The Single Most Ignored Metric by Investors

I woke up the other day to see Spectra Energy, one of the com­pa­nies in our sam­ple port­fo­lio1, had jumped 10%. I thought it was a mis­take, but looked into it any­ways2.

Turns out they did some finan­cial trans­ac­tion with a sub­sidiary that allowed them to increase their div­i­dend-raise fore­cast from ¢8/year to ¢12/year.

Dividend Increases are The Gift That Keeps Giving

It’s funny. The 10% increase in the stock price was good news, but a one-time piece of good news. The fore­casted 50% increase in div­i­dend raises over the next few years is a gift that keeps on giv­ing. Yet peo­ple seem to ignore the gift that keeps on giv­ing, and instead focus on the one-time hit of good­ness rep­re­sented by a stock price jump. We are so com­pletely con­di­tioned to look at our port­fo­lio size and not our port­fo­lio income as a mea­sure of suc­cess3 and this is a per­fect exam­ple.

This announce­ment means the div­i­dend will be higher4 at each rein­vest­ment, so each rein­vest­ment accel­er­ates my Elephant’s raises.

It means that we can be con­fi­dent of div­i­dend increases for the next few years (Spectra is not a div­i­dend aris­to­crat, so know­ing to expect raises is reas­sur­ing).

It means that the div­i­dend increases will beat infla­tion, so my Elephant is stay­ing ahead of the “value of money curve“5.

Dividend-Raise Press Releases

Dividend fore­casts are not made lightly. Missing a pub­lic fore­cast is bad, hit­ting it pro­vides no upside. Spectra is clearly focused on a qual­ity div­i­dend pay­out; this is their sec­ond div­i­dend fore­cast news announce­ment this year. The first in January, shared an intent to raise their div­i­dend at least ¢8 a year for “the next sev­eral” years.

They did change their word­ing this time. January’s release said “at least ¢8 per year”. This announce­ment used the phrase “approx­i­mately ¢12”. It seems that they’re giv­ing them­selves a lit­tle wig­gle room in case this was too aggres­sive, but it’s def­i­nitely higher than the orig­i­nal ¢8 fore­cast. The mar­ket loved the news, send­ing the stock up 10% for the day.

Let’s have a quick look at the math behind our Elephant’s upcom­ing raises. ¢12 is a ~10% raise. They’ve announced that they’ll keep the ¢12 raise up for a few years, but the % raise will decrease as the div­i­dend gets higher. Currently the div­i­dend is $1.22, so a ¢12 raise is a 9.84% raise. Next year, after a ¢12 raise the div­i­dend will be $1.34, so a ¢12 raise is ‘only’ 9%. Year 3, 8.22% raise. You can see that the %-raise decreases over time if the increase is a fixed amount6.

Pivoting Your Perspective to the Elephant’s Paycheck

In addi­tion to under­stand­ing the power of div­i­dends and div­i­dend raises there are 2 key points we can use as a way to under­stand the Elephant’s Paycheck a lit­tle bit bet­ter.

  1. Most peo­ple will judge their suc­cess only by port­fo­lio growth. Therefore, they’ll see last week’s 10% stock price jump in their rear-view mir­ror and feel that they missed out.The dif­fi­culty is that you can’t pos­si­bly know about some­thing like that ahead of time. If you did, espe­cially as an indi­vid­ual investor, every­one would know and the stock wouldn’t jump like that (or you’d be insider trading).You can’t really know ahead of time, but we act as if we should be able to know. This adds to our frus­tra­tion with invest­ing, our feel­ings that it’s not fair (some­one must have known, we think), and our expec­ta­tions that we should be able to invest in a way that helps us cap­ture these sorts of moves (in turn lead­ing to erratic invest­ing behavior).If instead, you value the div­i­dend raise, you know it’s increas­ing. It’s a sure thing (or as sure a thing as it gets). Measure that raise and you’ll feel good about what you’re doing and know that you’re mak­ing mea­sur­able pro­gress towards your retire­ment goals.Don’t for­get, you’re also increas­ing your pur­chas­ing power over time. You’re actu­ally get­ting ahead of the Jones’.
  2. Sometimes com­pa­nies tell you what their div­i­dend plans are. In our free 10-part email course we spend a whole lesson (lesson #10) talk­ing about what news to pay atten­tion to and where to get it. This is the sort of news you want to pay atten­tion to so that you learn, but don’t make your­self crazy. This infor­ma­tion doesn’t always come in the form of a press release. Sometimes, it’s talked about on con­fer­ence calls (Look at the bot­tom of page 24, or search for ‘pay­out ratio’ — it’s the first search result).

[Update] In the pic­ture at the top, the blue line is the size of the Elephant. Notice how it goes up and down. It’s an emo­tional roller coaster. The red line, the one going up and to the right con­sis­tently, is the Elephant’s Paycheck. We like things that go up and to the right almost-all the time. When you invest and are rewarded by ‘pos­i­tive results’ you con­tinue to invest. If you mea­sure your Elephant’s Paycheck you have a pos­i­tive reward cor­re­lated to your behav­ior, which in turn moti­vates good behav­ior (and reduces anx­i­ety).

  1. To get access to the sam­ple port­fo­lio, for now, you’ll need to sign up for our free 10-part email course

  2. A jump that big must have been related to news, so I went to Spectra’s investor rela­tions page to see what hap­pened. 

  3. I’m reminded of a key rule of busi­ness school that “cash flow is king.” In busi­ness school ter­mi­nol­ogy, com­pa­nies man­age to their cash flow state­ment, not their bal­ance sheet. Individual investors do the oppo­site. We man­age to our bal­ance sheet (our port­fo­lio size) and not to our cash flow. 

  4. Spectra usu­ally increases the div­i­dend in November. 

  5. I just made that phrase up. It means, his pay­check stays ahead of the increase in prices, so each year he is gain­ing spend­ing power. 

  6. Remember, we get raises from both div­i­dend increases AND rein­vest­ments, so these raises are only one com­po­nent of the increases. 

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