The Dividend Cafe - Dividend Growth in this Exact Moment

Episode Date: December 22, 2023

Today's Post - https://bahnsen.co/41vu6Qo It is the end of 2023 and we are entering the Christmas weekend. I am off to a land far away with my family and am looking forward to spending the holidays in the snow. The calendar year for markets still has a week to go (with the exception of Christmas Day on Monday), and by this time next week we will have brought 2023 to a close. I will avoid saying anything else due to the never-ending superstition that us money managers live with regarding our ability to make things worse by daring to say something prematurely. Let’s put it this way … I went to the Duke game at Madison Square Garden with my son on Wednesday night and Duke (my college basketball love since 1990) was up by 11 points with eight seconds to go. My 13-year old son was celebrating the win and I scolded him – “it’s not over, son!” You know – that famous 11-point play – what can I say. Better safe than sorry. Anyways, I thought it appropriate as we approach the end of the year to reaffirm some of the truly evergreen realities of dividend growth investing. Not only am I committed to dedicating one Dividend Cafe per quarter to this subject (minimally) but I also believe this final 2023 edition ought to address some really important realities in the present state of markets and our investing philosophy brought to life. It is incomprehensibly fun for me to write on this subject. This subject is embedded in my being. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the final Dividend Cafe of 2023. I guess it's sort of bittersweet, you know, you're saying goodbye to one year, getting ready to welcome in another year. I am going to give everybody the week off. Next week, we will celebrate the Christmas holiday early in the week. And we're going to go this final week of the year without DC Today and Div Cafe on Friday.

You know, I don't believe a lot of you will want to read it or need it. I want the production team to get a little time off. And then, of course, somewhere in that list of priorities, I'm going to be taking it off myself, which I'm sure my family will appreciate. We will be out of the country and in a very cold place. So in the meantime, today's Diving Cafe is going to kind of unpack, I think, what might be one of the most important investing messages you will hear this year. In a way, you could say I've saved the best for last. But in another way, you could say you've talked about this stuff for decades. And that is correct.

And this will be 20 plus more years to come. I want to talk about the current lay of the land and where dividend growth investing fits in. We're talking about another year. After I am done recording this, you will still have five market days remaining this year, the Friday and then four days next week because Monday is the Christmas holiday. And then we're done with 2023. So with the caveat that we can't know what these five trading days will bring, we essentially know that 2023 is going to be another big year for the stock market.

And 2021 was a big year for the stock market. And 2019 was a big year for the stock market. And 2019 was a big year for the stock market. And since 2009, out of what is essentially now 15 market years, only two of them had a negative return. 13 had a positive return at a compounded annual growth rate for the S&P 500 of 13.9% over a 15-year period. So that is what we call a bull market. And I make the point in Dividend Cafe this morning in the written version that, you know, life is pretty much a bull market. History is pretty much a bull market. That may not be very useful to people that go through a real bear market, a prolonged bull market. History is pretty much a bull market. That may not be very useful to people that go through a real bear market, a prolonged bear market. But when you're talking about 20 year, 50 year, 75 year, 100 year, 200 years, because of my beliefs about the nature of

the free enterprise system, and then of course, the testimony of history itself around market reality. This is all a bull market. But we don't usually talk about it in terms of 20 or 50 or 70 year period, we can narrow it down. And in this 15 year period, 13 out of 15 positive years with a 13.9 compound, that's a bull market. And I want to make the point that particularly, like let's say since 2017, that's a more recent period of time, as the clock strikes midnight and the ball drops here in about a week, it'll be seven years since January of 2017. And one of the marks, just to kind of give you a reference point, No significance in it. I'm just trying to bring it to a timestamp. That's when President Trump was getting ready to be inaugurated. He had been elected and he was getting ready to start his first term. So that's a, you know, that wasn't yesterday, but it was an ancient history. And you're talking about in the period of time, a president, excuse me, President Trump's term in office, COVID, and now this three years of President

Biden's term so far, in that period of time, the S&P has exactly doubled. That basically, it was at about, I want to get this right, 2350, January of 17, it's at 4700 now. And then one end you go, my gosh, the market's up 100% in seven years. That's a big number. But much like the point I made about housing, that's 10% a year. Now, housing numbers over a long period of time are much lower. But the rule of 72, you divide the number into the number 72, how many years, that's the percentage to double.

