Motley Fool Money - A Rough Day for Dividend Knights

Starting point is 00:00:00 Two dividend-paying stocks getting crushed today with yields above 3% is now the time to dig in. Today on Motley Full Money will be knighting some dividends. I'm Emily Flippen, and today I'm joined by analysts Matt Argusinger and Aunt Chavone to talk about dividend stocks. We'll be covering some recent headlines for dividend-paying companies and discuss opportunities that should be on every investor's radars. But first, of course, we have to talk about the framework that you, Matt, and you, Aunt, about and look at when looking at income generating investments. I know you both recently updated your list of dividend nights. Now, remind us what that means and what you generally look for. Sure, Emily, and thanks for having us. So the dividend nights are something Ant and I came up with

Starting point is 00:00:55 a few years ago. And it was really in reaction to a lot of the other monikers that you hear out in the marketplace, if you're a dividend investor, whether it's the dividend achievers, dividend aristocrats, dividend kings. And a lot of those classes, of stocks, those dividend paying stocks, are based on consistent dividend raisers. So whether companies raise a dividend for 10 consecutive years, 25 consecutive years, or in the case of the Kings, 50 consecutive years, amazing. But we don't think it tells the whole story about how a company is doing and whether it can sustain the kind of dividend growth that we think is going to lead to great returns.

Starting point is 00:01:30 So we came up with the dividend nights, which is it kind of follows a rule of 10, Emily, which is we looked at companies that have paid a dividend for 10 consecutive years. years, have grown that dividend, not necessarily raised it for 10 consecutive years, but have grown that dividend at a 10% compound annual rate for those 10 years. And maybe most importantly, over those 10 years, this is a company that has outperformed the S&P 500 on a total return basis. So three big 10 rules. We also apply a little bit of quality factors as well, just to make sure we're looking at quality companies. But it's that rule of 10 that is so key and that drives the dividend nights.

Starting point is 00:02:06 Yeah. So just one step further, kind of when you look at total returns for stock as well. You have the income generating aspects, but also an element of capital gains here and growth that make it maybe a little bit more of a solid play than purely looking at the dividend. But to be honest, I mean, when I look at my own portfolio, I'm in my 30s, but I still consider myself a younger investor. But I don't really spend a lot of time thinking or caring about dividends. If a stock pays a dividend, I'll just generally reinvest it. And are you noticing that there's a shift away from these like income-based investments amongst investors? Or is this just the same as it's ever been?

Starting point is 00:02:38 Yeah, I think it rhymes with the past, Emily. And what I mean by that is, sure, I think there has been a noticeable shift from companies and investors who now prefer share buybacks over dividends. And as a result, what we've seen, we've seen the S&P 500's dividend payout ratio come down dramatically as buybacks have become the preferred method to return castor shareholders. Now, we could debate whether that's the correct method, but that is what's happening. Now, I also think that there's a valid reason why investors like yourself, Emily, don't really care about dividends right now. And I think that's kind of the relentless bit of the market. Nobody cares about dividends when the SP5-100 is appreciating 25% a year. Today, the SP5-500 yields yields about 1.2%. So that percentage return that investors in a broad market index fund have received from dividends this decade is not really meaningful. But when the market does hit a rough patch, like we saw off the period from 2000 to 2009, that's when income-producing assets become more attracted to investors. Yeah, all of a sudden, people start. caring about earnings and cash again whenever things are looking a little tough. And I know that there

Starting point is 00:03:43 are at least a couple of interesting dividend-paying companies that this morning are looking a little tougher on a comparative basis. So coming up next, we'll have to talk some health care earnings. Stick with us. The old adage goes, it isn't what you say. It's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the range Rover Sport. The range rover sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll

Starting point is 00:04:25 find true modern luxury with the latest innovations in comfort. Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response to fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers atrangerover.com. Of course, we have to talk about earnings as we're here in the middle of earnings season. And this morning, we have health care companies, Novo Nordisk and United Healthcare, both with some pretty big headlines. United Health Care reporting poor earnings amidst high medical costs.

