Dividend Aristocrats: The Gift That Keeps on Giving

The Elephant’s Paycheck invest­ment strat­e­gy for 401K rollovers is sim­ple to under­stand. Invest in div­i­dend aris­to­crats and allow div­i­dend rein­vest­ments to ampli­fy your rewards.

What are div­i­dend aris­to­crats?

Aristocrats, not Aristocats

Aristocrats, not Aristocats

They’re com­pa­nies that have increased their div­i­dends every year for at least the past 25 years in a row. They’re also larg­er com­pa­nies and pay reg­u­lar and con­sis­tent div­i­dends, but key point is that div­i­dend aris­to­crats have increased their div­i­dends every sin­gle year for at least the past 25 years.

By increas­ing their div­i­dends, the­se com­pa­nies give their investors a raise each-and-every year.

Can you imag­ine get­ting a raise every sin­gle year, like clock­work?

Can you imag­ine that the raise beats infla­tion, so your pur­chas­ing pow­er increas­es over time?

Can you imag­ine that, unlike your salary, the rais­es you get over time con­tin­ue to be mean­ing­ful, instead of flat­ten­ing out after a decade?

In many of our careers we’ve moved up and switched jobs to get to the salary we are now. At some point, we’re at a lev­el that we’ll stay at for a while at which time, rais­es get a lot small­er (and the­se days less fre­quent). The dimin­ish­ing raise… that doesn’t hap­pen to our Elephants.

Who Decides the Criteria for the Dividend Aristocrats?

The div­i­dend aris­to­crats are an index cre­at­ed and tracked by Standard & Poors (S&P).

You can get the full list of aris­to­crats by select­ing the “con­stituents” tab, and then the “full con­stituents list” link from the S&P div­i­dend aris­to­crats index page.

A Dividend Aristocrats Example

Let’s have a look at P&G’s div­i­dend his­to­ry and what it means to our Elephants.

We’ll start with their lat­est div­i­dend increase press release, from April 2013. The title of the release? P&G Gives Your Elephants a 7% Raise.

Notice how proud they are of their div­i­dend his­to­ry too:

P&G has been pay­ing a div­i­dend for 123 con­sec­u­tive years since its incor­po­ra­tion in 1890. This marks the 57thcon­sec­u­tive year that the Company has increased the div­i­dend.

As I point out in Lesson #4 of our free 10-part 401K rollover email course, this atti­tude by P&G man­age­ment around their div­i­dend his­to­ry trans­lates into reduced invest­ment risk for you (and your Elephant). I mean, do you want to be the per­son that breaks the 123 year chain of pay­ing a div­i­dend? Or the 57 year chain of increas­ing it con­sec­u­tive­ly? They’ve been increas­ing their div­i­dend every year since 1956. That’s a long time.

Dividend Aristocrats Raises Accelerate

This is the excit­ing part. Over time, your rais­es get big­ger and big­ger (and your Elephant doesn’t even need to work any hard­er).

I have no choice but to use a big word. Absolute val­ue. If you get a 10% raise, it’s 10% regard­less if you were earn­ing $10,000 or $100,000 a year. However, that 10% raise has a dif­fer­ent “absolute val­ue” (or “absolute dol­lar val­ue”). 10% of $10,000 is an absolute raise of $1,000. On a $100,000 salary, the absolute val­ue of a 10% raise is $10,000.

We like to look at per­cent­ages, because they’re more moti­vat­ing (Lesson #9, an insight­ful lesson in moti­va­tion and track­ing your portfolio’s suc­cess). However, it’s impor­tant to under­stand when switch­ing to absolute val­ues makes a big dif­fer­ence. And, in the case of the long term rais­es your Elephant receives, it makes a big dif­fer­ence.

As div­i­dends are increased over time, the increas­es get larg­er because they are based off of larg­er div­i­dends. Even if the % of the raise is reduced, it trans­lates into larg­er and larg­er amounts over time.

Say what?

Have a look at P&G’s div­i­dend his­to­ry and you’ll see what I mean. Broadly speak­ing1, P&G’s div­i­dend in 2002 was $0.84. By 2013, it was increased to ~$2.40.

The increas­es over those 11 years are not equal. In 2003, the div­i­dend was raised a very gen­er­ous 9.5%. An absolute increase of $0.08.

2013’s increase, from ~$2.24 to $2.40 is just over 7%. Notice that’s a small­er per­cent­age, but on a much larg­er num­ber. Since it’s 7% of $2.24 — it means a raise of ¢16. Double the raise our Elephant was get­ting just over a decade ear­lier.

Here are the punch­li­nes, ready?

  • Your div­i­dend has tripled in those 11 years since the orig­i­nal invest­ment. If they were pay­ing ~3% div­i­dend back then, you’re now earn­ing ~9% on your orig­i­nal invest­ment even with­out even count­ing any rein­vest­ed div­i­dends.
  • You’ll keep earn­ing that 9% regard­less of whether the stock goes up or down.
  • Based on 57 years of his­to­ry, you’ll be earn­ing even more next year.
  • With his­to­ry still as a guide, 7% increas­es cer­tain­ly beat infla­tion so you’re actu­al­ly “get­ting wealth­ier”.
  • Finally, your increas­es are get­ting larg­er each year, as you can see in “just” 11 years, the size of the increase has dou­bled from ¢8 to ¢16.

It’s impor­tant to real­ize that unlike the stock price going up, the div­i­dend being increased and the increas­es get­ting larg­er are not sub­ject to the whims of “the mar­ket”. It’s not just wish­ful think­ing to hope bet they go up. To hope you’ve timed the mar­ket right, to buy low and sell high. Creating an Elephant’s Paycheck Blueprint gets you out of the “stock mar­ket game” and into a dis­ci­plined approach to prepar­ing for your finan­cial future. An approach where you can project your results instead of try­ing to pre­dict them.

Of course, if you’ve cre­at­ed an Elephant’s Paycheck Blueprint Portfolio, you’ve been rein­vest­ing your div­i­dends and  have a lot more P&G stock than when you start­ed. That extra stock dra­mat­i­cal­ly improves your Actual Results even more than we’ve just dis­cussed here.

  1. We’re strict­ly count­ing the annu­al div­i­dend amount as announced by the board of direc­tors in that year. For exam­ple, this year, the 7% raise brought the div­i­dend to a rate of $2.40. That’s the num­ber we’ll refer to for 2013, when in fact, the actu­al div­i­dend paid is less. This helps sim­pli­fy the dis­cus­sion with­out mak­ing it any less valid. 

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