ETF Edge - Dividend Growth in 2020

Episode Date: January 31, 2022

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The ETF Edge podcast is sponsored by InvescoQQQ, Supporting the Innovators Changing the World, Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you are in the right place. Every week we're bringing you interviews and market analysis and breaking down what it means for investors. I'm your host, Bob Pisani. Today on the show, we'll discuss how to navigate the choppy waters in this market. Could 2022 be the year of the dividend? Are they finally stealing the show from corporate buybacks? And how can you get spot on with some of these companies that are growing the dividends rather than just offering attractive yields? Plus, we'll get an update on the nation's first Bitcoin futures ETF and how meme stocks have fared during the recent sell-off.

Here's my conversation with Simeon. He's the global investment strategist at ProShares, Dan Egan, Director of Behavioral Finance and Investing at Betterment and Todd Rosenblufe, head of ETF and Mutual Fund Research at CFRA. Simi and I reported Friday that we are seeing record payouts for dividends this quarter with big hikes from companies like Halliburton, Lenar, and Wells Fargo. What's going on with dividends right now? I know you emphasized there's been inflows for many years into some of these funds, but it's a topic right now. Rightly so, but I think the key distinction here, and Todd and I've talked about this for a long, long time, is the distinction between the high yielders. and the dividend growers. You can see some outsized increases in high yields from some of the more cyclical players,

but really the key is consistent growth of dividends. That tells you that you've got staying power in a name, and you've got that important ability to grow those dividends through a cycle. Extra important in an inflationary environment, absolutely. But consistency, perhaps, is more important than an unusually large hike that you haven't seen before from some of them were sick. Yeah. No, I think that's a very good point. I mean, to me, when we talk about why are dividends a big topic right now, the key point is that when returns on the S&P 500 are expected to be much lower,

perhaps, you know, in the mid, you know, single digits, for example, a two or three percent dividend return becomes much more important to your overall total return, no? That's absolutely true, but also because the dividends in the S&P 500 aristocrats nobles the ETF, because they grow faster than the dividends in the S&P 500, you very quickly, in the course of just a couple of years, get a little bit of cake and eat it too. What do I mean by that? The yield on that original investment compounds much more quickly such that you really are having not just that small, benefit in the initial higher yield, which now is a little higher than usual, about 100 basis points higher, but that delta compounds to two, three, four, five hundred basis points of more

yield on costs versus owning just the S&P 500. And that's where it becomes a really key part of that longer term total return picture. Yeah. Now, Todd, Simeon touched on this, but not all dividend funds are alike. The returns can be different here. Most of the dividends, and the ETFs had returns in the mid-20% last year, maybe a tad below the S&P's 27% return. Those are ones, and I'm excluding high yield. How do you actually make a choice here? Is it as simple as Simeon was saying? Or how do you make this decision?

Here's some of the returns that we've seen recently. So I think what's important is that you focus on either dividend growth, companies that have consistently raised their dividends and are likely to do so in the future. and companies that are ETSs that are constructed based on dividend yield. If you want growth, then you want to look into how far back into history are you looking for that dividend growth? So NOBL, which is the pro-share's product, goes back 25 years. The Spider-S&P dividend goes back 20 years.

You've got Vanguard's VIG and the I-Shares core dividend growth that are shorter than that period of time. And those two ETS, VIG and DGRO include companies like Apple and Microsoft that have grown the dividend for seven to ten years plus, but that have not hit the 20 to 25-year mark. And so you don't have technology exposure the way you would in NOBL. You have much more exposure to consumer staples and financials and industrial companies. So you really need to understand whether you're looking for growth or you're looking at yield

before you go a step further. Right. So even this is very sophisticated, Todd. Even amongst aristocrats, there's a difference between those are growing from 10 years and those who are growing them 25 years. It seems, though, overall, I'm trying to give some guidance to the viewers here. The most important thing is to distinguish between those who are increasing their dividends regularly, whether it's 10 or 25 years, and those who just pay a high dividend. Is there evidence that one outperforms the other long term?

