Chowder Number / Chowder Rule – The Perfect Mix of Dividend Yield and Dividend Growth

The Chowder Number/ Chowder Rule is all about finding the right mix between dividend yield and dividend growth.

In a perfect world, we’d all be investing in high-yield, high-dividend growth stocks. The reality is that many high-yield stocks have lower dividend growth rates than lower-yielding stocks. 

So how do you find the right balance between dividend yield and dividend growth?

Enter the Chowder Number / Chowder Rule …

What is the Chowder Number / Chowder Rule?

If the dividend yield is low you want a higher dividend growth rate, and if the yield is high you’d be willing to accept a more moderate dividend growth rate.

The Chowder Number / Chowder Rule applies this premise using a simple formula: 

And, the Chowder Rules set out reasonable criteria of how to best balance dividend yield vs. dividend growth.

Sure Dividend does a good job explaining the rules:

Source: https://www.suredividend.com/the-chowder-rule-explained/

The threshold for utilities is lower because utilities are thought to have more reliable/predictable income streams.

How to Calculate the Chowder Rule / Chowder Number?

Current Dividend Yield % + 5-Year Average Dividend Growth Rate % = Chowder Number %

The Chowder Rule is normally a backwards-looking measure as it uses the historic 5-year dividend growth rate + current dividend yield.

Fortis Inc (TSE:FTS) Example 

I’ll use the utility, Fortis Inc (TSE:FTS) as an example. 

As I write this in February 2021, Fortis has a 3.9% dividend yield and its 5-year annual dividend growth rate was 6.8%. 

So the Chowder Number would be 10.7%.

Fortis is a utility, so it passes the Chowder Rule as its Chowder Number of 10.7% is higher than 8%.

If Fortis was not a utility it would fail the Chowder Rule because its yield is over 3%, but its Chowder Number is less than 12%.

If you have two stocks that both pass the Chowder Rule, the one with the higher Chowder Number is generally better.

In other words, the higher the Chowder Number the better.

The Chowder Number is a useful screening tool for dividend growth investors, but I prefer the Forward Chowder Number.

How to Calculate the Forward Chowder Number?

I like to use a forward-looking (future) dividend growth estimate instead of the backwards-looking 5-year dividend growth rate.

This helps weed out stocks that are slowing future dividend growth.

The difficulty with the Forward Chowder Number is that there are only a few places to find long-term dividend growth estimates.

For dividend growth estimates I generally look at 3 different sources:

1. Value Line, 
2. Dividend Stocks Rock, and 
3. Company Guidance, if it’s available (often it’s not).

After reviewing these 3 resources, I use my own judgement to come up with a reasonable dividend growth estimate to use in the Forward Chowder Number calculation.

Fortis Inc Example Continued

Continuing with the Fortis Inc example, I can see that Value Line is estimating average annual dividend growth of 6% per year over the next 3-5 years.

Source: December 11, 2020, Fortis Inc Value Line Report

Value Line only covers a limited number of Canadian stocks, so for better Canadian coverage, I recommend Dividend Stocks Rock.

Tip: Check your library’s online database section for free online access to Value Line. For a list of all Canadian libraries that provide free online access to Value Line read this article.

Dividend Stocks Rock (DSR) is estimating the same 6% dividend growth, but for 10 years, then dropping to 5.5% after that.

Source: Dividend Stocks Rock (DSR) Fortis Inc Stock Card – November 23, 2020

DSR also provides a short summary of the dividend growth prospects for each of the 500+ companies it covers. I like to check this at the same time as I get their 10-year dividend growth estimate.

Source: Dividend Stocks Rock (DSR) Fortis Inc Stock Card – November 23, 2020

You’ll notice in this Fortis example DSR mentions that management already plans to increase dividends by 6% per year until 2025.

And that brings us to Fortis’s company guidance. 

Just as DSR pointed out, Fortis is guiding 6% average annual dividend growth to 2025.

Source: Fortis Inc. February 2021 Investor Presentation

Tip: If you want start-to-finish instructions on exactly how I found these 3 dividend growth estimates watch the video below.

Video: Step-by-Step Instructions on Where to Find Long-Term Dividend Growth Estimates from Value Line, Dividend Stocks Rock & Company Guidance

So I have Value Line, DSR, and company guidance all giving me a 6% per year long-term average dividend growth estimate.

A quick look at its historic dividend growth rates and I can see they are also around 6%.

Source: Canadian Dividend All-Star List, February 16, 2021

So taking all that into consideration, I think it’s reasonable to use 6% as our future dividend growth estimate in our calculation of the Forward Chowder Number.

I should mention that normally it’s not this simple.

In our Fortis example, we got lucky and all 3 resources (Value Line, DSR, & company guidance) had the same 6% long-term dividend growth estimate. When the dividend growth estimates differ, you have to rely more on your own judgement.

Adding our 6% long-term dividend growth estimate to Fortis’s dividend yield of 3.9% results in a Forward Chowder Number of 9.9%.

Here’s a reminder of the 3 Chowder Rules.

1. If the yield is +3%, the Chowder Number should be above 12%,
2. If the yield is less than 3%, the Chowder Number should be above 15%, and
3. If the company is a utility, the Chowder Number should be above 8%.

Fortis is a utility, so rule #3 from above applies.

Fortis passes the Chowder Rule as its Forward Chowder Number of 9.9% is higher than 8%.

Summary

How do you find the right mix between dividend yield and dividend growth?

If the dividend yield is low you want a higher dividend growth rate. If the yield is high you’d be willing to accept a slightly lower dividend growth rate, but what’s a good mix?

The Chowder Rule / Chowder Number helps solve this problem with a simple formula to find a good balance between dividend yield and dividend growth.

Dividend Yield % + 5-Year Annual Dividend Growth Rate % = Chowder Number %

• If the yield is +3%, try for a Chowder Number above 12%,
• If the yield is less than 3%, try for a Chowder Number above 15%, and
• If the company is a utility, try for a Chowder Number above 8%.

The higher the number the better. 

The Chowder Number is a useful screening tool for dividend growth investors, but I prefer the Forward Chowder Number.

Current Dividend Yield % + Long-Term Dividend Growth Estimate % = Forward Chowder Number %

I like to use future or forward-looking dividend growth estimates instead of the backwards-looking 5-year dividend growth rate to avoid stocks with slowing dividend growth.

To find long-term dividend growth estimates I use:

1. Value Line, 
2. Dividend Stocks Rock, and 
3. Company Guidance, if it’s available (often it’s not).

Which do you prefer, the regular Chowder Number or the Forward Chowder Number?

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