The Chowder Rule

There's a lot of dividend stocks to choose from. In this article, we will highlight a systematic way to select dividend stocks using something called "the chowder rule".

The Chower rule uses both the dividend yield and the dividend growth rate to come up with "a chowder number".

More specifically, the current dividend yield and 5-year dividend growth rate are are added together.

For example, Coca-Cola's current dividend yield is 2.82% and it's 5-year dividend growth rate equals 4% which results in a chowder number of 2.82 + 4 = 6.82. But what does this mean?

The chowder rule is used in the following way to select stocks:

1. Current yield over 3% and Chowder number over 12%

2. Stocks with current yield under 3%: Chowder number over 15%

To consider adding Coca-Cola to our portfolio we need a chowder number of above 15% since the current dividend is below 3%. Therefore, following the chowder rule, we won't buy Coca-Cola because 6.82<15.

In terms of performance, the strategy has been shown to do quite well.

https://seekingalpha.com/article/3591016-using-chowder-number-to-select-dividend-growth-stocks-from-1995minus-2014?source=Drive

A few stocks that currently satisfy the chowder rule:

1. High-yield:
Broadcom (3.32% + 34.82% = 38.14% > 12%)
Abbvie (3.67% + 17.46% = 21.13% > 12%)
Trow (4.16% + 15.48% = 19.64% > 12%)

2. Low-yield:
Skyworks (2.22% + 14.87% = 17.09% > 15%)
Tractor Supply (1.81% + 23.81% = 25.62% > 15%)
Lam Research (1.4% + 29.46% = 30.86% > 15%)

*I own all these stocks. Not a buy recommendation, just illustration.

Things to note:

This strategy does not take into account the payout ratio i.e. % of profits paid out as dividends. Also, the dividend growth rate is based on past growth rates which might not be indicative of future dividend growth rates. Lastly, the criteria is quite strict so there might be periods where the strategy only selects a few stocks.