The Dividend Cafe - Financial Certainty in a Time of Global Uncertainty

Episode Date: July 24, 2020

Today's Dividend Cafe reminds of the uncertainty that exists around the world today. Europe may seem to have rectified some parts of their uncertainty, but they invited new uncertainties in doing so. The U.S./China tensions are not solving themselves, and you may have read somewhere that COVID case growth hasn't solved itself yet either (highly contagious viruses are interesting, that way). It is a both unavoidable and unsettling reality of life right now - many conditions, globally and not just domestically, are uncertain. In answer to this uncertainty, the Dividend Cafe provides a little refresher of some of the most basic investment principles we believe in, applied to the methodology The Bahnsen Group has built its business around - dividend growth. Links mentioned in this episode: 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. Hello and welcome to this week's Dividend Cafe. This is David Bonson. I'm the Chief Investment Officer of the Bonson Group. And those of you watching on video get to see yet another location as we bounce around here in this quarantine, post-quarantine, you know, period of time. I think last week I was at my apartment in the city. Now I'm out at our house in the Hamptons and I will be back in the office in New York in another week. So different locations all up here in the New York area and in August actually back in the California office again. But hopefully you don't even care where I'm recording from. It's just the stuff that I'm sharing with you, which today is interesting. I am going to spare you more details this week on my jogging routine and instead focus a little bit on a little history.

from our dividend growth investing philosophy that I thought were maybe particularly apropos to the current environment that we're in and had a particular application in the investing context of today. And throughout the week, it became more apparent to me that this theme of uncertainty, which I think a lot of people, when they use the term in the U.S. right now, they're still referring to COVID. And I believe that there's a lot more uncertainty than just simply those that particularly pertain to coronavirus. I think that what we have right now, when you look at this week's announcement of a huge debt stimulus program in Europe, when you look at escalating tensions with China, each country going back and forth, closing consulates and whatnot, you have a certain degree of global uncertainty, some of it minor, some of it

more severe, some of it more provokable, if you will. And then obviously we know that there still remains various uncertainties around what the economic recovery coming out of COVID will look like and whatnot. I talk every day in COVID and markets about the particular aspects of where things are in COVID's impact on U.S. markets. But I don't want to rehash all that now. I just want to sort of make a point about where dividend growth and global uncertainty comes together. And that is that I truly believe that any attempt of mine to make an ad hoc application of dividend growth, something tactical, something

contemporary, is misguided. Now, it doesn't make it untrue, and it may be useful to certain readers and clients who can take it in the right context, but the entire point of dividend growth investing is that it is meant to be not tactical and not timely, but evergreen, timeless, if you will. And there's another thing that I'm talking about that has in common with dividend growth, timelessness, permanence, and that's uncertainty. The very uncertainty that I'm talking about, it is absolutely true that the size and shape and color of the uncertainty is different in different periods of time. In 1998, we were not going through a global coronavirus pandemic.

We were going through uncertainty around the Russian ruble. We were wondering at that time if the dot-com tech market was getting overheated. We were dealing with the implosion of the long-term capital management hedge fund. There were totally different uncertainties in 1998 than there are now, but there were uncertainties in both. But as I look back over the 20-year journey in which we've been doing dividend growth investing, and I look back at the history that I've studied that got me to dividend growth, the social unrest of the 1960s did not take away of the efficacy of dividend payments, dividend coupons, higher quality companies generating free cash flows.

And yet there was an uncertainty that was really world changing going on at that time. 1970s, an incredible stagflationary period, did not take away the efficacy of dividends as a significant and in fact, in that decade, vital part of total return for an investor. We had a very positive, after a double-dip recession in the early 80s, we had a very positive period of economic growth throughout the 80s and 90s. And thank God investors were clipping dividends along the way and reinvesting those dividends throughout that economic growth period.

Lost decade of the 2000s from dotcoms blow up. High quality companies still paying out dividends, maintaining cash flows to investors who needed them. The latter portion of the decade, financial crisis, housing bubble, credit market collapse. financial crisis, housing bubble, credit market collapse, dividends serving that buffer purpose, and of course, reinvestment of those dividends providing unbelievable growth into the decade we just got through. So I could go on and on.

I'm purposely choosing the last five decades, which are a little bit closer to the time I've been on planet Earth. But if you go through the five decades before that as well, it's still the same. I believe dividend growth is intentionally implemented in client portfolios because of the permanence of its benefits and the permanence of the global uncertainties, the uncertain world in which we all live, that it seeks to remedy.

It takes on different manifestations at different periods of time. There are certain points of time where people might appreciate some benefits more than others. Those things can shift around a bit. But the underlying reality of dividend growth, and I made a list at DividendCafe.com today in our weekly written commentary, those timeless benefits that undergird the philosophy, I believe, ought to serve as that counteract to what we view right now as an uncertain moment, when in reality, it is a different manifestation of a permanently uncertain world. So these are themes I've been talking about quite a bit, and I'm hoping that today's application

of it makes a little more sense to you. It's also true that in today's Dividend Cafe, I do go through the week that just was in the markets. I'll do a couple of these things for you all right now on the podcast. Through Wednesday, the market was up 350 points on the week. On Thursday, it went down 350 points. And so we're even coming into Friday. And as I'm sitting here recording, the Dow is down about 100 points. The Nasdaq's had the bulk of the volatility this week, as all the big tech names have

had some shine come off of them. But we'll see where all of that goes. The tit for tat with US and China, we closed their consulate in Houston. They just announced a closing this morning. It's not moving markets yet. It isn't that substantive, but it is potentially quite substantive as it just indicates a kind of geopolitical vulnerability in both countries testing each other's will. The debt mutualization agreement in Europe this week is by far one of the biggest economic announcements in a long time.

