Keeley Teton Advisors

In this installment of the Keeley Teton Dividend Tracker, we provide our semi-annual update on the universe of dividend-paying stocks. It was a difficult first half for dividend-payers on a relative basis. After last year’s market declines the sudden outbreak of enthusiasm for artificial intelligence equities boosted the growth sectors within the stock market. As a result, dividend payers lagged. The other factor affecting the performance of dividend-paying stocks, further down the market cap spectrum, was the thrashing that bank stocks took after the failure of SVB Financial and Signature Bank in March. Bank stocks typically pay dividends and the 24% decline in the KBW Nasdaq Regional Bank Index weighed heavily on the performance of dividend-paying small caps.

As we detail in the pages to follow, the fundamentals of the universe of dividend-paying stocks did not change much. Our feature in this issue looks at companies that increase their dividends consistently over long periods of time. We look back over the last forty years at which companies have been able to sustain dividend growth for long periods of time. We discovered nearly fifty companies that increased their dividend every year between 1983 and 2022. That is a very select group. How select? Read on.

SEMIANNUAL UPDATE

The Dividend Universe

Observations

Russell reconstitutes its indexes near the end of June every year. As a result, we typically see more turnover in the first half of the year than in the second. This year we saw the number of dividend payers increase, but their weighting in the indexes declined because non-dividend paying stocks performed much better.

  • The number of dividend payers and the percentage of companies paying dividends increased in the small-cap and mid-cap indexes but declined in the Russell Top 200.
  • The decrease in the weighting of the dividend payers in the three different indexes was due to the outperformance of non-dividend payers in the first half of the year. We will cover this in a later section.
  • The Russell reconstitution impacts the change in the number of dividend payers in the benchmarks, particularly the Russell 2000. While the propensity to pay dividends is less for companies moving into the index, it is even lower for companies leaving the index. On a net basis, the reconstitution added about forty dividend payers to the Russell 2000, ten to the Russell Midcap, and deleted three from the Russell Top 200.
  • Mergers and IPOs are the other piece of the puzzle, although they occur throughout the year. The slow pace of these transactions and the fact that few of the companies involved in these transactions paid dividends meant that this factor had little impact on the dividend stock universe.

Dividend Changes

Observations

Because dividend increases are often seasonal (companies raise their dividend the same time every year), we look at the year-over-year change in the indicated dividend.

  • The column titled “Avg. Increase” presents the average increase of the companies raising their dividend, not all the dividend paying stocks. It is heavily distorted by some very large outliers. For example, Service Properties a hotel REIT in the Russell 2000, increased its dividend by 1900% from $0.01 to $0.20. If we look at the median increase for those that increased their dividend, it is about 8% in each index. If we look at the median increase for all dividend payers, it is about 2% for the Russell 2000, 6% for the Russell Midcap, and 7% for the Russell Top 200.
  • The percentage of companies raising their dividends started to tail off over the last six months, particularly for small caps and mid-caps.
  • Cuts and omissions ticked up in across the market cap spectrum and are at or slightly above pre-pandemic levels.
  • The percentage of companies paying dividends increased in the Russell Midcap and Russell 2000 indexes but declined in the Russell Top 200.

Yields and Returns

Observations

The table above presents the simple average of the yield on the dividend-paying stocks within each index. The yield on the index is lower because not all stocks pay dividends.

  • There was little change in the yields for small and large-caps, but mid-cap yields declined as share price increases outstripped dividend increases.
  • Dividend-paying stocks lagged non-dividend paying stocks by a huge margin. This somewhat reflects investors’ preference for growth stocks in the first half, but even adjusting for style, dividend payers did not keep up.

Feature: Looking at Streaks

If this year is like the last fifty years, sometime in October the Keeley Midcap Dividend Value Fund holding RPM International will raise its quarterly dividend. For those unaware of RPM, it is a specialty chemical company that focuses on coatings. It sells intermediate and consumer products across a wide range of applications and is probably best known for its Rust-Oleum brand of paints.

This accomplishment is remarkable. RPM will become one of less than fifty US companies to raise its dividend for fifty consecutive years. When considering it is in an industry that is generally viewed as being highly cyclical, the achievement is even more impressive. While thinking about this, we became curious about how unusual this is and about companies with long histories of raising their dividends. One thing led to another, we did the research, and we hope you enjoy the output.