Well, the recent history has been favorable towards the dividend growth-oriented ETFs. So let's use the two Vanguard ETFs that are dividend ETFs that are popular. which is Vanguard dividend depreciation ETF and VYM, which is Vanguard high dividend yield ETF. VIG has outperformed in the last three years by over 300 basis points by favoring those more growth-oriented sectors, including technology, as opposed to the above-average yields that you'd find within VYM. So if you're looking at the recent past, again, not guidance or not gospel, you can see that VIG was the stronger performer. We happen at CFRA to happen to like VIG more going forward.

because we think the cyclical slant is going to be rewarding to investors. Now, Simeon, I know you've said several times in the past that there are fairly consistent inflows into Noble. Do you anticipate they'll accelerate this year? I mean, the strategy you enunciate about why dividend yields makes a lot of sense to me. Not only is a hedge against inflation, but if you're only expecting, I'll pick a number, 5% return a year, 2% or 3% dividend yield becomes very important at this point. What are your expectations for Noble this year? We've seen it already happening. The flows have absolutely been accelerating, not just in the first month of this year, but going into the back half of last year as well. As to your point,

people are really focusing on the dividend piece of the equation for a number of reasons. We mentioned the inflation hedge. We mentioned also the signaling effect, the fact that when companies raise their dividends. They're telling you that the future's looking good. You know, it's a key distinction between dividend growth and buybacks. Todd mentioned the composition. So it's true noble with its 25-year track record is light on technology. That's one of the reasons why we also offer the technology dividend aristocrats, ETF, which is ticker TDV, and that focuses on the apples and Microsofts of the world that have been growing their dividends, not quite 25 years, But a long time, technology dividends are becoming an increasingly important piece of the marketplace,

and that's a place where that distinction between dividend growth and buybacks is so important. People think it's the same thing, but a buyback is just telling you that the company had good times yesterday, while a increase in dividend because you never want to cut one, is a much more forward-looking indicator. So both for Noble and Technology Dividend Aristocrats, TDV, we're seeing increase in. increase in interest and flows in both of those in this environment. Yeah, I think your point about the signaling effect is very important because with a lot of cash flow for corporations, the fact that at least some of them are choosing to increase their dividend is a real sign of confidence.

You can't, as you point out, you can't, you can stop a buyback pretty easy and nobody's going to scream at you. You stop a dividend or reverse a dividend increase and you're going to get flak from the viewers, the investors, excuse me. I want to broaden out the conversation a little bit. and chat with Dan Egan and bring him in. He's the managing director of behavioral finance and investing at Betterment. Dan, thanks for joining us.

January is mercifully coming to a close on an up note, at least for the moment today. But a lot of damage has been done, and particularly to speculative tech stocks, the Kathy Woodstocks, the so-called meme stocks, and to Bitcoin as well. What's going to happen to all those new young investors? You know, Robin Hood reported the other day they have 22 million accounts. what's going to happen to those people? Will they stay in now that we're in a modest downturn? For a lot of those accounts, you know this as well as I do. This is their first investment run here. If they have a bad experience, are they going to stay? And how do we get them to stay? It's a great question. I really hope they will. Generally speaking, they are in a better position to last through this than any generation has been before.

So, yes, your formative experience in investing play a big role in whether or not you're not. stick with it. Some people will have a good experience with the meme stocks. They will have managed to get out in good stead. And they'll probably be looking for ways to keep investing, but more responsibly. As pandemics wind down, as we sort of get back into a normal life where we have to do real work weeks, the attraction of being on your phones being trading all day is definitely going down for a lot of people. Another key thing to remember is that it's probably not the only exposure these people have. A lot of us invest via 401ks and IRAs, which is a little bit more like going to the gym than going to Los Vegas. That's where they're probably going to continue to invest

regardless of it. A lot of the meme stocks and even cryptocurrencies are going to happen in taxable accounts, which are really different. They feel very different. Now, that said, I do think that there are people who are going to come out of this with the wrong impression that markets are rigged, that you can't win, that the system is against you. And unfortunately, those people might opt out of the system for the rest of their lives, which would be an absolute shame. Right. And that worries me. How do you stop this, oh, the market is rigged? There are silly things that people say. Another silly thing is, oh, it's all the bots.

