The Dividend Mailbox

Selling Is Easy... But Can You Hold Like Ronald Read?

July 15, 2022 Greg Denewiler Season 1 Episode 13
The Dividend Mailbox
Selling Is Easy... But Can You Hold Like Ronald Read?
Show Notes Transcript

When the only streak in the market seems to be a losing one, it's easy to wonder if you should jump ship. Bear markets test the resolve of even the most seasoned investors. But the investors that achieve next-level success have unwavering faith in their strategy, standing strong regardless of market conditions. 

One of these exceptional investors is Ronald Read; a simple man, with a simple lifestyle, and a simple strategy. Yet, there was nothing simple about his discipline over the course of more than 70 years of market events.

In this month's episode, Greg takes you through the complete story of Ronald Reed. You may not know his name now, but his story is one to remember when the going gets rough. He also takes a look at current market conditions and provides some brief updates on companies we have covered in past episodes.

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0:09 Greg

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. 

 

0:35 Greg

So welcome everyone to the July episode of The Dividend Mailbox. I want to start today's episode off with just a brief market update. Everybody's concerned about: “are we going to have a recession or not, maybe we're already in one, how high are interest rates going to go?” Then we'll look at a few of our past investment ideas and how it pertains to our long-term dividend growth story. And then we're going to look at how an investor dealt with volatility in the markets and high inflation, high-interest rates, 2008, and I think it'll be a story that will really help give you a good perspective on just a long-term view, just how to approach your investments. 

 

1:23 Greg

So let's look at what's happening currently, and why the media has a million reasons why you should sell on. Wednesday at 6:30 am in Denver, 8:30 on the East Coast, inflation numbers come out and the headlines blare: inflation for June 9.1%. Well, of course, 10-year treasury yields didn't like that. So, they immediately spike up to 3.07%. And the futures market, which was up a little bit before the announcement, immediately proceeds to sell off and is down four points. So the markets are in turmoil. They're trying to figure out whether we've got higher inflation and interest rates are going to go up because of that, or “wait a minute, we're going to have a depression! Well, maybe not that bad, but we'll have a recession and yields will end up going down.” Well actually, the yield curve has what they call inverted. Short-term rates are a little bit higher than longer-term rates. One-year treasuries are about three-tenths of 1% above the 10-year treasury. So that's what we call or what investors call an inverted yield curve. Historically, it has been a pretty reliable indicator that a recession is potentially coming. So clearly the market is concerned. But here's an interesting note. We've had this environment now for several weeks, probably going on a few months now. Where we go back and forth between worrying about high inflation and worrying about the recession. I will say that we're starting to see some seeds sown. Oil is down, price of wheat is down fairly dramatically. So maybe we are getting close to a top, we'll see. But interestingly enough, Standard & Poor’s tracks earnings estimates. And several months ago, the earnings estimates for the S&P 500 for 2022 was $225. That's been out there for several months, and we've had more time to see high inflation numbers and companies coming out with potential earnings problems and supply chain problems, higher costs. The estimate was $225 a share and as we speak right now, it's $223.50. So, analysts have only cut estimates by $1.50 for 2022 so far. And surprisingly, or maybe not, the number for 2023 is $248. That basically has not changed since the beginning of the year. So whatever big fears we had, apparently, aren’t too big yet because revisions from analysts have not really started to come in yet. Now, of course, that can all change in a heartbeat, and we've got earnings are going to start coming out here- well they've already started. PepsiCo was a day or two ago, they actually came in with pretty decent numbers and the stock is holding up fairly well. Having said all that, even in this period of uncertainty, the S&P 500 dividend is now up to $65. The dividend yield or the dividends that are actually paid continue to grow. And as we've seen, even in light of a recession, companies are committed to their dividend.