This fiscal union, well, excuse me, this monetary union that has never really served as a fiscal union, 27 countries had to unanimously agree to generate debt that they're all collectively on the hook for that are clearly going to benefit some member countries more than others. So a sign of solidarity in the European Union. My argument is that that is one of the things that has plagued the dysfunctions in Europe is that monetary union without fiscal union. However, what this doesn't do and can't do is address the lack of organic growth, the lack of an economic engine, and the fact that they still maintain a lowest common denominator structure when between

their currency and their economic union, stronger countries are brought down by weaker countries and weaker countries' interests are not aligned with stronger countries. So let me get into the dividend growth side instead of going down all the tangents that we talk about at Dividend Cafe this week, but recognize that at DividendCafe.com, there's about 10 different topics that we give a treatment to. For interest of time here on the podcast, I'm just going to focus on dividend growth and go from there.

It is absolutely true that the types of companies positioned to provide financial stability and therefore the wherewithal to maintain dividend payments and in fact growing dividend payments in any aspect of the economic cycle must be stronger companies financially, ergo more defensive in your portfolio. There are times when people may not feel like they need that defensiveness and there are times like when a global pandemic breaks out or an economic recession breaks out where that defensiveness becomes much more appreciated. Dividend growth investing provides a consistency of cash flows for investors

who may need such a thing for their financial objectives. I don't think I could ever state this adequately. The ability to generate consistent cash flows represents one of the true gifts of dividend growth investing for those withdrawing from their portfolios. Now, this is even heightened in a secular interest rate environment where we're looking at interest rates that have come down to virtually nothing, and yet many investors are still in need of income. And not only do they want consistency of income, but they want reliability. They want to believe it's going to be there.

And this category of companies provides that option. Market volatility affects the price return of a portfolio. Market volatility is basically a direct byproduct of sentiment. The more one is relying on sentiment, the popularity of a company up and down, the more volatility they'll expect. But to the degree that a dividend investor is focused on a fundamental, particularly the fundamental of cash flow, which is the ultimate fundamental in any business and any financial investment, the reality is that you then put the focus on the more reliable and less volatile of the two things that affect prices,

fundamentals and sentiment. By being focused on dividends, you're more focused on fundamentals, which are inherently less volatile. By focusing on sentiment and price return and multiple expansion, you're buying into a higher volatility trade-off. You may be willing to do that, but that's what one is doing. Dividend growth inherently reduces that volatility. I think holding management accountable, capital allocation is how you get bad M&A deals, bad acquisitions, capital projects that have a wealth-destroying effect on a company

balance sheet, a negative return on investment for a company, buying back stock at inopportune times, high valuation periods. A focus on dividend growth significantly improves the alignment between management and shareholders. Efficient capital allocation is necessary even when it doesn't feel like it, even when companies can get away with buying back stock at the wrong time or making a really not very thoughtful merger acquisition. But when the tide runs out, that's when efficient capital allocation becomes so important. And I think that dividend growth is by far one of the great governors on management, far more so than company accountants and regulators could ever be.

far more so than company accountants and regulators could ever be. And then finally, I'll kind of wrap it up with this. We went through 100 years almost where it was just expected that dividends were going to be a huge portion of an investor's return. We're not in that period now. And dividends make up of the expected return of the S&P 500 about 20%, 15% maybe of what investors historically have been accustomed to getting from an equity index. So one either has to believe, I've said this so many times over the years, I can't even count. One either has to believe that the price appreciation is going to be bigger than it's ever been, or they have to just be in a different expectation mindset of what their return will be, something significantly less than it's historically been. Our argument is that getting

the dividend to represent a portion of your return that it has historically represented puts you on a far better glide path over a long period of time. Not one year, not one quarter. Look, it's been a tricky 2020 for dividend growth investing. I'm well aware of that. And it's been, when you compare dividend growth to some of the FANG names over the last five years, you could argue that big tech and some of these things

have really been the place to be. My point is, again, back to that longevity argument and the non-cyclicality of dividend growth investing over longer periods of time. There will be full cycles, and through full cycles, we think that that dividend as a higher portion of the return you're getting is going to A, increase your return and B, decrease the risk and volatility you're taking along the way to get it. So these are timeless principles. I don't think I talk about them enough. Some of you might think I talk about too much because, you know, I did write a book about it and have done God knows how many podcasts over the years on it.

But the point I want to make is that right now in this period of COVID uncertainty, global uncertainty, election issues, China, U.S., geopolitical instability, I believe as fervently as ever that dividend growth investing will do, has done, and is going to do what it has done in every other decade of uncertainties as different as those uncertainties may feel in your mind right now. They are not. And the things I believe about next week and next month on behalf of the portfolios I manage, on behalf of our clients at the Bonson Group, is that next month I'm going to be dealing with various uncertainties in this uncertain world in which we live. And next month, I'm going to be relying on the consistent generation of cash flows from well-run companies in a free enterprise system to remedy some of that instability that we all deal with.

I hope this is helpful. I hope you get the points I'm making. But please reach out if you have any questions. Thank you, as always, for listening to and those of you that are viewing the Dividend Cafe. And as I always will remind you, if you don't mind writing us a quick review, rating us with some stars, forwarding you around, it helps us in the podcast feeds in which we participate. Your subscription in the feed is better than listening to us off the website. I hope that makes sense. In the meantime, have a wonderful weekend and thank you for listening to The Dividend Cafe. The Bonson Group is a group of investment

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