Motley Fool Money - Dividends 201: The Payout Continues

Episode Date: July 16, 2022

There are plenty of reasons to love a stock with a high dividend, and plenty of questions for investors to ask. Matt Argersinger, Anthony Schiavone, and Ricky Mulvey continue their conversation about dividend investing and discuss: - Dividend stocks that have taken a recent hit - A potential high-yield trap - The power of compounding dividends Stocks mentioned: KO, WMT, SBUX, HD, TXN, MTN, STWD, MO, VALE, IRM Additional resource: Dividend Kings - https://www.fool.com/investing/stock-market/types-of-stocks/dividend-stocks/dividend-kings/ Host: Ricky Mulvey Guests: Matt Argersinger, Anthony Schiavone Engineers: Dan Boyd, Annie Franks Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. Remember, when a company chooses to pay a dividend, it's choosing to set aside, you know, sometimes a meaningful portion of its excess cash to go out the door to shareholders.

Therefore, it can't reinvest that cash in projects that might not work out or might not generate high returns on capital. And again, if you study history of companies, the biggest companies of today or won't be the biggest companies from tomorrow. And that's because a lot of companies really struggle to invest at high rates and return over long periods of time. And that's Motley Fool senior analyst Matt Argusinger. We're going more in-depth on dividends.

Matt joins Anthony Chavone and Ricky Mulvey to continue their conversation about investing in companies that pay some of their profits to shareholders. Let's hit a couple of basics. I don't think we really hit on this in last week's show. I think it's worth bringing up. We always talk about dividend stocks is kind of this like stodgy old thing, but I think there's a really compelling case that younger investors. People earlier in their investing journey should really pay attention to the value of compounding dividends.

Absolutely, Ricky. I think it's one of those, I don't know, misnomer's if that's the correct word, but there's a sense if you're a younger investor that you shouldn't care about dividend companies. You've got decades to invest, go for the hot home run growth stocks and leave the dividend stocks for, yeah, stodgy old guys like me. I think that is a terrible way of approaching it, because dividend stocks are amazing. And I'll illustrate it, I think, with this one statistic, which is just mind-blowing. So Anthony found this data point that's almost unbelievable. It's from S&P Global.

If you go back to 1930, I know that's a long time ago, but if you invested $1 in the S&P 500 in 1930, that $1 would have turned into about $197 by June 2020, 21, so last summer. So that's almost 200 X in roughly 90 years. Fantastic. But if you also reinvest the dividends you got from that $1 investment, that $1 would have turned into, get this, $6,430. Now, that feels almost impossible, but it's not because by reinvesting those dividends, you're compounding an increasingly large number of dollars.

So over many years, that results in really exponential gains in total return. Anthony, actually, there was that unbelievable Coca-Cola example that you and I talked about on the dividend show like a month ago. It's pretty incredible. So the price of a single share of Coca-Cola at its 1919 IPO was $40, and that's on a non-split-ad dress-head basis. So if you bought that single $40 share of Coca-Cola at its IPO and reinvested all the dividends, would have netted a total return of about 21 million by 2019, a century later.

But even more impressive that single share, which has been split many times over the last century, would be generating nearly $600,000 in annual dividend income, assuming you reinvested all dividends. So I would say that's a pretty good yield on cost there. And you hung on through Coca-Cola taking cocaine out of the drink itself, which some might call a thesis change. Right. Yeah, you went through some upheaval.

But, yeah, $40 into $21 million and paying you $600,000 today in dividend income. It's mind-blowing. Now, none of us are able to invest for 90 to 100 years. Most of us won't even live that long. But compounding dividends can work even over much shorter timeframes. For example, let's say you started with just $10,000 today. You added $200 a month and invested in just an average basket of dividends. Stocks paying, say, an average dividend yield of 3%.

