A lot has happened in the span of a month, especially in regard to inflation, interest rates, and the Ukrainian War. These events have only added to the downward momentum of the stock market so far this year, painfully reminding investors that not every year can be like 2021.
Last month we took an in-depth look at two investment ideas: Chevron and Clorox. Has the recent market volatility really changed the long-term prospects of these companies? It is never fun to watch your account value sink, but in this episode, Greg argues that only more opportunities have presented themselves. He also examines how to determine whether to buy, hold, or sell, when dividend growth is the key goal. It is only natural to have anxiety about the market right now, but by adopting the dividend mindset, you can sleep better at night.
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Greg Denewiler 0:11
This is Greg Denewiler. And you're listening to another episode of The Dividend Mailbox, a podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks, and make each year's check larger than the last.
Greg Denewiler 0:37
In today's episode, I want to revisit two ideas that we discussed in last month's podcast. One was Chevron and the oil story. And the other was Clorox, as a potential long-term candidate for dividend growth. By continuing to follow some of these ideas it will help give you a feel of how we actually apply the strategy and how it actually works on an ongoing basis. And then we'll look at how important mindset is if you want to compound dividend growth over the next several decades.
Greg Denewiler 1:13
So as you are all aware, we've had some pretty dramatic news headlines in the last several weeks, and it's created a lot of uncertainty in the markets. The war in Ukraine is obviously one of the big ones. We've got inflation that's really picking up, which leaves us wondering what's going to happen to interest rates and what the Federal Reserve is going to do. This gives us a great opportunity to look at dividend growth and investing in dividend growth. And then what do you do when things go really well? And what do you do when things don't go so well? With the s&p 500 down 10%, it really tests your resolve as far as: "okay, what am I trying to accomplish here?" or "what do I do in this situation?" So in the last podcast, I had mentioned all the reasons why investors just didn't seem to want to have anything to do with oil. But those same variables were the reasons why oil was probably going to be a good place to invest for the next several years. Well, what we've had is just an extremely dramatic shift in the whole climate. And now it seems like everybody wants to invest in oil. It's been really a total surprise as far as how well oil has done. It has probably been the most or the best performing group in the marketplace in the last few weeks. Last month, oil was around $85 a barrel, and now it's at 110- and it's been as high as over $125 a barrel. So, oil has had a significant move. And just a month ago, Chevron was $135 a share, and I also mentioned that we were no longer putting any new money in it, because it was just a little- the stock was a little higher than what I felt comfortable paying for it. But Chevron now trades at $170 per share. So what do you do when you have an investment that works really well? How do you decide: Should I put more money in it? Should I just hold it? Or is it time to sell?
Greg Denewiler 3:26
Well, one of the things that I really try to use as my base, as I've mentioned before, is that 10 year projected dividend growth model, where I just simply take the dividend today and then grow it by 6% a year for 10 years. How much does the company have to make to cover that 10 year projected dividend? In Chevron's case, currently, they're paying $5.31. A 6% dividend growth rate would mean that the dividend in 2031- it would be up to $9.60. If we thought $80 barrel of oil was probably going to give Chevron enough earnings growth, at $120 a barrel, I guess you have to say it's kind of a layup. But the problem is now we're interested in today forward. What does our return look like? At $170, the stock currently yields three and a half percent. If Chevron does grow its dividend to $9.60 in 10 years and it yields 4%. At that point, then that would imply a stock price of $240. So in a 10 year period, you've got a capital gain of about $70 a share and then you've earned $74 in dividends; not counting reinvestment or compounding. I picked 4% as the terminal value for Chevron- its dividend yield in 10 years- because let's face it, the oil industry is is probably going to be out of favor now for the next several decades. So we might even should use a little higher yield than 4%. But we're gonna stick with four for right now. So that gives you a return, a total return of about 85%. Our long term target is to double our money every 10 years, that gives you a little over 7% return a year. Part of that comes from dividends, and part of that comes from stock appreciation. With Chevron, we're now below that, so I call it a hold. But more importantly, you have to look at: "okay, has the environment really changed to change that dividend number over the next 10 years?" And what I mean by that, do you really think oil is going to be at $120 a barrel 10 years from now? Of course, I have no idea, but I am not going to make an investment based on that assumption. So therefore, I actually think the dynamics have almost totally changed from just a month ago. A lot of things are in place now to actually encourage drilling. Not only is the price high, which the old saying goes: "The best way to cure high prices or higher prices." But you've got incentives to drill more now. You've got some political pressure actually to produce more, so we may get some temporary relief on drilling restrictions. You know, really the dynamics have changed short term. But you have to ask yourself: "Is this something that's sustainable long term? Or is it more just a temporary situation?" The problem is, the regulatory environment is still basically the same. So at the moment, rig counts are still flat at 650, where they've been for the last several weeks, even though oil has spiked up dramatically. Personally, I'm not willing to wager that the dynamics have changed that much for oil. Hopefully, this war doesn't drag out too long and probably in a relatively short period of time, that we'll be back to the scenario we were in just a month or two ago. And if the price of Chevron comes back down into the low one hundreds, at that point, I think it's probably a good dividend growth candidate again, but I'm not willing to buy it up here. So therefore, I just have it as a hold. So in regards to selling a position, and let's just take Chevron as an example, because it has moved up quite a bit. If the yield gets down to 3%, we'll probably start to look at selling half, maybe all the position. Because at that point, I can go buy another equity position that will yield 3%, that has not had a dramatic run up; it will have a lot less risk in it. And the reality is, oil is probably not at a sustainable price when you're looking out long term. But one thing is for sure, if they were going to have dividend growth at $80 a barrel, they're going to have an excellent prospect of dividend growth when oil is at $120 a barrel. With the dividend still at three and a half percent, I think it's a good hold. But it is something to watch, and at some point, you do sell these things for better opportunities. We'll look for another position that has more upside and still has the dividend growth.
