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Building a Dividend Growth Portfolio with Tomorrow’s Dividend Aristocrats

If you’ve ever listened to Andrew on his podcast then you know that Andrew is the self-proclaimed DRIP King!  You might know this but always wonder why…well, let me show you the true power of having a great performing dividend growth portfolio.

In the past I have written about the importance of Dividend Reinvestment Plan, or DRIP which gives you a good 101 entry into what exactly DRIP is and the importance behind it.

Essentially, DRIP is when you take the dividends that you’ve received and then they’re automatically reinvested right back into that same stock instead of you simply just taking the cash.

In my previous blog, I walk through an example how if you were to invest $2000, and DRIP your investments, you could end up with over $235,000 in 50 years…from just $2000!  But, if you didn’t DRIP your investments, and instead you just banked that dividend and held onto it – your value would be just under $160,000.  Still an amazing investment, but a solid $75,000 less than the DRIP option.

So – you’ve decided that you want to start to create your own DRIP portfolio – where do you start?  Well, my #1 piece of advice is to make sure you stay within your circle of confidence.  Only invest in companies that you know, or are interested in getting to know, especially when you’re first getting started. 

Personally, I think Dividend Aristocrats are overrated…I like to find the future Dividend Aristocrats!  Instead of finding that company that has already made its way to that prestigious Dividend Aristocrat title, start smaller. 

Look for a company that has shown many consecutive years of increasing dividend payments but maybe they’re not quite in the S&P 500 or maybe they’re just not at the 25-year mark.  Maybe they were a company that split from their parent company but their entire existence they’ve increased their dividend!

These are the types of things that I try to look for.  I’m essentially trying to find a company that is showing the promise of a Dividend Aristocrat but simply just hasn’t had the time to completely flourish into that level.

A great place to start is Dividend.Com as they have a really good list of companies with their current share price, annual dividend, dividend yield and the amount of years that they have been paying that dividend.  Unfortunately, if you want much more than that, you’re going to have to pay for their subscription.  But this is a great starting point for you to start taking a look at some of these potential fits for your portfolio.

My recommendation would be to scroll down to companies that have been distributing a dividend for < 20 years and then seeing if any really catch your eye or that you’re familiar with the company.  The first name that I saw that really stuck out to me was Costco.  Costco has been distributing a dividend for 16 years and their dividend yield is only .84%.

Personally, I prefer finding a company with a low dividend yield in this case.  I think that if I can get in on the ground floor then the company is only going to continue to increase their dividend from year to year and eventually hit that Dividend Aristocrat status.

When I clicked on Costco, this screen came up:

It has some high-level dividend data, but if we really want to understand the company and their dividend better, then we need to get to the meat and potatoes!  If you scroll down more, you can see their Dividend History:

If you just click on that ‘expand’ button it goes all the way back to 2004 when they implemented their dividend.  If you want to download the spreadsheet then you’re going to have to become a paid subscriber but guess what – just highlight the data, copy it and then paste it into an excel document. 

Takes an extra 15 seconds and is completely free!

Once you do that, the process is very simple!  Since the dividend is broken down by each quarterly payment, you just need to add together the first four dividend payments for year 1, then the next four for year 2, so on and so forth. 

I have done that for you and then also included the increase over the year before as well as the percentage increase, shown below:

As you can see, Costco has met one of their most important requirements to be a dividend aristocrat of continuing to increase their annual dividend each year, and they’re maintaining a 12 – 17% increase over the prior year which is pretty substantial growth. 

I mean, if your entire portfolio grew at 12 – 17%, you would be pretty happy, wouldn’t you?

Now, you should go out and buy 100 shares of Costco right now, right?!

WRONG!

As with any investment, you need to look at the entire company as a whole and not just their dividend distribution.  Take a look at their financials as a whole to try to get a good feel whether the company is undervalued. 

The best way that I can describe a dividend is to envision it as a side dish.  While a side dish is essential for almost every single meal, I would never pick a meal just because of the side dish.  And if I get a meal without a side dish, the entrée better be pretty freaking good!

Understand better?  Hopefully.  If not, I bet you’re hungry at least.

The best way to efficiently run the numbers is to put the financials into the Value Trap Indicator that Andrew has created for us all to use. Using the VTI not only ensures that you’re getting accurate financial ratios, but also that you’re focusing on the correct ratios!  I can’t tell you how much I struggled when I first started investing about what ratios I should really key in on and how much they all matter. 

Lucky for us, the VTI does this for us.

At the end of the day, a dividend growth portfolio is a must have.  There are few things more exciting than getting a dividend payment and immediately seeing it be put right back into that same company, therefore generating more dividend producing shares for the next quarter. 

Don’t believe me?  Try me.  I bet you’ll get hooked on Dividends.