 

5:07 Greg

Clorox just raise their dividend. We've hit on Clorox. I don’t want to talk about it, because you can go back to some of the previous episodes where we mentioned that a lot more. But one of the things we want to do is try to be accountable. Clorox right now is $147 a share. We first started buying it around $160. We put on most of the position probably around $140 to $144. And year-to-date, the stock is down 14%. But for the second quarter, it's actually up 5%. So, the stock is starting to perform a little bit better. One of the reasons we bought it was because the margins. They've had very stable margins, cost of goods sold for the last several decades. That, we're looking for things to normalize and for them to adjust pricing to account for inflation, and basically for the business to return back to normal. That's been the story. But one of the things that we've mentioned, I think in the past, that we were not worried about but we just expected, was the dividend growth will probably slow down for the next few years. But then we'll get back on track to be plus 6% or better. Well, Clorox announced a 2% hike in the dividend. Some people- I even saw a few comments that somebody thought that dividend was going to get cut. Well, they raised it 2%, two cents. It's just another fact that these companies don't like to cut dividends unless they just have to. You've got a good long-term track record here, consistent, predictable management. And sure enough, they're barely earning the dividend at the moment. But you got to look at the long-term story. Revenue Growth is still there, long-term debt is coming down, and share count has come down. So that's what's going on with Clorox. 

 

6:58 Greg

And then we've also mentioned the oil story. And this one, we kind of backed away from it. We brought up the old story, but we never really had a chance to do much with it because oil immediately started going up, Chevron started to go up, and I just didn't feel comfortable buying it at the time above- we were shooting for around 112. Well, should’ve, would’ve, could’ve because the stock got all the way up to a high of 182 given what happened here recently. Luckily, we already had decent positions in oil beforehand. But part of the story is we've owned it for a long time, $182 was a new all-time high, and it was significantly higher than the previous high. So one might think, “hmm the stock had a big move in here, gone from 120 to 182, maybe I should take profits?” But I can tell you right now have no interest in selling it. The dividend is still 4%. Even though it's 139 right now, sure, it would have been nice to have a clear view in the rearview mirror that you know the stock was going to sell off 40 Points. But you just never know what is going to happen. But the long-term story and oil story just hasn't changed. Rig count really hasn't changed that much. It's hanging around 750 rigs, which is way below where it's been in the past when oil was $100. In fact they should be up probably around 1500 rigs so, they're still not looking for that much. And then you look at the government. They've restricted some of the offshore drilling. In the past, that's been about 30% of our oil production. So, we're not going to be getting as much there. And then the brilliant politicians over in Britain decided that they're going to put a 25% windfall profits tax on oil and gas companies that are producing oil in the British North Sea because they're making way too much money. Well, the plan is to give, they estimate roughly $6 billion to the people of Britain who are struggling with high energy prices. And unfortunately, you got to feel sorry for them. They're going to try to help their population out with high oil and gas prices. But it's not too hard to figure out this might help them for the next 12 months or 24 months. But how fast do you think some of these big international oil companies are going to rush out to the North Sea to drill more oil when 25% of their profits are immediately gone? Their cost structure just went up by 25%. It doesn't exactly encourage production. Everybody wants to move over to a greener economy. Well, sure, but the problem is we're just not there yet. And they're doing everything they can to discourage these companies from going out and finding oil. So, we're probably going to end up paying a price for it. We'll see, that's what makes a market. But I really have no interest in selling Chevron. If it comes down a little bit more, maybe in the future, we'll spend part of a podcast going back to the oil story and where we start looking. Interestingly enough, one of Berkshire Hathaway’s now larger positions is Occidental, and they continue to be fairly aggressive buying. So apparently, I'm not the only one who's figured this out. Anyway, so that's kind of a quick update there. As far as you know what's going on. 

 

10:50 Greg

I think it's normal that people are going to want to look at podcasts, read things, trying to figure out a is a recession coming, are we in it? What do I do? How should I invest? Just give you some idea maybe what to expect here in the near term, or how to interpret some of this data that comes out on the economy or stock you're following. To be perfectly honest, I do the same thing. I think it's normal. Everybody does that on some level or another. You know, you're sort of looking for some answer. Well, we don't have any silver bullets. But I'm going to share a story with you that hopefully makes it clear that you really don't need any silver bullets. 

