A 25% Bigger Raise This Year vs Last

Today’s excit­ing post is about how your Elephant’s Paycheck rais­es increase over time. We’ll have a look at GE as a demon­stra­tion because I think we’re in for some good news in December. I believe this year we’ll get a 25% big­ger raise than we did last year. Pretty excit­ing, right?

Remember, The Elephant’s Paycheck invest­ment strat­e­gy at its core is sim­ple to under­stand. Invest in div­i­dend aris­to­crats and allow div­i­dend rein­vest­ments to ampli­fy your rewards. With these tech­niques, mea­sure your Elephant’s Paycheck rather than the size of your port­fo­lio as a way to help you focus on what real­ly mat­ters (both when it comes to mea­sur­ing results, and keep­ing track of the com­pa­nies you own).

Why div­i­dend aris­to­crats?

Because they increase their div­i­dend every year. With each increase, your Elephant gets a raise. In plain-old-English: With each div­i­dend increase, you’re earn­ing more.

An inter­est­ing thing hap­pens over time (time mea­sured in years):

Dividend increas­es get larg­er over time.

Looking at GE’s Dividend

GE isn’t a div­i­dend aris­to­crat. They were until the recent finan­cial melt­down. If I remem­ber cor­rect­ly, they had raised their div­i­dend every year for 32 years before it was cut in 2009. Since 2010 there have been five GE div­i­dend increas­es (two a year in 2010 & 2011, and December 2012). More impor­tant­ly, the CEO has indi­cat­ed that restor­ing the div­i­dend is a key pri­or­i­ty.

For the last cou­ple of years, GE’s div­i­dend has been raised 8¢/year. First from 60¢ ((Technically, the 15¢ div­i­dend before the raise was only paid twice, so it was­n’t real­ly an annu­al rate of ¢60. The annu­al div­i­dend amount at the time of the increase was actu­al­ly 58¢. However mea­sur­ing the increase from 58¢ would  over­stat the affect of the increas­es we’d usu­al­ly see because the div­i­dend had been increased twice that year.  I’m mak­ing a more con­ser­v­a­tive argu­ment since in most cas­es div­i­dends are only raised once a year. This con­ser­v­a­tive argu­ment does­n’t weak­en the ‘rule’ that div­i­dend increas­es lead to big­ger rais­es over time.)) to 68¢, then from 68¢ to the cur­rent amount, 76¢. Percentage-wise, the increas­es were about 13% and 12% respec­tive­ly.

A sim­i­lar 8¢ increase this year would be a still respectable 10.5% raise (and real­ly good news).

However, this year, for the first time since the melt­down, GE’s finan­cial sub­sidiary has start­ed pay­ing a div­i­dend up to cor­po­rate (mean­ing sim­ply, GE as a whole has more cash to pay out), and GE is doing quite well, beat­ing expec­ta­tions this quar­ter.

I sus­pect that instead of an 8¢ raise, we’ll get 10¢ this year ((If not this year, most cer­tain­ly next year.)). That 10¢ rep­re­sents just over a 13% raise, with­in the bounds of what GE has increased recent­ly. It’s not an out­ra­geous thought that the raise would be increased.

A Bigger Raise, But What’s the Big Deal About 2¢?

A 10¢ raise com­pared to an 8¢ raise is a 25% larg­er raise than last year!

Think about your own pay­check, and your raise this year (if you got one). Have you got­ten two con­sec­u­tive year­ly rais­es? Was the sec­ond 25% larg­er than the first? That’s what your Elephant is achiev­ing.

Keep in mind, that 25% increase over last year’s raise does­n’t include any of the pay raise your Elephant achieves by rein­vest­ing div­i­dends over the course of the year. More plain-English: This year’s raise is some­what more than 25% big­ger than last year’s because you own more shares now ((How many more would depend on the exact pur­chase price of the rein­vest­ments and so esti­mat­ing is more like guess­ing, and not worth much.)).

How fun is that? Not only are you get­ting a big raise year-after-year, your raise is get­ting larg­er over time.

I’m not will­ing to update the Projected Raise ((This is one of the met­rics we track on the sam­ple port­fo­lio track­er; learn more by try­ing our free 10-part email course.)) in the Tracker on the hope that GE will increase it’s div­i­dend raise, I’d like to keep the pro­jec­tion con­ser­v­a­tive by stick­ing to last year’s val­ue. However, it cer­tain­ly is nice fan­ta­size about a rea­son­ably like­ly 25% big­ger raise with­in the next 17 months or so.

How is This Thinking Different?

We’re not won­der­ing about how the mar­ket will treat GE’s results over the next 5 months or so, and what the stock price will be. We’re not sim­ply hop­ing the stock price goes up so we have a larg­er nut, and unre­al­is­ti­cal­ly hop­ing it does­n’t drop back down. There’s a deep track record of div­i­dend rais­es and a man­age­ment focus to con­tin­ue. That’s some­thing we can use to shift our minds from wish­ful think­ing to struc­tured fan­ta­siz­ing. It’s like fan­ta­siz­ing about your wed­ding once you’re engaged, com­pared to naive­ly day­dream­ing when you’re 16.

By the way, anoth­er GE rein­vest­ment is going to hap­pen today (yay!), so I’ll put anoth­er post up soon describ­ing how nice­ly that impacts our sam­ple port­fo­lio’s Elephant’s Paycheck.

Afterthought

This post is not meant to be a pre­dic­tion. Predicting the future is quite hard, and I don’t want to be in that busi­ness. This post is meant to illus­trate the math behind how div­i­dend rais­es lead to a big­ger raise for your Elephant over time.