Starting point is 00:05:06 Nova Nordisk lowering their guidance for the year because of competition from compounders in the GLP1 market. And United Healthcare qualified as a dividend night under your framework up until June of this year. And Nova Nordisk has been paying a dividend for nearly 30 years. So after today's fall, both of these companies now seem to have dividend yields above 3%. What are your thoughts? Is this a buying opportunity or is this a falling knife? Yeah, well, it's falling knife. That is a question to answer. I think, you know, as expected for United Healthcare, it was a challenging quarter, adjusted earnings per share, well below analyst estimates. But I think what investors were really looking forward to support was the full year earnings guidance. And, well, that was also bad.

Starting point is 00:05:48 You know, management expects adjusted earnings per share of $16 in 2025. That's nearly half of what it originally expected at the beginning of this year. And, you know, so to me, this kind of feels like a bit of a kitchen sinking quarter, a sandbacking quarter, whatever you want to call it. You know, MNCHM might be trying to manage earnings expectations moving forward. They do have a new CEO, and prior to this year, UNAH had more than 60 consecutive quarters where earnings actually beat analyst estimates. So I think it would make sense that the new CEO would want to come in here and set a low bar. And, you know, sure enough, in the press release, UNH said that they expect to generate earnings growth next year.

Starting point is 00:06:26 So I guess from a valuation standpoint, I think United Healthcare and Novo Nordisk, they're getting more interesting. but these are also very complex businesses. They both have some internal issues they're dealing with. They have competitive issues, and they're grappling with changes happening in Washington. So I think the question that investors need to answer is, are these two companies going through a secular downturn, or is this more of a cyclical downturn that will eventually correct itself every time? And that's a very hard question to answer, considering the complexity of these businesses. So these are probably two stocks that for me, I would put into the proverbial too hard pile. It's really interesting to hear you say that. I mean, United Healthcare, obviously the new

Starting point is 00:07:09 management team, Novo Nord is actually today announcing their new CEO as well, as their former CEO, got some pressure to leave and mix competition for Wagovi and Ozymbic and how they handled a competition in the United States. All of this is to say, there's a lot of finger pointing that I think both these management teams are doing in regards to, look, it's not our fault. This stuff. is kind of happening to us. And Matt, when you look at your list of dividend nights, I expect that the too hardness of the healthcare industry isn't happening in a vacuum, right? It's not just happening to UnitedHealthcare, Nova Nordis. This kind of has implications for the broader industry as a whole. Are you worried at all about the dividend paying capacity for health care and how does health care

Starting point is 00:07:49 play into the dividend nights? Yeah, great questions, Emily. It's interesting. When we first did the dividend nights back in 2022, there were 11 health care companies that qualified. as Dividentites. Today, as of June 30th, they're just two. It's Eli Lilly, one, speaking of a competitor, maybe to Novodor-Disc, and Avvi. And those are the only two ones right now. And that's surprising on a number of levels, because I think in the past, healthcare, because it's sort of countercyclical, because we know the enormous demographic tailwinds that the industry has or the sector has, that it should be a source of good cash flow, good earnings, good visibility, and good dividend growth. And it just, it really hasn't been for the past few years. And it's startling to see the

Starting point is 00:08:34 drop. And you just wonder, as Ant was getting to, is this a sector that's just, there's too many interplays between regulators, between, you know, the FDA when it comes to drug approvals, to, you know, insurance and what, and how those claims are funded and what, you know, parts of the company that we serve, either through Medicaid or Medicaid. Medicare or through private insurance. It's a very complex space. And so I think a lot of these companies have just run into challenges where they don't have as much cash flow and earnings visibility as they might have had in the past. Although in the case of United Healthcare and of a Nordisk, it hasn't yet, to our awareness,

Starting point is 00:09:12 impacted their ability to continue paying their dividends. That's true. Although admittedly, maybe not growing at the rate that you and Aunt would normally look for. We also have some news outside of the healthcare space today. Another dividend-paying company, Whirlpool, reported earnings. dividend investor recommendation that unfortunately fell around 15% today. A bit of a big drop. Should we be concerned? I think they're also cutting their dividend alongside that. That was the big surprise, Emily. Not surprised that World Pool is facing a tough market

Starting point is 00:09:43 right now. They're the leading domestic appliance maker for kitchens and baths, right? But they have faced decades of competition from Asian suppliers, which often have cheaper labor, cheaper steel. And so the hope was that the new tariff announcements that do, apply to steel-made appliances would help Whirlpool. And management does expect they will. But unfortunately, in the short term, there's been a lot of stockpiling of inventory among World Pool's competitors, a lot of that coming from Asia. And so that in the short term, I think, is weighing on World Post business, forcing them to kind of lower guidance for the year. But the shock definitely was the dividend. This is a company that has paid a dividend for over 70 years