Greg Denewiler 8:27
Clorox is in a different situation, because last month, you may remember, one of their problems was they're dealing with higher inflation on their cost of goods sold. And they're having to raise prices to get their margins back. So now, if anything, we've had even more pressure in that area, and the stock is reflected a little bit. I's gone from about 144, down to 130 and the short term picture has actually gotten slightly worse. But again, I go back to that simple 10 year model that I use as my base. And with the dividend at $4.64, and in 10 years at 6% growth, they would have grown it to $7.84. That scenario, I think is still intact. In fact, if anything, it gives you a better entry point as far as your yield is slightly higher now. The story is still the same, the terminal value I think is still the same 10 years out. So therefore, now your total return has gotten slightly better. From a standpoint of: "okay, the stocks gone down a little bit do I worry about it?" No, because I still have that cash flow coming in. I've got that more than 3% dividend and nothing that's happened in the last month jeopardizes my 10 year growth story. That's really the beauty of a longer term dividend growth model because you just don't worry about the short term fluctuations. And if anything, you try to use them to your advantage. Chevron, it starts to become an opportunity to reallocate your money. In the case of Clorox, it just gives you a better opportunity to enter the stock at a price, that's going to give you a slightly higher dividend yield, which just increases your return long term.
Greg Denewiler 10:19
So now let's turn back to the market and just the economy in general. What's changed from a month ago, the outlook for inflation has only gotten a little worse. Are we going to have a recession? Will the high price of crude oil which translates into higher gasoline prices- could that potentially tip us into a recession? You know, Europe with their problems with natural gas coming from Russia- could they go into a recession, and then that tips us into one? You know, all these things you just don't know. But that's why you buy quality companies that are focused on raising their dividends that again, you know, look at more disciplined capital structures, ones that are better able to handle a recession, just because they tend to have lower debt. You need to stay away from things that are more cyclical, because you just have less certainty of that dividend growth over time. Currently, the dividend is around $61 on the S&P 500. And Bloomberg estimates are for 2022, for dividends to be at $67. And for 2023, they will grow to $70. Now, this was put out before the last few weeks, so you know, it's probably a little bit more in question now. But if analysts are expecting higher dividend growth for the S&P 500, that gives us a pretty high level of confidence that we will at least have that kind of growth. Because what we're doing is focusing just on that part of the S&P 500 that has a growing dividend, while the S&P 500 has a lot of companies that are not growing their dividend. When you have the confidence that you're getting paid, it just helps you to not worry so much about the short term fluctuations. Even if this war does end up affecting our economy, our strategy really continues to work. It helps to put you in a position where you just don't have to worry about it as much.
