Quarterly Dividend Velocity (QDV)

We already know what dividend growth is. If a stock's dividend goes from $1.00 to $1.10, the dividend growth rate is 10%. That doesn't tell the whole story.

Let's compare two fictional stocks, ABC Corp and CDE Corp. Both companies started the year with a $0.25 quarterly dividend, or a $1.00 per-year indicated rate, and both increased their dividend to $1.40 indicated rate by the end of the year - a 40% increase, right?

Let's look at the total payout of the two stocks:

ABC - Qtr 1: 0.25, Qtr 2: 0.31, Qtr 3: 0.33, Qtr 4: 0.35
CDE - Qtr 1: 0.25, Qtr 2: 0.25, Qtr 3: 0.25, Qtr 4: 0.35

Both stocks ended the year with a indicated annual dividend of $1.40, but ABC actually paid more (ABC paid $1.24 while CDE paid only $1.10). Why? Because ABC's quarterly dividend velocity (QDV) was higher.

The first lesson is that the indicated rate doesn't tell us everything we need to know about a company's rate of dividend growth.

So, how do we go about measuring and thus capturing the difference? In other words, how do we go about calculating QDV?

If we just ignored the indicated rate and looked at what was actually paid out each year, would that do it? Let's see. If both companies actually paid out $1.00 total over the previous four quarters, then ABC's actual increase in payout for the following 12 months was 24% ($1.24 vs. $1.00), while CDE's was 10% ($1.10 vs. $1.00). That doesn't really tell the story either, but it is way better information than what the indicated dividend 'increase' of 40% tells us.

Yahoo! Finance seems to 'get' there is a difference. They cite in their "Key Statistics" section both the "Trailing Annual Dividend Rate" (for our ABC example, $1.24) and the "Forward Annual Dividend Rate" ($1.40 for both of our examples).

So to summarize, it is pretty obvious the trailing dividend information is important, not just the forward rate.

Still, if we are trying to develop a better measure of growth - one that would tell us ABC corp is a better investment (from a dividend growth point of view) than CDE, we need to capture the trailing dividend values for each over time (something Yahoo does give us but we have to work for it) and then compare the historical growth rate in dividends.

If you have studied finance, you know it is better to get $50 today than $50 a year from now. Therefore, we also need to take into account the 'quarterly timing of payments' in the QDV calculation (their net present value).

The easiest way I have found to take all of this into account is to calculate a 'rolling historical annual payout' then look at the 'average annual rate of change'.

Here's the QDV calculation for Pepsi:

Date	Dividends	Avg Qtrly Div	Avg Qtrly Increase	Annual Increase (QDV)
6/5/2002	0.15
9/4/2002	0.15
12/4/2002	0.15
3/12/2003	0.15	0.15
6/11/2003	0.16	0.1525	1.67%
9/10/2003	0.16	0.155	1.64%
12/10/2003	0.16	0.1575	1.61%
3/10/2004	0.16	0.16	1.59%	6.51%
6/9/2004	0.23	0.1775	10.94%	15.78%
9/8/2004	0.23	0.195	9.86%	24.00%
12/8/2004	0.23	0.2125	8.97%	31.36%
3/9/2005	0.23	0.23	8.24%	38.01%
6/8/2005	0.26	0.2375	3.26%	30.33%
9/7/2005	0.26	0.245	3.16%	23.63%
12/7/2005	0.26	0.2525	3.06%	17.72%
3/8/2006	0.26	0.26	2.97%	12.45%
6/7/2006	0.3	0.27	3.85%	13.04%
9/6/2006	0.3	0.28	3.70%	13.58%
12/6/2006	0.3	0.29	3.57%	14.09%
3/7/2007	0.3	0.3	3.45%	14.57%

As you can see, the dividend went up around 1.6% quarterly, on average, to start. The last column is the annualized rate of dividend growth. Happily, Pepsi shareholders are seeing double digit annualized increases in the rate of average quarterly dividends. The annual has backed off from the quarter ending Mar 2007 compared with Sept 2005. Quarterly Dividend (growth) Velocity, or QDV, has declined to 14.57% from the 23.63% level in Sep 2005. In summary, the rate of change is declining over that period, however dividends are still being increased at a double digit average rate.

The take-away is that you can use the 14% figure to estimate future growth, but you need to consider the 'velocity effect'. If you look at the most recent quarters, QDV has started going back up (from 12.45% Mar 2006 to 14.57% today), so in this example, I might estimate 15% growth, or 3.5% average quarterly growth, over the next four quarters for PEP. This is the best way I have found for measuring dividend growth, and best for use in forecasting.