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.

Graphs of both portfolio growth and income growth over time

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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