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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