 

11:38 Greg

Part of this I'm just going to read out of Wikipedia because it sums it up really well. I read part of this story in The Wall Street Journal several years ago when the guy died. Wall Street Journal did an article on it and so I know that the story is basically true. But let's look at Ronald Read, who was born on October 23, 1921. Now Read worked for almost a quarter of a century as an attendant and mechanic at Haviland’s service station, a gas station that he and his older brother Fred, later purchased and sold upon retiring. Now I don't know about you guys, but I actually remember driving in the 70s when I was in high school and back in the 60s, going to the service station and somebody would come out and clean your windshield and my mom would give him the credit card and sign the little slip and it wasn't exactly a glamorous job. But continuing on with the story. He retired in 1979. They had sold the station and his retirement lasted for a year. He then worked part-time at JC Penney, I want you to remember that, where he did custodial and maintenance work before retiring in 1997 after working there for 17 years. I think most people would define that it's just a level of survival. Read’s hobbies included wood chopping, stamp collecting, and coin collecting. He frequently drove his car to his family's home to store firewood, chop there and look for tree branches on the ground to use for the wood-burning stove at his house. Read frequently patronized the Brattleboro Memorial Hospital's coffee shop to drink one cup of coffee and eat a breakfast of an English muffin with peanut butter. After the coffee shop closed, he began to eat breakfast and Friendly’s. Read met the hospital development director who suggested he check out the library and help him secure his first library card in 2007. He regularly visited the library to return a pile of books and check out another pile. Reader's Digest said he was a blue-collar guy with blue chip smarts. Now you got to realize you're going to hear a lot of references to a lot of magazines from a guy who worked at a gas station. So, the Wall Street Journal noted that his roughly $2,380 purchase of 39 shares of Pacific Gas and Electric Company, on January 13 1959 grew to $10,735 by the time he died.

Read bought many shares of JM Smucker Company, CVS Health, Johnson and Johnson and held for long-term several blue chip companies including Procter and Gamble, JPMorgan Chase, General Electric and Dow Chemical Company. He focused on companies that paid generous dividends, (hmm somebody’s podcast is named that), which he would reinvest into purchasing additional stock. He did not invest in technology companies and the stock du jour because he concentrated largely on companies he knew about. When he died, he had no fewer than 95 stocks that were diversified in many industries such as healthcare, telecommunications, public utilities, rail transport, banks, and consumer goods. Although he owned shares of Lehman Brothers when it went bankrupt in 2008, the bankruptcy minimally affected his returns because his investments were diversified. Read stored his stock certificates in a safe deposit box in his bank, which when piled together, reached five inches high, (which in the old days you used to get your dividends in the mailbox). To remain updated on his investments, he relied on the Wall Street Journal, Barron's, and the public library near him. Read read the Wall Street Journal daily. You notice he kind of just kept it simple. His neighbors, family, and friends did not know the scale of the money he had amassed. Read use the safety pin on his fraying khaki denim jacket so he could continue wearing it and put on shabby flannel shirts. Read was a regular at Friendly’s-- you got to laugh at this-- where a one-time patron paid for his meal because the patron thought Read could not afford them. He owned a used 2007 Toyota. Read’s lawyer said despite his being a millionaire, whenever he visited, he parked in the further parking spaces that did not have parking meters. The Boston Globe called Read the epitome of Yankee frugality. According to those who knew him, despite the limited salary from his employment, he was able to amass a substantial fortune through purchasing equities. The Washington Post praised Read: “how a man of modest means accumulated so much well, lessons for saving that apply to all of us.” The Wall Street Journal said besides being a good stock picker, he displayed remarkable frugality and patience which gave him many years of compounded growth. At the time of his death, his estate was $8 million. He gave away $2 million to his stepchildren. He donated 4.8 million to Brattleboro Memorial Hospital and 1.2 million to Brooks Memorial Library. Both of these requests were the largest donations that either institution had received. 

 

17:46 Greg

So, I hope you guys enjoyed that little story. So with the question: is there a recession coming, are we in it? Let's look at a few takeaways and do some reverse engineering and just see how Mr. Read handled the situation. If you go back to 2014, in June, which was when Mr. Read died, the S&P 500 was at 1960. We're just going to use 8 million as the terminal value for his portfolio. At that point, the dividend itself was $39 for the S&P 500. That was a 2% dividend yield. So in 2014, the income for Mr. Read was probably right around 160,000. In fact, I would venture to say it was a little higher than that because if you're in a dividend portfolio, you're probably at least 25 to 50% higher than what the S&pP 500 dividend is, but we'll use 160,000. Let's go back to September of 2007. At that point, the S&P 500 was it 1526. So that was 22% below what it was in June of 2014. So, his portfolio would have roughly been probably $6.2 million. Well, at that point, you got to step back and say: “All right, the guy is 85 years old, and he's basically 100% in equity.” If he took that portfolio into pretty much any advisor in the country, not every one of them, but probably if he went into Merrill Lynch or Charles Schwab or Fidelity, they would all tell him: “you got to sell at least 50% of his portfolio and get out of the stock market.”

