The Dividend Investor’s Secret Formula: How to Spot Stocks Poised for Future Success
Unlocking the Power of the Chowder Rule for Long-Term Wealth.
TL;DR:
Dividend stocks allow investors to "double dip"—earning income that grows over time while also benefiting from rising stock prices.
Using the Chowder Rule, we can filter stocks for high total return potential by combining high quality, high yield, and strong dividend growth.
At Wellth Canada, we apply this strategy to identify the best risk-reward dividend stocks.
The Dividend Growth Edge: Why the Chowder Rule Works
Investors often face a trade-off between high-yielding dividend stocks and those with strong dividend growth. Some stocks offer high current yields but little growth, while others have low initial yields but rapidly growing dividends. The Chowder Rule provides a simple yet effective way to compare these opportunities, ensuring that we focus on companies positioned for long-term success.
Why does this matter?
Income That Beats Inflation – Over time, dividend increases help protect purchasing power.
Higher Stock Prices – As dividends rise, stock prices tend to follow.
Reliable Financial Strength – Unlike earnings per share (EPS), dividends are difficult to manipulate.
With this approach, investors can build a portfolio of stocks that not only generate growing passive income but also appreciate in value over time.
How to Calculate the Chowder Number
The Chowder Rule formula is straightforward:
Current Dividend Yield % + 5-Year Average Dividend Growth Rate % = Chowder Number %
Let’s take Royal Bank of Canada (RBC) as an example:
Current dividend yield: 3.2%
5-year dividend growth rate: 9.0%
Chowder Score: 12.2%
This means that, based on historical data, RBC has the potential to deliver double-digit total returns through a combination of dividends and price appreciation.
What’s a Good Chowder Score?
8% Score – Suggests a stock could generate an 8% annual return over the long term.
12%+ Score – Offers a greater margin of safety and better future return potential.
At Wellth Canada, we focus on dividend stocks with a Chowder Score of 12 or higher to ensure we’re investing in companies with strong long-term potential.
The Limitations of the Chowder Rule & How to Improve It
While the Chowder Rule is a powerful tool, it has two key weaknesses:
It’s a Backward-Looking Measure – It relies on past dividend growth, which doesn’t always predict the future.
It Can Mislead Investors About Declining Companies – A company in decline can still show a high Chowder Score—until it can no longer afford its dividend.
Solution #1: Use Forward Estimates
Instead of relying solely on past dividend growth, we consider:
✅ Consistent revenue growth – A company with growing sales is more likely to sustain dividend increases.
✅ Steady earnings growth – Rising profits support long-term dividend payments.
Solution #2: Avoid Dividend Traps
A company can’t pay more in dividends than it earns (unless it's borrowing to do so!). That’s why we filter our dividend stock selections using payout ratios:
A payout ratio below 60% signals a sustainable dividend.
We avoid companies with rising payout ratios, which suggest potential trouble ahead.
By applying these additional checks, we ensure that our high-Chowder Score stocks are financially sound and positioned for sustainable growth.
The Winning Formula for Dividend Stock Success
To maximize returns, remember this simple equation:
High Quality + High Current Yield + High Growth of Yield = High Total Return
At Wellth Canada, we refine this further by looking for stocks that meet four key criteria:
✔️ Steady payout ratio over time – Ensures dividend sustainability.
✔️ Consistent revenue growth – Indicates strong business fundamentals.
✔️ Consistent earnings growth – Supports future dividend hikes.
✔️ Consistent dividend increases – A sign of financial strength.
When we find stocks that check all four boxes, we get excited—because these are the companies that build long-term wealth for investors.
Final Thoughts: The Power of Dividend Investing
Dividend investing isn’t just about collecting passive income—it’s about building wealth through compounding. By using the Chowder Rule, filtering for financial strength, and focusing on sustainable dividend growth, investors can:
✅ Earn reliable and growing income
✅ Benefit from rising stock prices
✅ Sleep soundly knowing they own financially strong companies
If you’re serious about maximizing returns with dividend stocks, this strategy is one of the most powerful tools you can use.
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Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Investors should conduct their own due diligence and consult with a financial advisor before making investment decisions.