Do you want to become rich? Then this post could be the first big step on that road!
Okay, so first of all, I have never defined on this blog when someone is rich. I will definitely link to a post when I do but for now, let’s keep it simple and say this:
You are rich when you achieved the state of wealth and additionally own $1,000,000.
I know for some people you are rich way earlier and others would also disagree with me as they think it takes much more to be rich. Some say richness has nothing to do with money. Anyway, I am a personal finance blogger and today I want to cover perpetual dividend raisers and how they can make you financially rich. So arguably with $1,000,000 on your bank account and a lot of site income, you are rich.
Perpetual dividend raisers are very important for dividend growth investing. Investing, in general, can solve both requirements to become rich. It’s probably one of the most passive forms of income (if you are not a day trader or do complex evaluations before buying a stock) and by receiving huge returns you can let the money work for you and get that $1,000,000 in just a few years (15+).
Before we dive into, I want to admit that I took some of today’s content from the books Get Rich with Dividends and Dividend Growth Machine. I highly encourage you to read one of the following books about dividend growth investing before you start picking stocks:
- Get Rich with Dividends by Marc Lichtenfeld. In my opinion, the best book on that topic. Tons of information and an easy-to-use-system to get started.
- Dividend Growth Machine by Nathan Winklepleck. A very short read (1-2 hours) but covers the basics. Good for total beginners but no hands-on-guide, so after this book, I’d read another book.
- The Single Best Investment by Lowell Miller. If you want to dive deep into the topic I can really suggest you read this book. It’s a little harder to read, especially for a non-native English person, but it covers everything you need to know.
What are perpetual dividend raisers?
So, before I tell you what a perpetual dividend raiser is, I want to tell you, why companies pay dividends in the first place.
The reason I like companies that pay dividends
If a company does well, they generate a profit during the business year. Now the management can decide if they want to use the money to grow the business (and potentially the profit) for the next year or if they pay a dividend to their investors. A combination of both is also possible (and what we’re looking for).
They will pay out a dividend if they think the investors can grow this money larger than they can by reinvesting it into the business. That means when they pay out a dividend they have their shareholders in mind and want the best for them and not just for the company. Sure, it’s always great if you have a bigger budget to work with even as a company but if you can’t use that money efficiently it’s better to pay some of it out to the investors.
This is one big advantage of companies that pay out dividends. But it’s not the only one. I’ve told you that a company can pay out a dividend if they made a profit. Technically, that’s not 100% true. They can even pay out a dividend if they haven’t done a profit by paying out some money out of their reserves but this will hurt the company hard and it can’t be done over a long time-period.
So if a company pays out dividends for several consecutive years it’s a good sign as they likely value their investors, act in their best interest and also have a healthy business that generates profits.
So now I’m able to answer the question.
Again, what are perpetual dividend raisers?
Perpetual dividend raisers are companies that have increased their dividend for several consecutive years. If a company pays out $1 in dividends through inflation you will receive less money every year. So if you look for perpetual dividend raisers these are companies that have increased the dividend payments for X years.
You can categorize them into the following:
- Dividend Kings: Increased their dividends for at least 50 consecutive years. These include companies like Coca-Cola (Symbol: KO) and Johnson & Johnson (Symbol: JNJ).
- Dividend Champions: Increased their dividends for at least 25 consecutive years. These include companies like Wal-Mart Stores (Symbol: WMT) and Becton Dickinson (Symbol: BDX).
- Dividend Contenders: Increased their dividends for at least 10 consecutive years. These include companies like Caterpillar (Symbol: CAT) and IBM (Symbol: IBM)
- Dividend Challengers: Increased their dividends for at least 5 consecutive years. These include companies like Eaton Corp. plc (Symbol: ETN) and QNB Corp. (Symbol: QNBC)
Note: Sometimes, especially when looking at European companies, you won’t find many champions and kings. In Europe, it’s much more common to maintain the dividends in a bad year. You will find companies with 30 years of maintaining (or increasing dividends) but only 5 consecutive years of increasing dividends. I like to count them in into my evaluation as I am an active investor in the European market because I don’t have to take care of exchange rates and at least they haven’t cut the dividends for a long time. However, make sure to check their dividend growth rate of the last years so you have still an indicator that the dividends are growing.
Now you may ask, why would someone invest in a contender if kings are out there? The reason is simple, the kings and champions are mature companies. You have a pretty safe bet that your dividend will be increased in the coming years but the price is already pretty high and don’t expect much jumps to the top. The reward and the numbers can be great for contenders and challengers. However, they come with a bigger risk.
With that said, you always have to make a trade-off between safety and higher returns. In general, perpetual dividend raisers are a very solid and safe investment and they have proven over several years that they are managed well.
Why perpetual dividend raisers don’t like to cut dividends
You’ve probably already heard the sentence: ‘Past performance is no guarantee for future results’.