Very easy to find today. As long as you keep investing and reinvesting the dividends, and if history is any guide, you'll have over $1 million in 30 years. Or let's say you're a little older, you're a little bit wealthier. You could start with $100,000, add $1,000 per month in new cash. You'd have almost $2 million in less than 20 years. So that just shows you. I think the key, of course, is to get started as soon as you're able, and above all,

keep investing and adding new money, and keep reinvesting those dividends. And what that can do to your wealth, even if you're a young person and you don't think dividends are cool, it's pretty magical. One caveat to that, I would say, though, is one of the appeal of dividend stocks is that you can continually get a dry powder for new investments. So there is a trade-off of not reinvesting your dividends. Absolutely. And you can choose not to automatically reinvest the dividends and just get that cash that comes in and then sort of deploy as you see fit.

and even deploy that cash into non-dividend companies. But I think it's just that power of having that extra yield when you make an investment in a dividend company that brings, like you said, brings you dry powder, brings more cash into your account that you can then reinvest in your best ideas. Yeah, it sounded like I was disagreeing with you, but I wasn't actually disagreeing with you. That's the magic of podcasting. Moving on, let's look at some of the frameworks you guys have laid out for finding a sustainably high dividend payer.

Matt, you want to walk through that? and then basically how investors can view that framework. Sure. So we did this special show, I guess, on the Dividend Show. By the way, if you're a member of any of our Motleyful services, you can catch the dividend show on Motley Fool Live. It's every Friday at 10.30 a.m. Eastern. Sorry, Ricky had to put that plug in.

So on the Dividend Show, we did this exercise looking at high-yielding dividend pairs, and we asked three questions. Is the dividend for real? So is that 7, 8%, 10% yield really reflective of what the company was paying now? Two, is the dividend sustainable, meaning is the payout ratio reasonable, and our current and future earnings able to support the dividend and grow it over time? And three, simply has the stock of the company been a good investment over time? I know the old saying, past performance is no guarantee of future results, which is true.

But I think when it comes to dividend payers, especially history can tell you a lot about the future. So that was kind of the three questions we posed as we were kind of analyzing high-yielding dividend pairs to see if those dividends were for real. All right. Let's look at some of the strong dividend payers that are down right now. In addition to seeing these high flyers get knocked off their perch brought back down to earth, I think you're also seeing some really strong companies get brought into that mix. It kind of reminds me of the sibling who's punished, even though they haven't necessarily

done anything wrong. Does that analogy make sense to you, or am I stretching there? No, I think that sounds about right. All right. So let's start it out. One dividend payer that's been knocked off a little bit is Texas Instruments, ticker TXN. That's right. So Texas Instruments, long-time dividend payer.

I don't know. I think they're short of being an aristocrat, Anthony. We'd have to check. But I know they've been paying a dividend for a long, long time. If you think about the chip space, semiconductors, but a company that's been innovating for many, many decades and just has just these kind of business lines that really no one has been able to touch for a very long time. We tend to think of a semiconductor and technology companies being highly disruptive and

disrupted over time, and you can see a company like Intel has struggled, or even a company like Nvidia, which has had an enormous stretch run in the last decade or so. They certainly have been through periods of tough times as well. Look at a chart of Texas Instruments, and you'll see, like, you're just this business that has just been so, so steady, a company that has grown shareholder value for decades and steadily paid a dividend. Here's a company that because of the fears in the market, because of worries about chip supplies, especially, their stock has been hit pretty hard. I think it's down about 30, 35 percent from its high. And now you're getting that dividend yield of right around 3 percent.

And it's just one of those companies that I think just has so many competitive advantages, works in markets that no one's going to touch, long-term customers that just rely on. and their technologies. So that's one, I think, passes a lot, checks a lot of boxes for us for Anthony Amiens. We're looking at dividend companies in terms of a company that you can buy, hold, feel reasonably good about their ability to raise that dividend over time and grow the wealth of the company. John Rotonte did a great deep dive on Texas Instruments on a podcast called Chit Chat Money. That came out back in April. If you want a deep dive on Texas Instruments, Rich Templeton strategy, it was good. I recommend.

How about another beaten-down dividend player? Anthony, what you got on Vail Resorts, ticker MTN? Yeah, so when we talk about dividend-paying companies, they usually have some sort of moat that leads the pricing power. And I think that's exactly what Vail has. They have that pricing power because they own some of the top skiing resorts in North America. And there's just generally a limited supply of ski resorts because there's a limited supply of mountains. And it's also very expensive to build new ones as well. So with the recent market volatility, the stock is down a little bit more than 40% from its high, and it's yielding about 3.6% right now, which is well above its historical yield. Prior to the pandemic, this was actually a company that grew its dividend in eight consecutive years

and at a pretty good rate as well. So that pricing power definitely showed up there. And then COVID hit and management really had no choice but to suspend a dividend since all the resorts were forced to close and there's really nothing that management could have done. As COVID started to subside, the business started to recover, and they reinstated the dividend last September, albeit at a lower payout. And then they raised the dividend above its pre-pandemic payout this past March. So the business seems to be back. They have a strong track record of dividend growth if we were to look past the pandemic.

