The Chowder Rule Explained: Balancing Dividend Yield, Growth, and Total Return

Dividend growth investors often struggle with a deceptively simple question:
Should I focus on dividend yield, dividend growth, or total return?

Each approach makes sense on its own — and each can quietly fail if taken too far. High yield can stagnate. High growth can take years before it meaningfully contributes to income. Total return can feel abstract when your goal is cash flow.

The Chowder Rule exists because of that tension. It doesn’t try to predict returns or replace valuation analysis. Instead, it blends current income and income growth into a single framework that nudges investors toward balance.

Used properly, the Chowder Rule isn’t about chasing a number. It’s about avoiding one-dimensional decisions while building a durable income portfolio.

The Chowder Rule matters most during the accumulation phase. Once portfolio income is sufficient, it becomes a confirmation tool rather than a driver.

At its simplest, the Chowder Rule adds two numbers:

Dividend yield + dividend growth rate = Chowder Score

But that simplicity hides several important assumptions — particularly around how dividend growth is measured and what time period you choose.

Dividend yield is straightforward. It’s a snapshot of what the business is paying today. Dividend growth, however, is a trend, not a point-in-time figure. And trends depend heavily on the time frame you observe.

Most investors calculate dividend growth using a compound annual growth rate (CAGR) over a fixed period — commonly five or ten years. This smooths out year-to-year fluctuations and provides a cleaner view of how management has increased the dividend over time.

The Chowder Rule doesn’t dictate which period to use — but that choice matters more than most investors realize.

A 5-year dividend growth rate tends to be more responsive. It captures recent execution, reflects current capital allocation priorities, and adapts more quickly when a company accelerates or slows its dividend policy. For businesses that are actively expanding, acquiring, or scaling — including many compounders — the 5-year number often better reflects today’s reality.

A 10-year dividend growth rate, on the other hand, is more forgiving. It blends multiple economic cycles, smooths out temporary disruptions, and reduces the influence of unusually strong or weak recent years. For mature businesses — especially banks, utilities, and established dividend payers — the 10-year figure often provides a more stable, conservative baseline.

Neither is “right” or “wrong”.

What matters is what question you are trying to answer.

If you are assessing whether a company’s current strategy supports continued growth, a 5-year rate may be more relevant. If you are judging long-term dividend culture and resilience, a 10-year rate may be more appropriate.

This distinction is critical, because the Chowder Rule is inherently backward-looking. It assumes that past dividend growth offers insight into future potential — an assumption that works reasonably well for stable businesses, but less so for companies undergoing structural change.

That’s why the Chowder Rule works best as a sanity check, not a forecast.

It doesn’t promise future returns. It simply asks whether a company’s recent income behavior, when combined with its current yield, clears a reasonable hurdle for long-term compounding. In short, is this dividend stock likely to deliver a reasonable long-term total return?

A good Chowder Score should be above 10% but the number really is up to you based on your goals and desire. Reaching 12% can be hard at times.

Keep in mind the industry of the company and the state of the markets. If you have access to the Chowder Score, try to filter above 10% to start with and go from there.

The Chowder Rule quietly incorporates inflation awareness. Stocks with weak dividend growth struggle to pass the rule, even if the yield looks attractive.

Canadian banks are a natural fit for the Chowder Rule, but they aren’t the only ones.

Take Royal Bank of Canada as a classic example. Over long periods, it has offered a moderate dividend yield paired with steady, disciplined dividend growth. The resulting Chowder Score rarely looks exciting — but it consistently lands in an acceptable range.

That consistency is exactly the point.

The Chowder Rule doesn’t reward banks for being flashy. It rewards them for being durable compounders — businesses that grow earnings through cycles, increase dividends responsibly, and allow shareholders to benefit from both income and long-term capital appreciation.

The same logic applies to Canadian non-bank compounders like Alimentation Couche-Tard and Dollarama.

These companies often start with lower dividend yields, but make up for it with strong and consistent dividend growth, supported by reinvestment, pricing power, and scalable business models. Their Chowder Scores tend to look healthy not because of yield, but because growth does the heavy lifting.

This is an important distinction.

Where banks balance yield and growth, companies like Couche-Tard and Dollarama demonstrate how dividend growth alone can drive total return, even when current income is modest. Over time, that growth shows up not just in dividends, but in capital appreciation as well.

Together, these examples highlight the real strength of the Chowder Rule:
it adapts to different business models while still enforcing discipline regardless of the dividend investing strategy.

Pipelines are where the Chowder Rule starts revealing trade-offs more clearly.

Companies like Enbridge attract investors with generous yields. That income can be meaningful, particularly for those prioritizing cash flow.

But dividend growth has slowed over time.

When yield is high and growth is modest, the Chowder Score forces an honest reassessment. The stock may still pass — but narrowly. And that narrow margin highlights the reality: pipelines are income vehicles first, not growth engines.

The Chowder Rule doesn’t label pipelines as good or bad investments. It clarifies what you are buying — current income with limited acceleration — and whether that aligns with your goals. You must choose how it will fit your portfolio diversification strategy.

Utilities often confuse dividend investors until context is applied.

A company like Fortis operates in a regulated environment. Growth is capped, but cash flows are predictable and resilient. Dividend increases are modest, yet remarkably consistent.

The Chowder Rule adapts to this reality by lowering expectations rather than forcing utilities into a growth framework they were never designed to meet.

That flexibility is one of the rule’s understated strengths. It acknowledges that different business models deserve different benchmarks — without abandoning discipline.

When applied across sectors, the Chowder Rule stops being a stock-picking tool and starts functioning as a portfolio lens.

At the portfolio level, patterns emerge quickly. Traditional dividend payers like banks tend to sit in the balanced core, where yield and growth contribute roughly equally to long-term returns. Income-oriented holdings such as pipelines naturally skew toward current cash flow, while utilities anchor stability and predictability.

Then there is a different category altogether: compounders.

Canadian compounders such as ATD and DOL often look unimpressive if judged by yield alone. Their dividends may start small, sometimes barely noticeable. But dividend growth — supported by reinvestment, pricing power, and operational scale — does the heavy lifting. Over time, that growth drives not only rising income, but meaningful capital appreciation as well.

The Chowder Rule captures this distinction cleanly. It doesn’t force every holding to look the same. Instead, it allows different business models to justify their place in the portfolio in different ways — through balance, income, stability, or growth-led compounding.

Seen this way, the Chowder Rule isn’t ranking stocks against each other.
It’s clarifying roles.

Well-constructed dividend portfolios often converge toward similar average Chowder Scores over time — even though the underlying holdings may look very different on the surface.

That convergence isn’t coincidence. It reflects intentional design: mixing income anchors, balanced core holdings, and growth-driven compounders so the portfolio compounds steadily across market environments.

The Chowder Rule is not precise, and it is not predictive.

But it is honest.

It discourages lazy yield chasing. It respects the difference between income and growth. And it quietly reinforces the idea that total return still matters, even when income is the objective.

Used thoughtfully, the Chowder Rule becomes what it was always meant to be:

A framework for better decisions — not a shortcut to certainty.