Dividend Aristocrats and Long-Term Gains

02/23/2015 9:00 am EST


Jimmy Mengel

Editor, Outsider Club

For long-term investors looking to build a retirement nest-egg, Jimmy Mengel suggests a dollar cost average strategy focused on high quality dividend paying stocks. The editor of The Crow's Nest also shares several of his favorite stock ideas.

Steven Halpern: Our guest today is Jimmy Mengel, editor of the Crow's Nest Newsletter. How are you doing today, Jimmy?

Jimmy Mengel: Great Steve, how are you doing?

Steven Halpern: Very good. Thanks for joining us. For long-term investors, you emphasize the importance of dividends. Could you expand on that?

Jimmy Mengel: Yeah, I can. Essentially, when it comes down to it, I'm very risk adverse, and I'm also rather lazy, so I don't really like to watch my portfolio every day.

Typically, what I focus on are long-term blue chip stocks, specifically, dividend aristocrats that I know are going to continue to raise their dividend. I know I can plug them into a dividend reinvestment program and kind of set it and forget it.

Steven Halpern: Now, you mentioned dividend aristocrats. What qualifies a stock to be in that select group?

Jimmy Mengel: Well, yeah, it's kind of funny. It's a weird throwback name that sets apart companies from the majority of stocks.

When you think of aristocrat, you kind of think of the highest order of social class; barons, dukes, lords, any hoity-toity guys back in the day that were very wealthy. But when it comes to stocks, these are kind of like the royalty of blue chip stocks.

To qualify as a dividend aristocrat you have to have raised your dividend each and every year for 25 years in a row. That's pretty much all it takes. It's funny because I gave a speech at the Toronto Money Show and I kind of threw that term around loosely.

I was talking about dividend aristocrats as if everyone knew what I was talking about, but after the speech, I had 20 or 30 people lined up saying, “hey, tell me about these dividend aristocrats, what in the world is that?”

It's that simple. If you raise your dividend every year for 25 years, you are classified as a dividend aristocrat. It shows that you can continue to raise enough money to reward your shareholders year after year for a long period of time.

Steven Halpern: Now, another important part of your underlying strategy is dollar cost averaging. For those who may not be familiar with that approach, could you briefly explain what dollar cost averaging is and what the benefits of that kind of strategy are?

Jimmy Mengel: Yeah, absolutely. If you are buying one of these dividend aristocrats, or even just a dividend paying stock, often times, I don't particularly think of that as a short-term solution. I think of that as you hold it for 10, 20, or 30 years and they are kind of your retirement stocks.

Instead of, say, buying a stock one day for, say, $50 a share and just dumping all of your money into it, what I like to do is kind of ride the trends. It's a pretty simple strategy if you can, kind of, keep your cool.

But, it does require you to have the stomach to stick to the plan, especially when the markets drop, you just want to keep buying. Essentially, dollar cost averaging is buying a fixed dollar amount of a particular stock regardless of the price.

I think a lot of retail investors generally fail at this because they have it all backward. They like buying the hype and then they sell the fear. When you dollar cost average, the more shares you purchase when prices are low, it drags down your entire cost of your investment.

Purchase more shares when the prices are low and then you buy fewer when the prices are high and you kind of ride the wave along with the stock. The end result is that over time the average cost of your shares will become much, much smaller as if you were to dump all of your money into a stock all at the same time.


Steven Halpern: It's really the opposite of trying to time the market. In this case, you are really eliminating the timing aspect and making the commitment to what you believe is a high quality stock.

Jimmy Mengel: Yeah, absolutely. It goes back to my risk aversion. I would much rather space out all of my purchases over a period of time then just double down on one particular stock.

Steven Halpern: Let's turn to some individual stocks that you believe qualify to be bought on an on-going basis for a long-term portfolio. At first you highlight Johnson & Johnson (JNJ), the healthcare leader. What's the attraction here?

Jimmy Mengel: Well, Johnson & Johnson is pretty much the quintessential dividend aristocrat. When I first started writing financial information, a colleague of mine told me his Johnson & Johnson story, which really opened my eyes to dividend investing, dollar cost averaging, and dividend reinvestment programs.