So I think this is an interesting income and growth play with the stock down about 40% off its high. What do you think about the climate change issues for someone like Vale, where one of the beefs I hear with them, and I guess that has kept me a little hesitant on the company, is the idea that they have lots of years with minimal snowfall and then some years with record snowfalls, and that it's going to be hard to predict revenues out into the future when you have that much variability in snow conditions now? That's a great point. And Vail, they've actually made a pretty strong push in recent years to get most of their visitors on annual passes. So that reduces their dependence on good weather and skiable days since those passes are already purchased ahead of the ski season. So the weather doesn't play as big of a role. But yeah, if more weather keeps on happening, it's definitely going to have an effect on their business down the road.

And I'll just add, Ricky, the Vail pass is it's almost like the Costco membership in a way. It's become that way where there's such loyal customers, loyal visitors to Vail resorts, and that cash that just comes in from those passes, whether or not the skis, to the extent the skiers utilize those passes, it's just a regular stream of cash flow that Vail can rely on. Yeah, and they've also cut the cost of a lot of those passes in recent years, too, which is an investor. I don't know if that's a good or bad thing. Now with that same framework, let's look at some high dividend payers. First up, Starwood Property Trust, ticker STWD, seeing a 9% dividend yield here.

Yeah, is that real? Yeah, Ricky. Actually, the dividend is for real. For those who don't know, Starwood is a mortgage rate that primarily focuses on commercial lending, but they also have a portion of their portfolio that owns physical real estate. So to me, it's more of a hybrid rate between your traditional equity rate and a mortgage rate. But yeah, over the last four quarters, their dividend payout ratio was about 82% of their distributable earnings.

And that's after accounting for a one-time boost in earnings that was related to a property sale. One thing that is interesting about Starwood's dividend is that they were one of the only mortgage rates that didn't suspend or cut their dividend during the COVID crash in 2020. So I think that speaks to the broad diversification of their commercial loans where the underlying assets are located across varying property sectors and geographical regions. And the fact that owning that physical real estate makes earnings a little bit less volatile. And if they absolutely need to, they can even sell off those properties to support the dividend. That's not ideal,

but it does give them a little bit more optionality than you'd see in your traditional mortgage rate. All right. Let's look at a sin stock. You're not going to hear this on other finance shows. So let's talk about Tobacco, Altria, ticker M-O. That is an 8% dividend yield. Hey, invest in your best vision of the world, but this is a lot of dividend yield from a highly addictive product, right, Matt? This is. And, you know, Altria Group, formerly Philip Morris company, it's famous for paying a

dividend, a relatively high dividend. And, you know, a lot of them, I have no comments here about, you know, whether what you think about cigarette companies or tobacco companies, but there's no question. about Altria's incredible performance over the decades. It's been, in fact, over the last 50 years, it's one of the, I think it's in the top 10 still in terms of total return, in terms of best performing stocks. That might have changed recently, but anyway, it's been a wonderful investment for a company that does something I'm sure a lot of people take issue with.

But you look at that dividend yield, yeah, it's over 8%. And is the dividend for real? Absolutely, it's for real. This is the dividend that they've been paying. That's what they're guiding for. Is the dividend sustainable? Yep, Anthony and I looked at it, and you've got a payout ratio. That's kind of right around 80%, which would seem high for your typical dividend company,

but Altria's business is relatively more stable, or at least it has been, over the decades. And so they've always been comfortable paying a much higher rate of their earnings out as dividends. And the third question, you know, has been a good investment. Well, I already mentioned that it has been, but the numbers for Altry Group are just stunning. just from the late 80s, if you invested in Altry Group, in the late 80s, reinvested the dividends, you made over 103,000 percent on your investment, 103,000 percent, which is about 50 times more than the return of the S&P 500. So, again, whether you like cigarettes or not or the tobacco business, there's no doubt

that Altria has been just a monster of an investment for shareholders. That's one of those high-yielding companies out there. I cannot confit with if you're looking at. for higher income in the market. Yeah, Altree's got to be on your list. Judgment-free zone. There you go. This is one of those things where I was like, because, you know, you want to have your investments reflect your best vision of the world, how you want the world to progress. And like, there's a part of me for that where I'm like, I don't like investing in private equity companies for that reason. But then there's also a part of me that's

looking at a cigarette stock with a dividend yield of 8% thinking, like, I think they can probably sustain that. Like, this actually might be a great investment. Ricky, if your best vision of the world is you generating more income for yourself, Altrey could fit that vision. Let's look at a dividend trap. Potentially, we've talked about some sustaining or sustainable high-yielding companies. Let's talk about Vale, not Vale Mountain Resorts, which is paying about a 15% dividend. What's going on with Vale?

