Chowder Rule

[rnsmth]

(03-14-2014, 09:38 AM)Kerim Wrote: Thanks very much for all of the thoughtful replies. The Chowder rule seems to be popular indeed, even if most are careful to indicate that it is only one of many metrics to consider. I guess I'll just have to remain content with not "getting it."

I still understand that yield and dividend growth are related in important ways, but I just can't see the logic of adding the numbers together -- even as just one step in a screening process.

Let's say company A has a yield of 4 percent and dividend growth of 7 percent, and company B has a yield of 2 percent and dividend growth of 15 percent. Those are very different profiles, and we all would dive deeper to understand the specifics of each company. But at a fundamental level, you are comparing a company with a higher initial yield and slower (but still healthy) dividend growth with a lower yielding company that has higher dividend growth. And there are lots of reasons a person might choose one over the other.

So what actionable information is added by saying that company A has a Chowder number of 11 and company B has a Chowder number of 17? We all weight the importance of yield and growth differently, and indeed might weight them differently be sector or individual company. Is company B worth more attention than company A (17 is a lot higher than 11, after all)? It depends on what you need and want in your portfolio. And given that yields are likely to be lower than dividend growth percentages, the Chowder approach would seem to weight growth much higher than initial yield. I'm just not seeing the value of this metric.

Thanks again for trying to help me understand this one.

I think it can help in Portfolio Construction.

I have often written that a DG portfolio is like a symphony. Individual companies are the musicians. There is room in my portfolio for initial yields as low as 2.75% with higher dividend growth rates (at purchase), for stocks with initial yields double that with lower growth rates, and for companies with higher initial yields and higher DGR. I have all three.

There is not room for companies with lower yield at purchase and lower recent divvy growth rates, like WMT, for example. There is not room for companies with high initial yields and low divvy growth rates, like T, ED, or HE, for example.

It is a balancing act and as the artistic director of my dividend growth compounding machine symphony the Chowder guideline helps me keep a sweet sounding, balanced group.

It has helped me make choices between two companies, but usually things like initial yield, valuation, earnings growth, payout ratio, financial,strength and other metrics play a more important role there.