If you've doubled in seven years, then you've been up 10% a year. It's back of napkin math, close enough. Okay. 10% a year. Not bad. So a 15 year bull market since financial crisis, a seven year doubling of the market. What could go wrong? The only thing I'd say, again, depending on time perspective, is if you go back two years from right now, December of 2021 to December 2023, going into Christmas weekend, you're down. Not by much anymore. The kind of 12%, 11% run in markets here over the last seven weeks has helped,

but you're still not quite back to where you were in December of 2021. So somebody put money in in 2021, two years later, they're down a little bit if they bought the entire index. Not a big deal. It's only two years. But let's say that you look at the S&P right now and it's trading at 21 times earnings. You think it's going to get 11 for you to get another year of 15 to 20 percent returns in the S&P. You're going to have to, if you meet 11% earnings growth, if you get to this $252 of

earnings that are currently the projection, you're going to need a 23 or 24 times multiple to get that 15 to 20% return next year. I mean, I suppose it could happen. I wouldn't bet on it. Now let's say for a second, okay, so we're going to end up being down 5% or up 5%, some kind of boring return around the zero, give or take 5% next year. Now all of a sudden, you're talking about compounding over three years at about 2% to 3% a year, less than the return on cash. And that's not a short period of time. Now it's becoming longer. And so that's where this belief system I have that historically the periods following robust bull markets and mathematically where we are in the cycle,

that I think we're in an extended period of a choppy, flattish market. And a choppy, flattish market can be up 20 in a year like this year, just as it was down 20 in a year like the one before. And then if you have another year, you're up big and you're down big, and then you're up a tiny bit or down a tiny bit. All of a sudden, three, four years go by, and you're getting maybe a positive return, a very, very modest one, a very sub historical return. That's the type of market that I think we're in. Now, here's the thing I'd throw out there. What if you do get another 15 to 20% year in the market next year, that means you've ended up at 24 times earnings. What happens then? Maybe it's a month later.

Maybe it's a year later. These are not timing things. But 100% of the time in history, when markets get overstretched, you go through a mean reversion. And that reversion to the mean of something resembling a historical average of historical valuation, now you're talking about being down 40%, really significant deterioration of value as hyper overstretched becomes just normally stretched, let alone going to below average returns, below average valuations. Remember, you can't have an average valuation when the average is the floor and

everything above it is above it. By definition, that would mean it wasn't the average. An average becomes an average because it's right in the middle of numbers above and numbers below. I can repeat that if it's confusing or anything. So hopefully you follow what I'm saying here. I don't think people should be rooting for a 20% return on the market next year and getting to a 24 times multiple, knowing that basically it just simply means we end up setting ourselves up for a far more violent bust. And I think at whatever level you're talking, there is a mathematical reality that is problematic. And yet, I look at dividend growth investing, and I think I see something that is insulated in a much different way than an index investor could be. And you get back to the kind of point of what

brought me evangelistically into dividend growth investing. When we were at 29 times in the S&P in 1999, and you can make up whatever multiple you want for the NASDAQ because there were barely any companies that made money. So the PE ratio was negative to the power of infinity. And it went down 80% and stayed down 16 years. The S&P went down roughly 50% was down for almost three years. These are real big deals. I remember them well. And I do not believe we are imminently facing something like that. If we were to go up another 20% from here with the same level of earnings, I think you set the table for a pretty substantial correction, yeah. But I don't know that we will do that. I would be surprised if you got that kind of price appreciation from this level, knowing what it would mean to valuations to get there. And so my argument is, rather than

