historical dividend growth of the company to identify the company’s profit, you can expect that consistent dividend growth implies the company has the ability to grow their bottom line and increase profit. You cannot increase the dividend consistently without the price of the stock (see previous point) taking a beating.
One caveat on the dividend growth is to ensure the dividend payout ratio is not growing at the same rate otherwise it’s a fake growth in bottom line.
Using the Chowder Score
Chowder established the following guidelines for himself but they are for you to adapt to your investing style.
His initial thoughts based on his research was to target 3% dividend yield and 5% dividend growth for a total of 8%. He then adjusted it for the moat and settled with a total of 12%.
- For a stock with 3% dividend yield, he needs 9% dividend growth. This is where the dividend yield and dividend growth can offset each other.
- For certain stocks such as utility, he establishes a lower dividend growth of 5% for a total of 8% as a rule target
What is a good Chowder Score?
Based on my own Chowder Score calculation, only available through Dividend Snapshot Screeners, the filter I use is for a score above 12.
Anything above 20 is more of a red flag needing to be looked at deeper. It implies a fast growing company.
How I use the Chowder Score
Once I applied the default Chowder Score to my dividend stock list (all 200+ stocks), I was not as happy with the results from the 5-year dividend growth rate identified by Chowder. Some stocks passed the rule without the consistency in dividend growth.
After working through the numbers, I was able to smooth out the anomalies and landed on a satisfactory formula. For now, the formula is propriatary.
My intention is to blend my stock selection process by using the Chowder Score with the Dividend Achievers. Keep in mind that the rule does not assess whether a stock is undervalued or not or if it’s a good company to invest in to start with.
The High-Quality Stock part is for you to assess whereas the Chowder Score tries to establish the potential for total growth based on historic trends.