It's all the bots that control all the trading. There's no humans as if bots own stocks. They don't. But this is a very easy thing to throw around. When you don't understand what's going on, just say, oh, it's the bots doing everything. When you don't understand why the market's down, oh, it's an evil conspiracy. how do you educate people better about that? That the whole history of the stock market is filled with ups and downs,

and it's not, you know, the Illuminati are not meaning to figure out a way to deprive you of your, you know, gains in GameStop. What kind of education do you need? One of the things I'd love to see is we don't make it sort of salient how easy it is to have a normal success investing-wise in this country, right? You hear about billionaires, but you don't necessarily hear about all of the normal millionaires that are out there. that have gotten there by saving in their 401k reliable,

just putting money away year after year. So the more that we can make it available that we can people see, listen, there are lots of people who did very well by getting rich slowly, not getting rich quickly, but getting rich consistently and reliably and slowly, using the systems that are out there, putting away a nice chunk of each paycheck.

We can make people see this is very attainable. You don't need to be a superstar or to get the one over on the system in order to have it work. We need to make those people more salient. So I think that there's a big part of seeing representation of normal millionaires in places like this. Yeah, no, it's a good idea. You know, Todd, you've noted, and we keep talking about, that investors have been adding to broad market ETFs, like the S&P 500 ETFs. We cover, of course, you know, in particular small tech investments, thematic tech.

But those people who have been putting money in broad S&P 500 funds, for example, don't seem very concerned about the longer term at all. That's right. So equity ETFs have pulled in nearly $50 billion of new money, according to CFRA's data, in the month of January, despite the market volatility. Vanguard 500 ETF, VOO, Vanguard total stock market ETF, which is VTI, are among those. leaders. Investors in many cases came into 2022 prepared to put new money to work into core equity strategies and they've continued to do so despite and in fact in front of the market volatility. So these are some of the people that Dan are talking about that are putting money to work into broad basic equity ETFs and

having a lot of success historically this has not been a great January but historically those ETFs have done very well and are likely to do well over the longer term. Dan, is this the same kind of lesson for Bitcoin? I know you referenced it briefly, but people seem to think it was a sudden path to riches for a while there and everything else, including Dogecoin. How do you educate people about this?

How do you assign value to something that doesn't really have an intrinsic value and get people to understand what that means? I think it's fair to say the early days of the gold rush are over, but gold has continued to be around for centuries. Bitcoin is looking more and more like a digital gold asset. So it's going to be somewhat uncorrelated with equity markets, not perfectly. It's not a hedge by any means, but it is uncorrelated. And critically, it's still really volatile. We're going to continue to hear the case of people making a lot of money and people losing a lot of money in Bitcoin, which is what's necessary for it to keep the

attention on it and keep people interested in. It's definitely maturing, though, into more of a alternative like a gold or precious metals would be, though, and therefore is maturing into Maybe you should have a little slice of it in your portfolio just for diversification sake. Yeah. You know, Simeon, we're talking about Bitcoin. We last had you on in October when you launched the very first Bitcoin Futures ETF, B-I-T-O. Bitcoin prices went up going into that launch, and essentially they've been down since then. Just brief us on how it's trading.

And a lot of cynics were coming out saying it wasn't going to track Bitcoin very well. What's the verdict now that we've had a few months of trading? So first, just let's start with flows. And I think to the point of the staying power, in the face of this price decline, we've actually seen inflows ever since the first week that we launched. So folks are really committing to the strategy. When you put the lack of correlation together with volatility, it becomes a powerful feature, if you will, not a bug.