And, you know, you hear the age weighting that you should have a percentage of your portfolio in the equity market minus your age. Well, that would mean that if you take 85 He should have sold all but 15% of it. Anyway, he's got $6.2 million and if we still use the dividend yield, he's got about $112,000 of income. But here's the thing I want you to realize. Right now the market is down 25%; you're wondering what you should do about a recession? March of ’09, at that point, the guy's 87 years old. His portfolio is probably somewhere around $3.2 million. He's lost well, he hasn’t lost, but his portfolio has declined by almost 50%. But here's one of the keys and the big takeaways. His income in 2009, was at least $97,000 because that's what the S&P 500 dividend was. You have to think the guy is maybe wondering a little bit: “I've lived on nothing. I use safety pins to keep my clothes together. And I've lost half my net worth.”

I don't know if he's thinking that or not. But I can tell you that the fact that he's got 90- at least $97,000 coming in the mail, probably helped him feel a little bit better. He's thinking I'll just keep buying because apparently, that's what he did. Well, in March of 2013, the market had recovered. It was back to 1569. So within three years, well basically four years, we're basically back to even. But the dividend yield on the S&P 500 at that point was $31.80. So, it had already risen a little bit through that period. And now he's getting $130,000 a year of income, and his portfolio has recovered, but he's earning almost 20% more. And over that period of the last three years of the recession in the market recovery, he's brought in almost $400,000 of income. Well you get out to 2014 and he’s got $8 million. His income at that point was running at a run rate of 160,000. Because it's a dividend portfolio, he's up somewhere probably around 200,000. 

 

22:27 Greg

So you know, the lesson to learn: if he did nothing over those seven years, which he basically did nothing, he earned about $900,000 of income. It's just the simple fact of letting the dividends grow and then the whole power of compounding. So, you know, one big takeaway was Ronald Read was great about getting on the line and just staying on the line. And for those of you who haven't listened to one of the previous podcasts, the line is just the dividend line of the S&P 500 and how over the last 100 years, it's grown at an average rate of 6%. And the second thing is, the key part that makes this work is the sustainable dividend growth. You want to own stocks that can grow their dividends, and in the end, that helps solve all your problems. If you've got some patience and discipline, because as the dividends grow, eventually the stock prices reflect that. So, it is a different strategy than just buying a high dividend. So those are two big things that I think that you know, in the environment that we're in, it really has a lot of lessons to it. The power of compounding allows a guy who basically barely earned enough money to live, to give a hospital almost $5 million, which is more than probably most people that have $50 million giveaway. So it's a pretty incredible story. I'm throwing that in there because you can wake up, you can worry about the current inflation number. You can worry about we are or we are not going to go into a recession. But if you have a time horizon that's more than a few years, it's all about consistency, t's all about compounding, it's all about growing that dividend stream. It's not the only way to invest, but it works. Keep in mind, a fairly significant piece of Ronald Read’s investment time horizon was in the 70s. And the 70s was a period of some pretty scary inflation, high-interest rates. I mean, we're not even close to where we were in the 70s.  Yet, he still achieved some pretty phenomenal results. So just be careful when you see these headlines. They grab your attention, but you just got to stay focused. I'm going to use Clorox, it’s a great example. Right now the story, it hasn't changed. We're going to get a quarterly report on it. Their earnings very well could still-- they're probably not going to be that great because they still have problems with inflation and their cost of goods. But they've got products that are enduring for the long term. It's a 100-year-old company. I have a feeling that you-- I don't even think you can get a certificate anymore, everything is held in what they call street name-- But if you could, it's one of the stocks that you can probably put in your safety deposit box and your heirs will pull it out someday it's probably going to be worth a whole lot more money. So don't let these headlines get you too wrapped up in what's going to happen in the next few days and really view them more as opportunities. One of the great things about dividends, you get a little bit of cash flow every quarter. If the market is down, you've bought more instead of having to sell something or just waiting for it to come back up. So there are advantages to it. 

 

26:15 Greg

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 ethan@growmydollar.com. Past performance does not guarantee future results. Each investor should consider whether a strategy is right for them and all the risks involved. Dividend Stocks are volatile and can lose money.