The Dividend Cafe - The Best Offense Is A Good Defense And The Best Defense A Good Offense - August 25 2017

Episode Date: August 24, 2017

The Best Offense Is A Good Defense And The Best Defense A Good Offense - August 25 2017 by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. custodial partners at Fidelity Investments, just a series of various meetings at Fidelity. And now I got to jump on a train and get back into New York. And so filming early, market hasn't opened yet Thursday morning. But so far this week, markets are up. We had one of the larger days up of the year on Tuesday, made up all of the downside from last week and then some. Yesterday, the Dow was down a little bit, the S&P not quite so much, and that will happen sometimes in the Dow and S&P for different reasons are somewhat uncorrelated to each other. But we'll see what happens Thursday and Friday.

Either way, I think that the slightly elevated levels of volatility here the last few weeks are healthy, becoming a little bit more common, which we think is good, and also very much reinforcing the silliness of trying to time around this market. There's no particular primary driver at this point, and it's a great opportunity for us to do what we do and to reinforce in things like this video and our writing the principles around this dividend growth investing that we've made our hallmark at the Bonson Group. The things that I want to share with you this week do pertain to dividend growth investing because it's interesting this year you have some of the very high growth, high octane type names in the S&P 500 being the names that have led so much of the market. The market has still had a wildly successful year so far. And yet you would think that with energy underperforming

and a lot of the dividend oriented sectors like consumer staples to some degree, but more so telecom, not maybe you would include in the utilities utilities that you would think that those things would be underperforming. And yet the reality is, is that the dividend growth space is having a very, very good year, even with energy underinvesting. In our case, part of the reason for our success this year is because emerging markets have, you know, you have an S&P up, let's call it 8 or 9 percent, a Dow 8 or 9%, maybe 10, and yet you have emerging markets up over 25% on the year. So that more attractive growth space where there were lower valuations has provided quite a boost in terms of the growth aspect of one's equity portfolio. But within the dividend growth area, as more of a longer-term understanding of the benefits to why we believe in companies that are perpetually growing their dividend, representing not only in terms of the offense we need out of our portfolio and the return profile we're seeking, but also from a defensive standpoint, that even though it's still exposed to market risk, we think it represents a superior alternative to receive a lower volatility experience.

You can look to the debt ratios. On average, if you look at just the dividend growing companies within the S&P, they have something in the range of a half of the debt to equity as far as a ratio that the non-dividend, excuse me, that the whole entire market has. But you would think, okay, well, that's nice in theory. It seems like those healthier balance sheets lower leverage ratios in the dividend growth areas of the market but let's look at it in practice and beyond theory an actual real-life downside I read a study yesterday on the train coming into Boston 17 years going back to 1999 so you're talking about through two nasty bear markets that if

you take every single month that the market was down and isolate just the dividend growers that you had 44% less downside for the dividend growers than you did for the whole market if you look at the 15 worst months that we've had, okay, so you're talking about some real doozies going back over 17 years. The downside level of the dividend growers was half of that of the entire market. So I think that this just sort of provides a little bit of understanding as to in real life why we believe the the health characteristics of companies that are perpetually growing their dividends represent a uh more downside protected less volatile scenario for an equity investor all the while still maintaining

the return characteristics offense growth, growth, growth of income that one wants as an equity investor. So again, I've said this quite a few times, but the downside to it is that there are these periods of time, usually very short-lived, where the hottest things in the market are not going to be the dividend growth type names and you go oh wow there's such a hot dot four or five technology names for example are taking off and we don't own those generally in those periods there's still a positive performance environment it doesn't have to necessarily be that way but they're usually the case so you're just simply talking about for short periods of time hotter areas of the market doing better, but in longer periods, you not only get a great return characteristic, but

you have a much lower risk profile. Well, this is not something that we're kind of tactically doing in this environment because equity valuations are high, although they are, and because geopolitical anxieties are there, because this bull market's been going on for a long time. For whatever different reasons an investor may feel, I want to be somewhat risk managed. Those things are all cases to make for the way that we believe equity markets should be approached. But we don't believe it just in this period of time. We believe in any period of time.

We think that that optimal risk reward trade-off can be found. And it's just, it takes a lot of work. It's not something that can be passively done. One has to go out and do the work to find companies, growing their free cash flow and growing the dividends that they're paying from that. So that's the approach we're taking right now. We care a heck of a lot more about that than we do anything President Trump says in a tweet or a press conference or a rally. We care a heck of a lot more about that than anything the New York Times puts in a headline or the newspaper. We care a lot more about that than we do the particular short-term machinations or speculations about what a central bank or Federal Reserve may do. And we think that drives a much better investor result in the long run. Quickly, I'll wrap up. Positive news out of the news cycle. I do believe, and I'm really

researching this heavily, following it as closely as I can. I really do feel very optimistic about where tax reform is headed. For those that are curious, I'm embarking upon a very significant research project as to whether or not I feel, for the first time in my career, ready to take a position in the country of Japan. Even if I did it, I wouldn't be taking a position in Japan, be taking a position in companies on a bottom-up basis. Dividend growers, by the way, our dividend growth philosophy doesn't end at the U.S. borders. We believe in the same thing when we go into other countries as well, developed nations like Japan or Europe, etc. But there's a number of macroeconomic cases and some studies that I'm embarking upon that have me very interested. Something interesting happened this week. I look back to the day that I began my career financial services many moons ago and where we are now and the Nikkei the kind of s&p 500 of Japan is at the exact same level nearly 20 years and not a single

dollar has been made and there's been some big gyrations along the way but literally a flat line from where I began and to where we are now something I guess I'm happy to see that we've throughout my career for totally different reasons I can talk about another time spared our clients that extended no return experience I've gone on too long so I need to let it go please do read dividend cafe calm this week there's a lot of material they're covering a number of other topics an updated chart from our partners at strategis research regarding the signs of the bull market topping off and they list out nine indicators and you can look at what those things look like to get an idea of the lay of the

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