Starting point is 00:10:21 and not cut it once. We're talking through many recessions, through the global financial crisis, through the housing crash, never cut its dividend, and yet yesterday announced that it was cutting its dividend by almost half. And so this was a situation where I think the balance sheet got a little too levered. Earnings got too challenging. Cash flow was in trouble. Management's going to cut that dividend, try to shore up the balance sheet, and hope that the tariffs come through to help the business and that the housing market revitalizes because a lot of their earnings are tied to the housing market. A lot of ifs right now with Whirlpool. It was really disappointing for us to see the cut to the dividend. Well, it doesn't surprise me not with the World

Starting point is 00:10:56 Pool in particular, but because when I look at your list of dividend nights, the number of companies that qualify, of which you just keep a running list, has fallen from around 175 companies in 2022 to around 117 in 2025. It looks like Whirlpool is now one of those that is heading off the list here potentially. So I'd love to get your take. When you look at that list of the remaining 120 or so companies that qualify as dividend nights, where do you see the most opportunity? Do you have any stocks or sectors that you think our listeners should be aware of? Yes. It's definitely been a dwindling number. That's because what's led the market, the broader market the last couple of years, of course,

Starting point is 00:11:33 has been a lot of the large-cap tech, which pay either no dividends or very little dividends. And so it's been harder for a lot of the companies that we follow to keep up. I would say the one sector that I look to that I think is interesting to me, there were only four from this sector at the latest seven nights, and that's real estate. And one of the companies, of the four real estate companies, is Prologis. one of the world's largest reits, a big player in warehouses and industrial space, and increasingly in data centers. I was happy to see Prologis get back on the Dividend Nights list as of June. It's definitely one I own, I love, and I think there's a lot of potential behind it.

Starting point is 00:12:07 What about you, Ann? Yeah, the energy sector stands out to me. There's only three energy companies on the Divided Nights list, and really there only should be three companies on this list because energy was one of the worst performing sectors in the 2010s, and it had the highest volatility. probably the worst place you could have invested money in the 2010s. And that's because management teams did not allocate capital well. You know, whatever cash flow came in, it went right out the door into low-returning production projects. But really, ever since COVID, investors have demanded that management teams return capital

Starting point is 00:12:37 through a growing dividend and share buybacks. And now since energy companies have less free cash flow to reinvest, the management teams have become way more disciplined by only investing in the highest returning projects. So when I look out five years from now, I wouldn't be surprised to see many more energy names on the dividend nights list. I wouldn't either, actually. In fact, when you look at some of the best-befaring companies in the last couple of years, those sectors that were out of favor, kind of circle back into favor. And I think energy is one of those, which still has a fair bit of opportunity, both with green energy as well as more traditional energy. So looking forward

Starting point is 00:13:06 to see where that takes us. Coming up after this, we'll go lightning rounds on what all investors should be thinking about when buying dividend-paying stocks. Stick with us. Some of the best lessons don't come from a classroom. They come from experience. On the power of advice, a new podcast series from Capital Group, you'll hear from CEOs, investors, and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast, published by Capital Client Group, Inc. As they wrap up here, I would love to go through in a short lightning round on some like broad and dividend investor topics that all of our listeners should be

Starting point is 00:13:46 thinking about when they're talking about expanding income generating investment ideas. So, a few different topics here. I'm going to go to each of you, 30, 60 seconds each. The first one is the payout ratio versus safety. Is there a certain range that you like when it comes to payout ratios? And at what point does it turn from a green flag to a red flag? So there's no science behind this number, Emily. It's just a kind of a gut and years of observation because it really does depend on the type

Starting point is 00:14:12 of company. But for the most part, I think a 70% or lower payout ratio, in other words, the percentage of earnings that are getting paid out for the dividend for an, and a number of the for a company is about right. Anything above that, I start to get a little worried, especially if it's a cyclical company, you want to probably a lower ratio. If it's a real estate, utilities, or even a consumer staple, where there's a lot more visibility and consistency to the earnings, you could probably go higher than 70%. But 70% is kind of that bar for me. Yeah, and like Matt said, the cyclicality in the business matters when determining what an

Starting point is 00:14:42 appropriate payout ratio looks like. But in general, and this might sound counterintuitive, But I'm usually looking for companies that pay out at least 50% of their earnings free cash flows a dividend. And that's because going back to our conversation on energy, I don't want companies warehousing cash that belongs to the shareholders. So if a company doesn't have a good investment opportunity in front of it, it's a return that cash to shareholders through a dividend. So maybe between 50 to the 70% depending on the company again.