That’s obviously true, however, what happens if a company cuts their dividends or maintains them after several consecutive years of increasing them?
That’s a change of the company policy and has a high impact on the way the investors will treat the company. They will lose a lot of their current investors as they changed the way the company is managed or they are performing pretty bad. This will drop the value of the shares significantly. That’s the reason why companies want to stay on top of that list of perpetual dividend raisers.
List? Wait, what list?
Exactly, you don’t have to randomly look for companies and try to find a company that pays out dividends long enough. You can simply use existing and updated lists. They don’t just list the companies but also order them into the categories and add some very useful values like dividend growth rate, yield or payout ratio. You will learn more about these values in another post. But today, I will already show you these lists.
- US perpetual dividend raisers: http://www.dripinvesting.org/tools/tools.asp
- European perpetual dividend raisers: https://eurodividendchampions.com/
- Canadian perpetual dividend raisers: http://www.dividendgrowthinvestingandretirement.com/canadian-dividend-all-star-list/
- UK perpetual dividend raisers: http://dividendchampions.uk/
Why and how dividend growth investing works
Let’s look at two very important values for dividend investors, the yield and the dividend growth rate of a stock.
Warning! These are not the only values you should use for your evaluation! I even look at another value (payout ratio) first before I take a look at the yield and the growth rate! This is just for demonstration purposes only! I will cover how I do my evaluation in a later post.
The percentage of the dividend to the stock price.
Dividend per share / price per share
A stock costs $100 and you will receive a dividend of $5.
$5 / $100 = 5%
Tells you how much of your investment you get back in the very first year. You want a high yield that is above the inflation rate. I try to find companies with at least 4% yield.
Dividend growth rate
The percentage value of the growth of the dividends.
I usually look this up in one of the lists above but you can calculate it with: Current dividend / Dividend (x years before) / x
We had a dividend of $5 and it has increased to $10 in 16 years.
$10 / $5 / 16 = 12.5%
The average value of growth the dividend will have annually. I try to find stocks with values above 10% but even 6-7% is okay for a short period. Make sure to look at 1-, 3-, 5-, and 10-year performance.
How the dividends will change over time
Let’s assume we use $10,000 to buy shares of a Company with a price of $100/share and a yield of 5% and a dividend growth of 10%. The table below shows the 20-year dividend payments.
What does this tell you? Your dividend will grow very nice and you can increase the dividend payments six-fold in 20 years! This will also ensure that you keep up with the inflation (avg. 3.4% per year) and build a nice site income (if your investment is large enough). At the end, even if the stock price of your investment won’t rise at all, you will make $10,000 to $38,637.50. This is an annual return of more than 19% without looking for a super hot stock or trying to find the next Facebook or Google. You simply take companies that are already successful.
Remember: By picking the stocks of companies who have paid dividends for several consecutive years, you will pick pretty safe companies and not any super speculative biotech company or invest in any cryptocurrency!
Dividend reinvestment or how to become rich with dividends
Again let’s take the example company above that pays a yield of 5% and you buy shares of them for $10,000.
If you do dividend growth investing you have two phases.
- Accumulation of dividends
- Spending your dividends
In the first phase, you want to reinvest all of your dividends.
You buy Company A with a yield of 5% and a price of $100. The dividend growth rate is 10% per year and you receive a dividend payment once a year. You invested $10,000 and reinvest just the dividends nothing more for 20 years. We assume a flat market where nothing changes for 20 years (and you’d make no money with index funds).
|Year||No. of shares||Yield||Dividends paid||Portfolio value|
Take a deeper look, after 11 years we have doubled our inital investment. This is a long time but after just another 3 we were able to triple it. After 20 years, our portfolio value has increased ten-fold!!!
That’s compounding at it’s best! And remember the stock market has an average annual return of 7.84%! We assumed it was 0% for 20 years and still we were able to increase the value that much!
Okay, to be honest, the market could have dropped during this period but this would even be better for us as we get more shares in reinvesting. I also have to admit that I didn’t reduce the calculation with taxes. But still, these are impressive numbers and this was only a 10k investment! Think about a 100k investment. This would turn into $1,065,421.95. Ka-Ching! 20 years and you are rich! Even after taxes with just an average increase in stock price, you would have a similar amount of money (and even more with a bear market).
As soon, as you have enough dividends you can stop reinvesting them and live from the dividend payments. With a good dividend growth rate and yield, you are likely to beat inflation and still grow your income every year.
With investing in perpetual dividend raisers you can become rich or at least wealthy in a few years if you constantly invest a small amount every month or start with a bigger sum and simply reinvest the dividends.
Thanks for reading my post today! I hope you get rich with this strategy. I will keep you updated on my progress in my monthly income reports. Let me know what you think about it in the comments or Twitter.