It means that you only need a little bit to add important diversification to. your portfolio. The tracking's been very good to spot Bitcoin. The futures market, if anything, is a better reflection of price than more liquid. There's more volume in the futures market than there is in the number one U.S. exchange. So that's really powerful. And BIDO, BITO in and of itself, trades lots of volume every day and their options on it as well. So it's a very useful tool to both longer-term investors, but also the short-term folks find it. Liquid in and invaluable too. And you want you want both of those there for a healthy ecosystem because even if you're holding it for a year, the day you're in, you want the traders there to keep the spreads

tight and the day you get out, you want them there. And we've found that to be very true of Biddo since its launch. And to bring up a painful subject, a spot Bitcoin ETF for 2022. Are you in the majority camp? We saw two of them rejected last week. Most people I talk to in the ETF community think there's almost no chance of a spot Bitcoin ETF in 2022. You want Want to comment, handicap that for us? I don't think any of us know, and it wouldn't be my place to comment, but I think the one thing that we would say is that there are lots of very important things about the futures market that are valuable. You have in the futures market multiple exchanges that converge to the price of those futures. Remember, you can't invest in that spot thing in the corner of your CNBC screen.

There are other belts and suspenders aspects to the futures market, including the clearinghouse. So those are really important as well. There hasn't been any fraud or any weird things, if you will, in the spot market. So I think there are key advantages to the futures market. When you combine that with the ETF structure, that make it a pretty compelling value proposition and bringing the opportunity for Bitcoin exposure into the normal ways that people have been managing their portfolio. Paulios. Dan, I want to bring you back in and go back to this 30,000 foot view of the markets and participants and ask you about how do we increase participation in the markets.

I was very excited with these 22 million new accounts, and yet the concentration of stock wealth is really breathtaking. We all know these statistics. 10% of the households by net worth control about 86% of the stock market wealth, 20% of the stock market wealth, 20% instead of the households controlled 94%. Essentially, it's a very small group of people. How do you change that? How do you get people to stop thinking about Bitcoin and get rich quick and thinking about getting rich slow? I mean, we all know, you have been talking about this for years. Most wealth isn't gained rapidly. It's gained slowly. And you don't hit a home run with GameStop or Bitcoin and suddenly retire at 26, at least very few people do.

Yeah, I think there are a few things. I think we need to say the first is that people need to have enough disposable income that they feel like they can save reliably. If you're in a fragile state where your income isn't reliable or where you don't have a lot of disposable income to save, it's really hard to feel like you can do anything besides buy lottery tickets. That said, once people are in that sort of state, I think they need to feel wins sooner. We need to start make investing be part of the discussion, not just about retirement, which

is 30 or 40 years in the future for a lot of people, but something that's more nearer term. So how do I save and invest for a home down payment or for my kids' college education or for my five and 10 year anniversary? Having people successfully use investing for nearer term goals where they can see the progress and see those wins and see that, yes, this sort of investing is a really important tool for helping me achieve my financial goals, not just 30 or 40 years from now, but a few years from now. That kind of good, safe exposure, I think we have had an allusion to fraud and people losing wallet keys, et cetera. It needs to be a good, safe, short-term experience for people where they can say, I can achieve a lot if I invest well,

even if it's not necessarily 30 or 40 years. Yeah. Well, what I see from a behavioral economics perspective is that people think they might be able to get rich quick, they'll do it quickly. We saw this in 99 with tech. I saw it in 2007 with emerging markets. All of a sudden, everybody on Earth thought that China was going to go to the moon and China blew up too. But it had a remarkable run there in 2007, in fact, breathtaking. And suddenly when it came back down, everybody got calmer. So there is that effect, that effect of the dopamine squirt in your brain that gets you excited when you see stuff that's up 5, 10 percent in a few weeks, and 20 and 30 and 40, 50 percent. So it's a matter of understanding what your brain chemistry is like.

And for me, you know, I'm in my 60s. I've been doing this 32 years. It's still an education process of my own head, Dan, just reminding myself about what you, you know, I make investing mistakes myself, but I know better. I'm the stocks correspondent. It's a very difficult process, an ongoing process. At any rate, I hope we keep those 22 million Robin Hood accounts. I really do, and they don't just stay.