Many Factors Keep Companies from Raising Their Dividends For Decades

To gain some insight into how unusual it is for companies to raise their dividends year after year for decades we looked at what happened to the companies in the Russell 3000 at the end of 1982. The FactSet database contains 2,858 companies in the index at year-end. Of those, 2,038 paid a dividend during 1982. Only 49 of these companies have raised their dividend in each of the last forty years, a 2% rate! Interestingly, these 49 were split 16/15/18 between the Russell Top 200, the Russell Midcap, and the Russell 2000 indexes. It was not just a bunch of big companies that were able to sustain consistent dividend growth!

Survivorship is a Big Hurdle. Lots of reasons exist why companies don’t raise their dividends year-after-year for decades. One of the biggest ones is that they do not survive as public companies for that long. As the tables below show, few companies remain public after forty years!

A few interesting observations.

  • As one would expect, the likelihood of a company still being public declines with the size it initially started at. Nevertheless, only 40% of large cap companies (Russell Top 200) remain public today. Still, that is twice the rate of the midcaps and four times that of the small caps.
  • Companies that paid dividends in 1982 produced much higher survival rates, particularly as you move down the market cap spectrum.
  • They also produced much lower failure rates. Small caps overall were more likely to fail than to survive, although most were acquired. The small cap dividend payers were about 2/3 less likely to fail than the non-dividend-payers. While this does not guarantee long-term outperformance, it can’t hurt.
  • Dividend payers were slightly more likely to be acquired. The acquisition rates look remarkably high and may be overstated due to our definition. On the other hand, if you think about the long time period, you are really talking about 2%-3% of companies being acquired each year.

We also looked at what happened to the companies that lasted for forty years. Did they grow on a relative basis? Or shrink? The table below shows migration between the indexes. The rows represent the index in which the companies were in 1982. The first cell shows that 64% of the dividend paying companies that were in the Russell Top 200 that continue to trade in the market are still in the Russell Top 200, while 29% have migrated down to the Russell Midcap Index.

  • For the dividend payers, the large caps were relatively stable with some falling into the midcap index, but few falling further. Midcap dividend payers were more likely to migrate down than up. Small caps had only one way to go and about a third did that.
  • The table for the non-dividend-payers is interesting. First, ignore the Top 200 row because it was only three companies. Second, non-dividend-paying midcaps showed great migration trends. Finally, small caps showed more home runs, but more stagnation as well.

Many Companies Never Start The Journey… Chinese philosopher Lao Tzu said, “A journey of a thousand miles begins with a single step”. For a company to sustain a streak of raising its dividend for forty or twenty or ten years, it must declare its first dividend and raise it the next year. Many companies, and most smaller companies, never do this. The table below shows how the propensity to pay dividends has trended over the years.

The most interesting thing about this chart to us is how much the percentage of companies paying dividends has fallen, particularly for smaller companies. In 1982, 62% of the companies in the Russell 2000 and 89% of the companies in the Russell Midcap index paid a dividend. At the end of the second quarter, these rates were 40% and 64%, respectively.

We could spill a lot of ink on the reasons for this change. It most likely comes down to lower capital gains taxes, executive compensation plans that focus on share price, and greater access to the public markets for unprofitable companies. The first two create a desire for capital returns through share repurchases while the last one reduces the pool of companies returning capital to shareholders.

…And Most That Do, Don’t Make It For a Variety of Reasons. We looked at the current Russell 3000, as well as the 2000, Midcap, and Top 200 indexes, to see how many companies have ongoing streaks. As the table below shows, few companies have streaks of increasing their dividends for more than twenty-five years and there is a clear bias toward larger, more-established companies in this group.

As we have discussed previously, survivorship is a big factor in this outcome. Only a third of the companies in the Russell 2000 have been public for more than twenty-five years and only 55% are more than ten years into their lives as public companies.

The other interesting thing about this list is the companies coming up on streaks that might generate more interest in their stocks. If Eversource Energy and FactSet Data Systems raise their dividends this year, they should be eligible for inclusion into the S&P 500 Dividend Aristocrats index. Prosperity Bank could also extend its raising streak to twenty-five years over the next year, but it is in the S&P Midcap 400 index, so would not likely be included. Casey’s General Stores has a twenty-three-year streak and is also in the Midcap 400. Interestingly, the Midcap 400 Dividend Aristocrats only require fifteen years of raising the dividend.

