How to use the Chowder Rule

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 NYSE:KMB and Manulife TSE:MFC. 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 used by Chowder.

Current Yield + 5 Year Dividend Growth = Total Return.

After experimenting with the formula and screeners, the version I am settling on takes the following shape. Basically, it takes away anomalies on the upper end of dividend growth.

Current Yield + Min(3 / 5 / 10) Year Dividend Growth = Total Return.

Your access to data will define what you can calculate but I prefer the first one after assessing the 3, 5, or 10 years dividend growth across 100+ companies. The minimum approach brings a worst case model which prevents us from over estimating the future total returns.

Getting the data to get the Chowder Score is not easy is the historical data you need is usually paid data. See below how Stock Rover can give you access to the Chowder Score below.

StockRover Chowder Score

The good thing with Stock Rover is that you can make your own 10-year Chowder Rule using the 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 overvalued, the dividend yield would go up as the price would drop and if it was undervalued, 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, 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 Chowder Rule to my dividend stock list (all 150+ 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.

I tried 10-year and got the same results as well as with the average of 3, 5 and 10-year dividend growth. I decided to use the lowest of the 3 data points I track and that worked well.

The result of using the minimum value of the 3, 5 or 10 year CAGR dividend growth is that it excludes any inconsistent spike in dividend growth and is a little more strict.

My intention is to blend my stock selection process by using the Chowder Rule on Dividend Achievers together. 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 Rule tries to establish the potential for total growth based on historic trends.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.