Greg Denewiler 12:24
This leads me into what I'm going to call the dividend mindset. If you get nothing else out of these podcasts, it's probably the single biggest thing that will help lead you to long term success. A few weeks ago, the Berkshire Hathaway annual report came out. And in Warren Buffett's letter to shareholders, one of the things they always do is they list the companies that are the largest positions that's in their portfolio. If you look through that, some of the names have been in there for a long time, American Express Bank of America, Coca Cola, Moody's- Apple's been in there for a few years now. Let me just use a few of these as examples. You know, American Express is not a dynamic company, that's growing at 30% a year. It's just a consistent long term, somewhat slow growth company. But Warren Buffett's cost in it is $1.3 billion and the market value at the end of 2021, it was up to almost $25 billion. His Bank of America position, he put $14.6 billion in it. Now it's almost $46 billion. Coca Cola really hasn't been that great of a performing stock, but his cost basis in it is $1.3 billion and now it's a $23.6 billion position. Moody's just a simple company, they mostly- its credit rating for corporate bond issues. He put $248 million in it and now it's worth $9.6 billion. With American Express, Bank of America, you know, there you've got some volatility, pretty much tied to directly what the economy is doing, whether it's going up or down. But something like a Coca Cola, there, the products get used pretty much regardless of what the economy is doing. So what you have are just consistently growing companies, but it takes a mindset to hold these things long term. I call it the second decade effect where you really get into where compounding really starts to play a significant part on your return. And all you need is a mindset that helps get you there. So then, you just let these companies do what they do. They allocate capital, they use discipline. They figure out how to deal with inflation. They figure out how to deal with supply chain problems. Wh en you invest in companies that long term prove that they can grow shareholder net worth over time, and that they can raise those dividends over time, basically, you just sit back and let them do their job. You just realize where these short term market fluctuations, headline news; it doesn't affect your long term strategy as far as dividend growth. The dividend mindset is really just about focusing on the cash, everything else is a distraction. And sometimes, it can be even as simple is just looking on your statement and seeing how many dividends have hit your account in the last month. It just helps to reaffirm hey, here's what I'm doing, it's working, I just have to let this keep going. You may remember in a previous podcast, I mentioned the vitamin C concept. And basically what that is, is your body does a store vitamin C, you have to take it every day. To apply the vitamin C concept to us currently- our model portfolio, which actually is a real life account, it was my sister's portfolio where she started with $15,000. And the only thing she invested in were the original 10 dividend stocks that I started with over 10 years ago on this dividend growth concept- If you look at her account for the first 10 days of March, there's five companies that paid dividends and it totals $180. If you annualize that number, it's more than the original first full year where we received $614. The great thing is, that's only five companies. So we have seven more that are going to pay because now we have a total of 12 in the portfolio. And we're at a run rate now that's almost three times what we originally started with 12 years ago. By just looking at the cash flow that's coming and looking at how it's grown, that sort of becomes your vitamin C. And that helps your discipline to stay on strategy. And when you see your income is growing, that's what gives you the confidence to not worry so much about the headlines. Whether it's oil spiking up, inflation up, potentially could we go into a recession? They're all unknowns. But what we're looking for is that consistent income stream that's unaffected by the news headlines. I think it also takes a commitment that look, you can't predict the market from day to day from week to week, year to year. But you can predict long term growth, because it's been there for the last 100 years. And you really just have to have faith in that. This strategy is not for everybody, because it does mean that you're basically saying, you know, "I'm not going to worry about short term market fluctuations." Sure, you know, nobody likes to see their account go down. But it gives you opportunities. And it doesn't really matter when you start taking this out for more than one decade. So mindset just becomes key. I would encourage you to go back and listen to the last episode, especially the part on Clorox, because, you know, here's a stock that's gone down. One thing you could say, "well, this, this isn't working so hot." Well the question I have to ask you is has the outlook for Kingsford charcoal really changed that much in a month? So are people going to stop using Clorox wipes? Arethey going to stop using Clorox? Are they going to not put Hidden Valley Ranch dressing on their salads anymore? Pine Sol- Are they going to stop cleaning? Brita water filters- I think most people are still going to want clean water. You have to go back and say, "you know has the story really changed long term?" And that's the key and that's where it just comes back to mindset.
Greg Denewiler 18:57
So a lot has happened in the last month. But by continuing to monitor both Chevron and Clorox, we've got a track record now that we're building and we can watch how these stocks perform and how the dividend income progresses over time. And I think in the next few months, we're probably going to have some opportunities to generate some new ideas. But the dividend mindset is really about what that dividend looks like a decade from now. And if that dividend has grown by more than 50% We've reached our goal.
Greg Denewiler 19:39
If you enjoyed today's podcast, please leave us a review and follow us on LinkedIn, Instagram and Facebook. If you would like more information regarding dividend growth or just our style of investing, go to growmydollar.com There you will find some of our previous podcasts and also our monthly newsletter. If you have any questions or anything to add regarding today's podcast, email firstname.lastname@example.org. Past performance does not guarantee future results. Each investor should consider whether a strategy is right for them and all the risk involved. Dividend Stocks are volatile and can lose money.
Transcribed by https://otter.ai