It's all rigged. I feel very strongly about that. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Market's 102 portion of the podcast. Today we'll be continuing the conversation with Dan Egan from Betterman. Dan, thanks for sticking with us. I want to ask a behavioral economics question about at what point do bonds start really competing with stocks? Because this looks like a very relevant question.

I know there's a whole theory that exists in the stock. market, the equity risk premium, which is the return you're expected to be compensated for for owning stocks over bonds and the risk-free rate of return and all that stuff. But I'm wondering if we can make it a little more simple. So if the Fed raises rates, bank CDs are going up. I looked at bank CDs today. There are a whole bunch of them that are approaching 1% right now. Is that some kind of emotional trigger?

What happens when CDs go past, and I'm talking about one-year CDs roughly? go past 1% or even towards 2%. Is that real competition for stocks? You know, I think you nailed it on the head there. Our brain hates complicated things, and it loves to simplify them down into something that it's easier to grapple with. So, yes, when bank rates tend to hit key even numbers,

1% and 2%, especially, retail investors, it really shifts their behavior. For context, I want to go back almost 12 years now, to 2010, which was when interest rates were really starting to hit rock bottom zero. This has been a very unusual time to be an investor where interest rates have been beneath inflation. The reason the Fed did that was to spur us going into equity, into riskier investments. And it worked, but it works both ways. So as we start seeing cash rates on savings accounts, CDs hit a magical number where people say, okay, I'm not going to lose money to inflation.

I'm not being forced and pushed to take risk. I can have my money still be worth what it's worth today if I put it into a savings account, that's pretty attractive, especially to somebody who's been forced to take risk for about a decade. Yeah. Well, I think of my generation, I'm 65, so I think of most of my generation, we didn't do any saving in the 70s when we were in our 20s. We didn't start saving until our 30s. And because of this, number one, a lot of us are in trouble. We don't have enough save for retirement, but also we've had to take more risk to get towards the retirement goals. And that kind of worries me a little bit.

And I'm wondering if people recognize that. I don't know if I would have invested in Bitcoin when I was in the 1970s, whether I had that kind of mentality I never did. But are we seeing younger people invest more wisely or earlier than we baby boomers did? You know, actually, we are. There have been a few studies that I was surprised in a good way by that looked at the financial

and specifically investor literacy of younger generations. And I think we have to remember, they grew up with the Internet, which, you know, for all of its foibles, it's a great place to go and learn things. And so they have had it easier than any other generation if they wanted to learn about EBITDA or dividends, et cetera, It's been easier than ever to learn about that at the point in time when you're interested in it.

When you look at the objective and subjective financial literacy and investor literacy of younger generations, it actually is higher. They are out there trying to learn about a good way to do this as they are hitting the slopes for the first time. So I do think that with that there's a little bit of their comfortable taking on more risk. Obviously, there are novel asset classes out there that don't fit into a lot of these existing frameworks like cryptocurrencies, NFTEs, whatever it is. There will always be a new frontier, but they are not naive. A lot of them are actually out there trying to learn as they do. Yeah, I agree about the educational power of the Internet. When I transitioned from the real estate correspondent to the stocks correspondent in 1996 and 97,

the Internet was still very young. And almost all the books that I read to transition out on the markets, they were all hard copies. I don't remember, maybe I did, but I read books. And I still have some of them sitting on my shelf. That's how I know I did, because they're still there 25 years later. Let me ask you about inflation. People seem to experience inflation in very different ways. Some people seem to think it's everywhere.

Other people, I mean, we know inflation is real, but others seem to experience it in different ways than some other people. What I'm concerned about is there's very good evidence that higher inflation yields to high inflation. inflation expectations. So how do you stop people from expecting consistently higher inflation because that it seems to me is what creates runaway inflation, right? Yep. I think this is one of the things I wish some of the reporting around inflation. I think I wish it had been a little bit more nuanced as we did it.

