The Importance of Revenue Growth In Selecting Winning Investments

This is a guest post from JC, who writes about dividend investing on Passive Income Pursuit. JC has been a dividend growth investor since 2011 focusing exclusively on dividend paying stocks for his long term portfolios.

Over the last couple weeks I've been writing about how companies grow and why it's so important to see how the growth is coming because not all growth is created equal.  Today I wanted to give an example of the differences that can arise if you just look at the numbers as reported instead of digging into them yourself.  But first a quick recap.

Revenue growth is one of my favorite metrics to look at for a company.  I don't have any numbers to back up my claim, but I think you'll all agree that a growing revenue stream leads to rising profits which leads to my personal favorite, a sustainably increasing dividend.  It's pretty safe to say that you won't find many companies that have a lengthy dividend growth streak that haven't also grown their revenue.  That's why I feel it's so important to monitor the top line and how it's growing.

Companies have 4 ways to organically grow the top line and another way to manufacture that growth.

The 4 organic growth avenues are:

1.    Price Increases - Real

2.    Volume Growth - Real

3.    Market Share - Real

4.    New Products - Real

The truly excellent companies are able to capitalize on all 4 of these sources and take advantage of opportunities as they come.  Whenever you find a company that is able to increase prices while also growing their volumes you ears should perk up.

This is how I plan to become financially independent by 2018

While this site is mostly about dividend investing, the topic today will be more based towards personal finance. This is because I am increasingly starting to realize that how a person allocates their money is an important decision, which has a very high weight on whether someone can reach their ultimate goals and objectives. Investing is a subset of that capital allocation strategy. One should not be investing in a vacuum – investing needs to be used in conjunction with understanding your overall personal financial situation.

Many of you know that my expected annual dividend income is at around $15,000. I have also shared with you that my annual expenses range between $18,000 - $24,000/year. According to my estimates, my dividend income will be close to the top of my expense range sometime around late 2018. Most of my passive income will come from dividends.

I expect that I would grow my organic dividend income by 10%/year, as long as I reinvest dividends. The rest of the growth will come from putting new savings to work. This could potentially add close to $4,000 - $5,000 in forward dividend income by the end of 2018. I am estimating a high savings rate, a 10% annual growth in dividend income, and tax advantaged compounding ( as most of it will be in tax-deferred accounts). This means that my forward dividend income around the end of 2018 will be close to $22,000 - $23,000/year. As you can see, even this will lead to a “shortfall” of $1,000 - $2,000/year, relative to the top range of my expected annual dividend income. If I were to wait for another year, that could potentially hit and even exceed the top range of my estimated expenses. I have said that I expect to be fully financially independent by the end of 2018, so I should stick to this goal. On the other hand, that $22,000 - $23,000 in annual dividend income is at the top of the range for passive dividend income. So I would consider that a success.

Target: An Attractively Valued Dividend Champion on Sale

Target Corporation (NYSE:TGT) operates general merchandise stores in the United States and Canada. Target is a dividend champion, which has paid dividends since 1965 and raised them every year for 48 years in a row.

The most recent dividend increase was in June 2015, when the Board of Directors approved a 7.70% increase in the quarterly dividend to 56 cents/share.

The company's largest competitors include Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST) and Amazon (NASDAQ:AMZN).

Over the past decade this dividend growth stock has delivered an annualized total return of 6.30% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 6.80% average increase in annual EPS over the past decade. Target is expected to earn $5.28 per share in 2017 and $5.80 per share in 2018. In comparison, the company earned $5.25/share for fiscal year 2016.

Four Reliable Dividend Payers Boosting Distributions

My retirement strategy is focused on building a dividend portfolio of high quality blue chips, which are reliable dividend payers. For my dividend portfolio, I look for companies which can regularly grow their dividends for years. A long record of dividend increases is an indication of a strong business model that produces reliable earnings, revenues and cash flows.

One of the ways I monitor my dividend portfolio holdings as well as the list of dividend growth stocks is by reviewing the list of dividend increases. I usually try to focus on companies that have raised dividends for at least a decade, when reviewing the rate of recent dividend increases. I did this to come up with the list of dividend increases to review today:

The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. The company operates through four segments: Cleaning, Household, Lifestyle, and International. The company raised its quarterly dividend by 3.90% to 80 cents/share. This dividend champion has been hiking dividends for 39 years in a row. The ten year dividend growth rate is 10.40%/year. The rate of dividend growth has slowed down considerably since 2013. Currently, the stock is overvalued at 26 times earnings and yields 2.50%. At this stage, I would not be adding to my position in Clorox. The company seems like a decent hold, where dividends are reinvested elsewhere. It would be more interested on dips below $100/share.

The real cost of buying a new car

I am a fairly frugal person. An example of that is the fact that I drive a 15 year old car. I would likely keep driving this car until all is left is the steering wheel. The money I have saved always purchasing second hand cars would result in me being richer by hundreds of thousands of dollars over my lifetime. I do not see the point of buying an expensive new car every five years in order to get from point A to point B, when an older but reliable car can do the same thing for less.

Not everyone is like me of course, and I am totally fine with this. I sometimes realize however why some individuals would never accumulate a lot of money for their retirement. As someone in the accumulation phase, I have come to realize that the only inputs I have control over include:

1) The amount I can save and invest
2) The type of investments I choose to put my savings in
3) Maintaining low transaction and tax costs associated with investments
4) Sticking to my strategy even if someone is (temporarily) getting rich faster than me