Downfalls of a Lottery Ticket Mindset with Jeff Weniger — Head of Equity Strategy at WisdomTree

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In this month’s episode, Greg sits down with Jeff Weniger, Head of Equity Strategy at WisdomTree. For the unfamiliar, WisdomTree is a fund and ETF manager with roughly $90 billion in assets under management. What makes WisdomTree’s funds special is that most of them focus on dividend and dividend growth strategies. One of their largest funds is the US Quality Dividend Growth Fund ($DGRW), which incidentally is our largest core position and is one we have mentioned over past episodes. Among their other funds, $DGRW is exceptional for gaining exposure to quality dividend growth.  


Jeff has spent decades in the finance world and specializes in the management and creation of strategy-focused ETFs. Prior to joining WisdomTree, he was Director & Senior Strategist at BMO, working directly with the CIO of the firm from 2006 to 2017. He is a CFA charterholder, and earned his MBA from Notre Dame.  As head WisdomTree’s equity strategy, Jeff has invaluable experience in equity markets and provides unique perspectives for long-term investors and the macro environment. 

During Greg and Jeff’s discussion, they cover the history of dividends, the difference between US and overseas dividend culture, why “boring” actually performs well, and why having a lottery ticket mindset can lead to mistakes. The interview is full of topics that the dividend investor should keep in mind and ultimately serves as a powerful reminder of why dividend growth investing is a long-term strategy that works.

EDIT: This episode was originally uploaded with an hour of silence that followed the episode. The current audio file has been edited and corrected. 

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Transcript

Greg Denewiler:  

This is Greg Denewiler, and you're listening to another episode of The Dividend Mailbox, a monthly 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

Welcome to Episode 22 of The Dividend Mailbox. This episode is going to be a little different. Today, I spend really the entire episode with Jeff Weniger, who is head of equity strategy at WisdomTree. WisdomTree is a fund manager that mostly manages ETFs. They manage almost $90 billion. And WisdomTree really targets dividend growth or just dividend-paying ETFs. And they've been around for more than a decade. They were earlier adopters of dividend-based ETFs, so, their funds do have a track record. And specifically, if you've listened to our previous podcasts, we do use a few of their funds, especially their dividend growth ETF which is DGRW. Jeff has been in the business, in fact, he'll tell you at the beginning, he's been around for a while. So, I hope what you get out of it is just the depth of dividend investing. We cover some history, we look at foreign-based dividend strategies to some degree, and we really kind of cover the broad spectrum of dividend investing. Hopefully, this will give you a little better feeling of confidence as far as looking at dividends, and then a little bit into what you may expect in the future. So just a quick note before we start due to compliance reasons, Jeff can't mention specifics about their individual funds in this podcast, but the one that we use is DGRW, so you can keep that in mind as we go through the interview. So here is my discussion with Jeff Weniger.

Greg Denewiler:

So today, we have Jeff Weniger with us, and he is the equity strategist for WisdomTree. On my way into the office this morning, I was thinking Jeff represents roughly $80 billion while I represent $80 million, but I thought, well, if, I maybe hesitate or mumble a little bit, you guys couldn't tell the difference, and we'd be on the same level. But anyway, the great thing about the dividend strategy and dividend growth, in general, is that it's really all about cash flow. And a lot of wealth is created by just compounding cash flow. It's that simple. And it's basically the whole center of this podcast, and it's what it's all about. So first, I'll let Jeff just tell us a little bit about his background and how he came to WisdomTree. I'm pretty sure but I'll let Jeff speak for himself, WisdomTree’s core focus is really dividends and dividend growth.

