Growth is an important part of investing, right? Do better this year than last year. Better next year than this year. At work, you think in terms of a big pay raise to measure doing better year over year. Why think differently about investing?
It’s common to focus on net worth. In my experience it’s what every bank and financial institution shows customers on monthly statements and annual summaries when trying to talk about how their investments have performed.
What if we used a different measure? What if we looked at investment income?
In fact, even more importantly than investment income, let’s look at investment income growth (with the goal being to get a big pay raise each year).
Why is getting a big pay raise important? Inflation.
Inflation is a main reason things cost more year after year. Even at low rates of inflation, as they are now, inflation compounds relentlessly over time.
Your New Investment Goal
Simply put, we’d love it if our income grew faster than the rising costs of the things we buy.
And, our investment goal should simply be to create an an income for retirement that grows faster than inflation.
In the Elephant’s Paycheck Blueprint, I present a blueprint based on dividend investing as a way to create an addition paycheck. Specifically, I recommend investing in dividend aristocrats. Dividend aristocrats are a set of companies that have increased their dividends each year for longer than the past 25 consecutive years. (There are a few other qualifications to be an aristocrat, but they’re irrelevant for the moment.)
You invest in these dividend aristocrats that have a history of increasing dividends year-after-year. While there is no guarantee that they increase dividends faster than inflation, they often/usually do. Each company you own that increases their dividend gives you big pay raise with each increase.
Next, instead of taking the dividends and spending them, you reinvest those dividends. Each reinvestment? Another big pay raise.
Reinvesting the dividends gives you four additional raises each year for each company you own. Five raises a year total for each company you own1.
The compounding power of five raises a year (per company you own) is pretty dramatic. In our sample portfolio for the 401K rollover, the first 11 months saw an 11.5% raise.
Let’s Put Your Elephant’s Big Pay Raise in Context
Did you get an 11.5% raise at your job?
And, it gets better. At the same time, we can conservatively project an additional 11% raise over the next 12 months.
These are the kinds of results you can achieve with your own Elephant’s Paycheck Blueprint, provided that you’re willing to change your perspective and focus (at least in part) on income as well as on net worth.
Not only is this a sound investing strategy, it sure is fun to get so many raises! ↩