How I Use Frugality to Accumulate Wealth

In a previous article I discussed that I am on track to have my dividend income cover my expenses sometime around 2018. I received a few questions on how I am able to achieve that. I have mentioned before, that I do not like to talk about myself, because I personally find it a little tacky. (this statement in itself sounds like humble-bragging, which is also tacky)

I think I have taken for granted certain topics such as saving, and the power of compounding. I always assumed that it was common sense that people who came to this site would not be interested in learning how I drive a 15 year old car, how I graduated college without any debt but $2,000 in the bank and no debt, and that my frugality has helped me save enough to build my portfolio since 2007.

I also naively assumed that everyone who already saves money sees dividend growth investing as a tool to achieve their financial goals and objectives, be that traditional retirement, early retirement, financial independence or something else. Based on many interactions I have had over the years, I think that I was wrong in my assumptions on what constitutes common sense and what doesn’t. Given the rapid growth of the site readership since its inception in 2008, it is reasonable to expect that not everyone will be on the same page when it comes to various topics.

The first thing about investing is that in order to invest, you need to have money. In order to obtain that money, you need to utilize your most important asset to either find a job, or start a business. You then have to make sure that your expenses are less than what you earn. This surplus cash is then invested every month in dividend growth stocks. The formula to achieve wealth is really simple:

17 Dividend Aristocrats for Further Research

Last week, I shared the 2017 list of dividend aristocrats. The most common question I received focused on which companies are attractively valued today, according to my criteria.

The criteria I use have been well publicized over the past decade. They are simple, but effective tools to help me identify companies to include for my diversified dividend portfolio. Obviously, since we are looking only at the list of dividend aristocrats, we are starting out with a group of companies which are already pre-screened for quality. After all, only a company with a strong business model can afford to raise dividends like clockwork for 25 years in a row, or longer. I love companies which can afford to raise dividends like clockwork. Warren Buffett also loves companies that raise dividends like clockwork. Some of Berkshire's largest positions such as Coca-Cola, American Express, Geico, IBM, Wells Fargo are examples of high quality dividend growth stars which have compounded nicely for decades.

The first criteria is to focus on companies whose P/E ratio is below 20. I focus on this rule, in order to avoid overpaying for companies. As we all know, earnings per share can be lumpy in the near term, and distorted by one-time events. While they are not perfect, I use forward earnings as a shortcut to quickly estimate earnings power without doing too much digging in the initial stage.

The second criteria is to avoid companies which have a dividend payout ratio above 60%. I want to focus on companies that can easily cover their dividend. I take the concept of margin of safety very seriously.

Four Dividend Growth Stocks Raising The Bar

As part of my monitoring process, I review the list of dividend increases every week. I usually focus my attention to companies that have raised dividends for at least a decade. It is helpful to see companies I own that keep growing their dividends, years after they have been purchased by me. I also find it helpful to review this list for hidden dividend gems. From there, I review the basic fundamental performance over the preceding decade. I like to see dividend growth which is supported by growth in earnings per share.

Over the past week, there were four companies which raised dividends and also had at least a ten year record of annual dividend increases. The companies include:

The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International. The company raised its quarterly dividend by 20.20% to 31.25 cents/share. This marked the 22nd consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate is 22%/year. Earnings per share increased from 83 cents/share in 2008 to $3.46/share in 2017. The company is expected to earn 3.91/share over the next fiscal year. Currently the stock is selling for 19.50 times forward earnings and yields 1.70%. Check my analysis of TJX Companies for more information about the company.

Dividend Aristocrats List for 2017

The S&P Dividend Aristocrats index is an elite group of companies, members of the S&P 500, which have managed to increase dividends every year for at least 25 consecutive years.

To qualify for membership in the S&P 500 Dividend Aristocrats, a stock must satisfy the following criteria:

1. Be a member of the S&P 500
2. Have increased dividends every year for at least 25 consecutive years
3. Meet minimum float-adjusted market capitalization and liquidity requirements defined in the index inclusion and index exclusion rules below.

Those companies deliver both strong income growth and strong total returns over time. The consecutive years of dividend increases serves as a filter for quality – only a company with a stable business model can afford to grow the business, increase dividends and intrinsic value over a quarter of a century. The ability of management to maintain stable or increasing dividends indicates the quality of a firm’s earnings and its growth prospects.

The index was started in 1989, and had 26 original components. The number of components in the index has ranged between 26 in 1989 to 64 in 2001. I used this list as a primary tool for identifying companies with strong brands, which have raised distributions through both good and bad economic conditions. Check this post Historical changes of the S&P Dividend Aristocrats Index for reference.

Raytheon (RTN): A High Dividend Growth Stock to Consider on Dips

Raytheon Company (RTN) develops technologically integrated products, services, and solutions worldwide. It operates through five segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint.

The company is a dividend achiever, which has managed to grow dividends for 13 years in a row. Last week, Raytheon raised its quarterly dividend by 8.90% to 79.75 cents/share.

Over the past decade, the company has delivered an annualized total return of 12.50%/year.

This strong performance was driven by the low valuation a decade ago, consistent dividend growth, consistent share buybacks, and strong earnings per share growth.