be exposed to these booms and busts, let's consider something that doesn't require periods of hyper extension and valuation. And let's think about the reality of a withdrawer. The point I've been trying to make to people for many, many, many years, is that if a portfolio itself averages 8% a year, the real underlying investment itself, not your dollars, but the investment averages 8% a year, but in the periods where it's down 10 or 15 or 20, you're withdrawing from it. Your investment can't earn 8% the way the market earned 8% because you deteriorate the value that then experiences the recovery. So whatever the

return is that gets to an 8% average return for the market, it's doing so with less dollars in your portfolio because by withdrawing during periods of a drawdown, you permanently erode the capital base. Dividend growth by nature of taking what is only positive, a dividend, and again, the idea being only growing, you leave the share count in place. You don't erode the principal value by getting rid of the tree that is bearing the fruit of dividends. This is one of the most powerful anti-negative compounding stories in the history of capital. Enabling somebody to withdraw from a portfolio without suffering permanent damage, even if the value of the portfolio is down. And that is a major mechanical benefit in a period like this, where people need

to withdraw from a portfolio that might very well go down 20, up 20, down five, up five for several years to come. I think that it's very likely to happen in markets that you have some form of a flattish return from a point A to a point B, and that in that period of time, it doesn't feel like it's flat at all because there's a lot of ups and downs. And yet withdrawing from a growing dividend base provides an amazing mathematical insulation. And then for those accumulators, those other 50% of investors that don't need to withdraw from the portfolio, they want to grow the capital base. In this case, you actually turn the negative of a volatile range bound flattish market to a positive as

you monetize that. This is the concept of anti-fragility. You're not just defensive or insulated or immune. You benefit, become stronger from such environment as you inevitably have periods in which dividends, which by the way, they don't all pay yearly. It isn't like the market is at a certain level flat all year that it has one date that it's down 10 and that's where you get a down 10 year or or vice versa, one day where it's up 20, and that's where you get up 20 year. It's quarter by quarter volatility. And guess what? Dividends are paid quarterly for the most part. So you're actually building in an embedded mechanism that is automatically reinvesting dividends at periods of lower prices, causing you to get a lower average cost for the same securities that

you're getting a higher share count in that are one day bearing the fruit you will live off of. This compounding is a miracle, and it's a miracle made more magnificent by these types of markets. The longer, the better. One, two, three years, you're going to get a little period of time of this accumulation benefit with reinvestment of dividend. Four, five, six, seven years, even longer, significant opportunity for accumulators. Withdrawers and accumulators alike united around a superior investment strategy of fundamentally better businesses with cash flows, with a balance sheet that enables them to get through hard times, with management aligned with shareholders, all subject to fallibility, all subject to challenges and execution, all subject to

extraneous shocks to the system from cyber attacks to consumer preference changes, to higher interest rates, to various changes in fiscal policy, and yet nevertheless able to weather through those things and continue this escalating dividend payment. I believe that the market we've been in illustrates the point of why I want dividend growth for the market we're going to be in. That it is a strategy for withdrawers of capital and accumulators of capital both that truly meets the moment, meets the challenge that we face today in investing. So I don't know what 2024 holds for index investors. I'm not rooting against the index. I never have. I know the math of what it will take to hit certain

numbers. And I know what probably follows in the chapter after that, if you do hit certain numbers. What I also know is that for dividend growth investors, whether it comes to monetary policy excess, fiscal policy, geopolitical risk, there is a better defensiveness in place for the drawdowns, the risk of significant deterioration of capital, and there is a benefit mechanically on both withdrawing and accumulating capital that dividend growth provides. That's a benefit that we have built our business around, I believe in with every ounce of breath in my body. I'm going to leave it there. And by it, I mean not just this Dividend Cafe, but 2023. I wish you and yours a very Merry Christmas because I won't be here to say it

next week. I wish you all a very Happy New Year. And we will be rejoining you in January. Look forward to bringing you our next Dividend Cafe on Monday, January 8th, the year behind, year ahead, special edition. And of course, you'll have DC Today and all that good stuff the week before as well. So for the last time in 2023, thanks for listening. Thanks for watching. And thank you for reading the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC.

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