Jeff Weniger:

Yeah, Greg, well, thanks for having me, I appreciate it. It's— I love doing podcasts essentially as a career path. This is not what I knew was going to be the case 20 years ago when we were back in school studying all this stuff, but yeah, the rise of the podcast to talk about our bread and butter. At WisdomTree— which you hit the nail on the head— the firm was founded, at this point, a generation ago. And when we launched ETFs in the summer of ‘06 which is now 17 years ago, there were 20 ETFs on day one. They were all dividend ETFs and with the rise of not only the standard dividend weighting ETFs that we've had since then but the quality dividend growth concepts that have been a real success for us in the last 10 years or so, it is definitely primarily a dividend operation here. And I got into WisdomTree, usually in the way that people find themselves there. Second, third, and fourth jobs, I had been in a private banking operation at the old Harris, if you know that Greg, which is the BMO Harris, and I was there from ’06, ‘07. I did my business school internship there in ‘05. And we saw that the rise of ETFs was pretty clear. ETFs were taking over mutual funds, and I was doing classic top-down asset allocation work in the Office of the Chief Investment Officer. And it was peculiar in that the Canadian operation out of Toronto approached me and the old CIO and said, “Hey, we're looking to do some ETF model portfolios, you're running ETF models for the US business, do you have any interest in running some ETF models for the Canadians?” And I'm looking at their market share at the time, and I think to this day was the number 2 percent market share in Canada. There I was this American guy in Chicago doing an asset allocation, and the next thing I know, I'm running the model portfolios for a huge ETF complex up there. So, I’m doing the ETF strategy for the US and Canada, with of course, help from colleagues, and I was a client of WisdomTree, and WisdomTree was trying to obviously get their ETFs into the models that we were working with the broker-dealer and ETF strategies that we we're putting in the high-net-worth group. And after a little while, it just gets to the point where you’ve known people— I've known Jeremy Schwartz, here at WisdomTree, since back when we were kids, back in ‘Boca. And he went off his separate ways and was one of the original employees at WisdomTree and I was over there at the bank. At one point, he said, “Look, why don’t you stop being a client of ours, and come on over and be the strategist here at WisdomTree? And you clearly believe in smart beta, you clearly believe in running something other than a cap-weighted index inside the ETF structure. Come on over.” And I said, “Well, there's just one thing, I've got these kids and we're in Chicago, do I have to move to New York?” And WisdomTree, to its credit, this was six years ago, said: “No you don't have to move to New York, you can stay put there because you’ve got your whole Rolodex down in the ‘loop’, so stay there.” And so here I am, six years later, and it's been tons of fun. And Greg, I'll tell you, for a while there, we were kind of just moving sideways as a business. The funds were doing fine, but dividends as a concept were not being respected. Everybody would be in Facebook, Tesla, and those types of things. And then last, what the past five, six quarters, it's really been a lot of fun to be at WisdomTree because I think we're getting a little bit of credit where credit is due at this point. People are embracing dividends as a concept, much more so than they were when it was all speculative mania in 2020 and 2021.

Greg Denewiler:  

I have to tell you, when I started, which was decades ago, there was Payne Weber, EF Hutton, Merrill Lynch, Dean Witter, and Smith Barney— all big blue chip brokerage firms. And yeah, things have changed a lot. But again, I can't overemphasize, one of the things I've learned is one of the great things that dividends do, at least for me, and it's helped my client base also, is that it really steers you down the middle of the road, and the middle will create wealth if you're just patient. A lot of people don't realize that almost half of the S&P 500, its total return has come from dividends, and that goes back 100 years. And another big point is that 400 companies roughly, of the S&P 500 pay a dividend. So, it's a significant piece of the marketplace, and that really hasn't changed for the last several decades. So as a strategist, what do you see currently, and going forward? As far as dividends and just the marketplace and the economy in general? How do you feel about the market right now?

Jeff Weniger:  