Starting point is 00:15:08 It's counterintuitive, but it makes sense. But what about ETFs? So whenever you're looking at investments, picking an exchange traded fund, which gives you exposure to a lot of different companies versus handpicking those investment yourself. At what point, if ever, does it make sense just to buy a dividend ETF as opposed to going through all the trouble we just talked about, about picking individual dividend companies? Yeah, I mean, there's absolutely nothing wrong with buying a dividend ETF. I know Matt, a dividend ETF that we tend to like is the Schwab U.S. dividend equity ETF,

Starting point is 00:15:38 ticker symbol SCHD. And, you know, it's a good way to get cheap, diversified exposure to high-quality dividend payers. So I think dividend ETS make a lot of sense. But when I look at sector ETS, like real estate in particular, I think hand-picking stocks does make a little bit of sense. And that's because many of those ETS are concentrated into things like cell towers and data centers, which I would argue are not necessarily true real estate investments as much as departments and warehouses. Yeah, I think ETS definitely makes sense.

Starting point is 00:16:07 I own several dividend ETS in retirement accounts that I have. And I own the one, the Charles Schwab one that Aunt mentioned. I also think there's one called the Vanguard dividend appreciation ETF. The ticker there is VIG. If you're interested in dividend growth, companies that may not pay a high yield right now, but are growing their dividend outsized rates, that's a good one. There's also the Nobel ETOBL, which is the dividend aristocrats, an really popular one. I think there are a lot of strengths with those companies and the consistency of those dividend

Starting point is 00:16:37 raises. So maybe two more to look at. Yeah, it's actually good to hear the overwhelming encouragement for ETFs here. My assumption was going to be, hey, no, try to do your own due diligence and find the good companies out there. Whenever I was researching the cannabis industry, for instance, there's lots of cannabis ETFs. In my opinion, the vast majority of them are completely junk, trying to pick the winners in a balanced basket was a better approach in my mind. But I guess this shows the difference between emerging industries and maybe some more established industries like dividend paying stocks. Lastly, as we wrap up here, I have to ask about growth versus yield.

Starting point is 00:17:10 I know that this isn't always a direct trade-off, but when you guys are looking, is there a balance? Does one matter more to the other to you when it comes to the dividend? Ah, growth versus yield. This is the eternal question. I actually wrote an article about this not too long ago, Emily. There are so many studies. There are studies out there that show that actually dividend growth is the way to go. So focus on companies that are growing their dividend, not necessarily having high yields. And there's other studies that say, nope, you want to focus on yields, especially maybe not the highest yielding companies, but maybe like the second or third tier of yielding companies in the market. But I think it always comes down

Starting point is 00:17:44 to personal preference. If you're someone who wants to generate a lot of income right now in the short run, favor high yield companies. If you have a little longer time horizon and not necessarily focused on generating income, go for dividend growth. Yeah, like Matt said, the data is a bit mixed, so I think it largely depends on investor preference. Ideally, I think investors should want to stock that as an above average yield, but is also growing its payout above the rate inflation. That's kind of the sweet spot. A good starting point might be to look for companies where the dividend yield plus the expected dividend growth rate equals at least 10%, which is roughly the market's long-term annual

Starting point is 00:18:18 return. So that might be a good place to start. Really great way of looking at it. Thank you all so much for this joining me and coming to this quick roundtable on dividend investing. Here's hoping that tomorrow holds better things for some of our dividend-paying investments. Here. Thanks, Emily.

Starting point is 00:18:33 All right. Thanks for having me, Emily. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations. for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Aunt Chivone, Matt Argusinger, and the entire Motley Fool team,

Starting point is 00:18:59 I'm Emily Flippin. We'll see you tomorrow.

Motley Fool Money - A Rough Day for Dividend Knights

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.