Right. So yeah, not to confuse, this isn't Vale the Mountain. This is the South American Mining Company, Vail. And what's fascinating about this Vale is that, yes, they've always paid a pretty high dividend. And the dividend is actually variable. This is not typical, but Vail tends to pay out dividends based on its earnings, not based on what they want to pay and adjust as they go. Vail says, all right, this is what we earned.

We earn this amount. So, therefore, we're going to pay this percentage out. So the first question, is the dividend yield for real? Well, it's actually not for real, because if you're an investor and you see this, you're thinking, oh, my gosh, I can buy the shares. I get almost a 15% dividend yield. That's fantastic. Well, no, that 15% dividend yield is based on the prior 12 months' worth of earnings where they paid out. They earned a lot, and they were able to pay out a significant amount to shareholders. So that is not the dividend you're probably going to get but buying the stock

today. Now, is that dividend sustainable? Well, it is if Vail, again, earns a lot of, makes a lot of money, and they can pay out a higher dividend. But you have to Remember, Vail as a mining company has really benefited from a lot of the increases in commodity prices, be it iron ore, copper that we saw over the past few years. So their earnings have really been boosted by this business cycle we've been in. If that reverses or if inflation comes down and they're not earning as much revenue from their mining operations, then that dividend deal is probably going to come down. So is the dividend sustainable?

Probably not. Now, final question, has the company's stock been a good investment? It actually has. It's been incredibly volatile, but if you go back to the early 2000s, veils up about 1,700 percent versus the market about 400 percent. So despite its volatility and despite its dependency on kind of high commodity prices, VALE has also been a fairly good investment. All right, let's finish off with one interesting income opportunity. Anthony, I think you got one with Iron Mountain. Yeah, so Iron Mountain, a former Warren Buffett real estate play in the 2000s. But yeah, they've had a ton of different business lines over their

history, but they're best well known for their storage business. That business mostly centers around the storage of paper records, fine art storage, entertainment storage, pretty much anything that you can think of. A couple of key advantages to this business, just that the quality of their brand, if you're a financial institution or healthcare provider and you need to store important documents, Iron Mountain is the place to go. I think about 95% of the Fortune 1000 still utilizes Iron Mountain services. The thing I really like is once they get those customers, those customers tend to stay. Their retention rate is about 98%. And the average storage box in one of their communities stays about 15 years. And one of the reasons for that stickiness is that the Iron Mountain charges service fees for removing records.

So that switching costs there tends to keep those customers in lock. And Iron Mountain is in a pretty big portfolio transformation right now. Obviously, our world is shifting away from paper storage and more towards digital storage. So they're focusing more on data centers and digital storage. So that's really a big driver for the future for them. And looking at their dividend, it is well covered, about 68% in the most recent quarter. And that's come down a lot from, you know, this same time a year ago. And the stock currently yields about 5%.

So I think this is still an interesting storage play for Iron Mountain. And I'll just add, yeah, the one thing we get with Iron Mountain that you don't get with a lot of U.S. REITs is that they have a lot of exposure internationally. They've made some investments in Europe. They made some investments in India, I believe, Anthony recently. And so you get kind of the old world storage business that's feeding the cash, that's generating this data center business that's actually growing internationally. Anthony Chavone, Matt Argusinger from our mogul and real estate winners services.

Appreciate you joining the show. Thanks, Ricky. All right, I got one quick plug for you, the listener. If you like this show, you got a stock you want to hear us talk about. Please call our voicemail. The number is 703-254-1445. Give us a company. Any question you got about it, then maybe we'll make a podcast segment out of it.

I really prefer if you call us from somewhere that's quiet, and that means not the checkout line of a grocery store. And again, that number, 703-254-1445. Thanks for joining us and see you soon. 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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.