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).
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¢1 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 year2. 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 now3.
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 Raise4 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.
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.
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. ↩
If not this year, most certainly next year. ↩
How many more would depend on the exact purchase price of the reinvestments and so estimating is more like guessing, and not worth much. ↩