I believe more than any other time in my life how you experience inflation is the most divided right now than it ever has been because where we get the average inflation number from is from an average of different goods and services. That 7% number is not everything going up 7% equally. There are very specific sectors like used cars and energy that are specifically going up very fast, and therefore somebody like me who happens to live in a city, I don't drive a car, I don't consume a lot of gas. I'm not feeling that inflation, but somebody who does consume that basket of goods will. So the first thing is that we're kind of getting a drift of what inflation means to different parts of the economy and different people.

And that hits them very differently. But when everybody is hearing about 7% inflation as a top line number, they're going to start thinking, well, maybe I need to go and negotiate a 7 or even 10% raise in my new job because of that. And, of course, employers are then going to say, well, maybe we need to increase the cost of our goods and services by about 11% to make sure that we're keeping track with it as well. So making sure that we highlight that these are generally localized inflation effects that are about supply chain disruptions and exactly who and how they're going to fit, hit, but also that they're hopefully not going to be a long-term systematic thing.

There's something that, as supply chains work themselves, that will get better. I think it's really important to help people avoid panicking and thinking that they need to start changing the way they think about money. What is behavioral, and I'm moving around a little bit here, but behavioral economics is such a broad topic and applies to so much of what we do that I want to just move around a bit. What does behavioral economics have to say about the work-from-home phenomenon? What's startling to me, I work at the New York Stock Exchange.

I was away for a long time, came back in May of last year, and then in the middle of December, decided to work from home for a month and came back a week ago here to the NYASC, and it was startling how relatively dead the downtown financial area is. A lot of people just were going back to work in early December, and decided after Christmas they were going to work from home again for another unspecified period of time. There seems to be two groups here. One group doesn't want to do the long commute and are tired of it, and they're looking for some alternative. Another group seems never have been terribly impressed about working in the office to begin with. They are quite happy to work from home and don't miss the camaraderie

or standing around the water cooler talking about the Jets game or don't want to backslap with the CEO. What does behavioral finance have to say about this whole phenomenon and where it's going to go from here? So the biggest concern, I think there's a lot of upsides, I say, from my house. One of which is that you can get more focused work done on. There were a number of studies early on looking at that people were actually pretty productive working from home at some level because they weren't distracted by so many social things. So I think I'm not worried about the kind of like office company output side of things. That said, what I am worried about is two things. Number one, we are losing the sort of social capital of having a workplace environment.

I'm reminded of the case where a judge, somebody was doing a video call with a judge and a filter was on and the person said, I'm not a cat. But actually, I don't know, like, are you real? Am I real? We're just people on a screen. So that, like, elimination of having a group, a community based on trying to get things done together, I worry about it being dissolved a little bit too much by being socially dislocated. And the other element of it that I think is a bigger sort of social thing is we are very, very sensitive to our peers, to how we compare to our community, et cetera. And work from home, as we all know, has allowed people to move from places like San Francisco and New York, places with very high cost of livings and people who earn very high salaries and continue to earn those salaries

in smaller cities, smaller towns, and disrupt local schools. the property prices in those areas, etc. And that sort of rebalancing of where people earn high salaries across America is going to lead to some real tensions. As people also, like they work with New Yorkers, but they live in Idaho. How is that going to work? Yeah, and how is it, how is the pay going to, is it going to continue to stay? Are you going to continue to be able to collect a New York salary and live in Idaho? And when is the pushback going to happen with that, Dan?

I think it's already happened, and so far, the remote workers seem to be doing pretty well. The pay cuts that they've been taking in order to continue working remote are not anywhere near what you'd expect of downshifting geographically. Yeah, that's a good point. All right, Dan, always fascinating to get your thoughts. I'm going to have to leave it there, but I really appreciate you sticking around with us. Dan Egan, folks, is the Director of Behavioral Finance and Investing at Betterman. And everybody, thank you for joining ETFH podcast. leaves new innovations create new opportunities.

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