A History of Dividend Increases Looks Like The Best Predictor of More Dividend Increases. We have long thought that behavior was an important part of companies’ dividend decisions. After all, what CEO or Board Member wants to be a part of breaking a long streak of success? The data bears this out convincingly.

We looked at companies in the Russell 3000 that paid a dividend in 2012 and what their behavior was in the years since. We see an enormous difference between the companies that had increased their dividends in each of the ten years before 2012 (2003-2012) and those that did not.

As the table below shows, more than 90% of the companies with a raising streak of ten years or more raised their dividend in 2013 compared with only 56% of the companies that paid a dividend in 2012 but had not established a ten-year streak.

Even more interesting is that two thirds of the companies with a ten-year+ streak raised their dividends each year from 2013 to 2022! This compares with only 16% for the companies that did not have an established ten-year streak. Furthermore, about 40% of the companies that “broke” their streak did so because they were acquired!

Conclusions

After looking at the data, we are even more impressed with RPM’s ability to sustain dividend growth for such a long period of time. This carries over to other portfolio companies including Black Hills and ABM. The ability to manage their businesses through cyclical ups and downs and grow cash generated to fund an increasing shareholder payout speaks to the companies’ selection of the businesses in which they will compete and their management of those businesses. In future reports, we will look at the characteristics of the companies that are able to build these records.

1 Russell Indexes initially created its indexes in January 1984, with a lookback to the end of 1979. We chose to start our analysis because it seemed convenient to choose a nice round number like forty.

2 We define failure as no longer trading on June 30, 2023, and having a last trade of less than $1. “Marginal” is defined as companies that continue to trade, but where the share price is below $1. There are also companies that we define as active (share price above $1), but which are no longer included in the Russell 3000.

Market performance presented solely for informational purposes. The Russell 2000® Index is an unmanaged index that measures the performance of the smallest 2,000 companies by market capitalization of the Russell 3000® Index. The Russell 2000® Value Index is an unmanaged index that measures the performance of the small-cap value segment of the U.S. equity universe and includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the US equity universe and it includes those Russell 2000® companies with higher price-to-value ratios and higher forecasted growth values.

The Russell Midcap® Index is an unmanaged index that measures the performance of the 800 smallest companies by market capitalization of the Russell 1000® Index. The Russell Midcap® Value Index is an unmanaged index that measures the performance of the mid-cap value segment of the U.S. equity universe and includes those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap® Growth Index measures the performance of the mid-cap growth segment of the US equity universe and it includes those Russell Midcap® Index companies with higher price-to-book ratios and higher forecasted growth values.

The Russell Top 200® Index measures the performance of the 200 largest companies in the Russell 1000 Index. The Russell Top 200® Value Index measures the performance of the especially large cap segment of the US equity universe represented by stocks in the largest 200 by market cap that exhibit value characteristics and it includes Russell Top 200® companies that are considered more value oriented relative to the overall market. The Russell Top 200® Growth Index measures the performance of the especially large cap segment of the US equity universe represented by stocks in the largest 200 by market cap and it includes Russell Top 200® Index companies with higher growth earning potential. These Indexes do not reflect any deduction for fees, expenses or taxes, and are not available for direct investment.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. The prospectus, which contains more complete information about this and other matters, should be read carefully before investing. To obtain a prospectus, please call 800-422-3554 or visit keeleyfunds.com.

Dividend paying stocks do not assure a profit or guarantee against a loss. Companies may choose to stop paying dividends at their own discretion.

This summary represents the views of the portfolio managers of Keeley Teton as of September 2023. The “R2000” represents the Russell 2000 Index, “RMid” represents the Russell MidCap Index and the “RT200” represents the Russell Top 200 Index. Those views may change, and the Fund disclaims any obligation to advise investors of such changes. For the purpose of determining the Fund’s holdings, securities of the same issuer are aggregated to determine the weight in the Fund. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual securities. All chart were produced by Factset. Risks: Smaller and medium-sized company stocks are more volatile and less liquid than larger, more established company securities. The KEELEY Fund Family is distributed by G.distributors, LLC.