Maybe a decade or two ago, he had started his Johnson & Johnson position with a few thousand dollars. What he did is he used that dollar cost averaging over the years to buy up a bunch when it was low and then ease off when it was high.

From a few thousand dollars that he started with, he accumulated almost $500,000 in a little more than a decade. It's all by following the same formula.

With Johnson & Johnson, he set up a dividend reinvestment program and he continued to dollar cost average his position whenever the market seemed like it was low. He would still buy it when it was high too but he would just buy less.

You kind of eliminate a lot of the risk with the stock market tanking and then you ease up when it hits highs. He accumulated a very attractive position on a safe blue chip stock, where he pretty much knew he wasn't going to lose his money, but in the long run, if you ride the trends, you can really accumulate a ton of stock.

In terms of the dividend reinvestment program, if you are reinvesting all of the dividends in something like Johnson & Johnson, you just buy up more and more shares when the market takes a hit.

Before you know it, it's kind of the set it and forget it thing, you all of a sudden have a war chest of a dividend stock that is just compounding upon itself and growing and growing without you having to do much work.

Steven Halpern: Another dividend aristocrat that you point to is the aerospace giant, Boeing (BA). Could you share your thoughts on that company?

Jimmy Mengel: Yeah, that's another great dividend aristocrat. In 2004, Boeing had an incredible year. It set a record for the most commercial airplanes delivered in one year, which I think was 720 planes that broke its previous record from the year before. I think that they had about 1500 orders for a price of $232 billion.

If you look at the rest of the aerospace industry, Boeing isn't going anywhere. They are continuing to deliver planes, and as far as being a dividend aristocrat, they have increased their dividend for the past 40 years.

That's another thing that I kind of look for, if you can continue increasing your dividend for that long it means you are making enough money to reward your shareholders.


With Boeing as an example, they just hit a 52-week high. I think most analysts' price estimate sees them reaping another 17% to 18% gain over the next year or two. It's a good long-term position. It's a company I don't think is going anywhere and they are going to continue to deliver that dividend.

Steven Halpern: Finally, let's turn to one name that might not be as familiar to some listeners and that's Nucor (NUE).

Jimmy Mengel: Yeah, it's funny, because when I looked through the dividend aristocrats list most people will have heard of most of these, so you've got your Coca Colas and some of the biggest blue chips you can think of, but Nucor kind of is under the radar.

They are the largest steel producer in the United States and they also are the largest recycler of any material in all of North America. They are a steel producer and it's kind of a fun fact about their business, they have not laid off an employee because of a work shortage in 30 years.

Then, it has to do with the fact that they offer a pay per performance employee incentive program. Employees get up to 25% of their salary based on the return on assets of their plans.

It incentivizes workers to keep them humming along and they reward that hard work, which is interesting in a cyclical industry like steel, which can be pretty volatile based on world production.

As far as dividend aristocrats go, it's actually far more volatile than most of the ones I cover. That being said, though, over the last ten years, they have returned 65%.

That's on top of a 3% dividend yield and it's also considering that they have hit a low of around $23 over those ten years and touched highs over $75.

It kind of works in perfectly with the dollar cost averaging because when the cycle starts heading downward, you can really scoop up a lot of shares during those low turns and then ride them all the way up to the cyclical highs.

Long story short, Nucor has raised dividends for 168 consecutive quarters. As I said, they have a 3% yield so that's not too shabby, especially if you load it into a dividend reinvestment program and continue compounding those dividends.

Steven Halpern: Again, we've been speaking with Jimmy Mengel, editor of the Crow's Nest. Thank you for taking the time to join us today.

Jimmy Mengel: Oh, sure thing Steve. I appreciate you having me.

Subscribe to the The Crow's Nest here...

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS

Keyword Image
Retail Sector is a Short
03/21/2019 6:00 am EST

The December retail sales report was a disaster, notes Landon Whaley, who recommends shorting the SP...

Keyword Image
2 Ways to Bet on BDCs
03/21/2019 5:00 am EST

Business development companies (BDCs) lend money to private companies in the form of fixed and varia...