Yeah, we have a chart floating around. I'm racking my brain right now. It's a 40- or 50-year chart where we have something like 67% of total returns being attributed to dividends. You had 100 years in your mind there. And in terms of dividend culture, the S&P 500 is, truth be told, it's less of a dividend culture than some of these overseas markets, even though to be in the S&P most companies have to pretty much check that box. The exception, of course, is the Silicon Valley firms. Though dividend culture has risen in Silicon Valley in the last 15 years, as well, we see it in our data with the percentage of total US dividends being paid by the tech sector. Entering the global financial crisis, it was like five, and now it's about 15%. The tech sector pays notable dividends and overseas, I mean, almost very few companies don't pay a dividend, certainly in Europe, Japan, and so forth. I think it’s not known that the Japanese— something like 95% of all Japanese corporations pay a dividend. We just think of that as a poultry dividend society. Not so, compared to the US, but will it continue? Yeah, I think it will. I mean the other thing that's in the background here, Greg, is what's going to happen with buybacks. This has been the tradeoff between “Do you want to hide your dividend and keep your dividends stable, cut your dividend?” Well, in the last four years, there's been the rise of the share buyback, and share buybacks exceeding US dividends for many, many years— it's about trillion dollars for the buybacks, but there is that big asterisk right now, Greg. Which is right now this buyback tax— there was no buyback tax, and the tax is now 1%. And they're talking about flirting with targeting— deciding what they want to do— to raise that up to; the number four has been floated. 4% does that increase your analysis? I guess econo-speak, Greg, your marginal propensity to favor the dividend program, you know, when you're looking at a dividend ETF and ETF that has dividend in its name, you should be cognizant of both the dividend policy and the buyback policy because they oftentimes go hand in hand? And I, let's say I've got this corporation and now reaching a state where I'm comfortable returning cash back to my shareholders, and I step up to the microphone on the quarterly call, and I announce I'm initiating a dividend. We had no dividend before, we're initiating a dividend, but also I'm initiating a buyback program. Those two are highly correlated, the buyback program and the dividend policy, and we'll have to see. That's kind of one of those curveballs that, we in the dividend industry, you're trying to get our hands around. Does 1% buyback tax change your calculus? Probably not. Does two or 3% tax? Maybe you start thinking about it. It might be from your left pocket into your right pocket type of stuff, but it's certainly something that's on the table. It's something to consider, something to research.

Greg Denewiler:  

Personally, I don't think the buyback tax at 1% will really make any difference. But if it goes higher, it very well could. It potentially could even be a positive in one aspect, from the standpoint that companies do tend to pay too much for their own stock. They won't buy— they’ll be less inclined to buy their stock back at higher prices if they're paying a tax on it. So over time, it could be a potential positive, but that's just me. And I think if the tax does go to 4 or 5%, companies not wanting to pay the tax on buybacks, they'll probably potentially increase their payout. And that would help investors from a dividend standpoint. Fortunately, capitalism is pretty good at figuring out where the best use of money is, if you just let it work on its own. You know, regulation is what it is.

Jeff Weniger:  

Yet whether we like the 1% tax or not, that is policy.

Greg Denewiler:  

So, one big thing that's been in the headlines recently, actually for a while now, is our current debt situation and the fact that debt continues to climb higher. How do you feel that may or may not affect dividends going forward? And do you think that's a risk to the dividend strategy?

Speaker 3  

The broad market dividend situation?

Greg Denewiler:  

Yeah, we’ll just stick to that right now.

Jeff Weniger:  

Well, corporate debt… corporate debt is an intriguing situation because some corporations were trying to economize during COVID. The issue with corporate debt and whether or not your dividend is going to be money-good is what happens when you need to roll over that debt. Now, I'm trying to figure out here in my head what the numbers I was reading a few days ago were. I think it's something like— in junk debt, which is really where you've got your issue, so it would be a junk-rated company that we'd be most likely to have a vulnerable, trouble dividend. A lot of the junk debt isn't due— I think only 20% of it is due in the next three years. So, you do have this wall that would be coming in ‘26 and ‘27, which could be a real issue, if the spreads don't come down by then. But the thing about junk spreads is they usually wouldn't stay wide for four or five, six years, but we will see. But the days of coming to market— remember Greg— when not to take a junk company, take a gilt-edged investment grade firm, but remember, Apple was issuing debt, just for the sake of being on the record, with some debt gifts. Of course, the company was a cash machine and didn't need to do that. And various companies have done that, Microsoft as well, just for the sake of “might as well— the board’s going to let us do it, it's half of a percent or 1%, whatever the coupon was, just go ahead and issue it.” But yeah, I mean, the biggest issue, I would suspect, to whether or not broad market dividends would be caught, is how long these interest rates stay up here. I mean, we just had the Fed take overnight money from a range of 0 to 0.25, up to the range of 4.75 to 5. So that's an incremental 4.75 basis points. And we've seen across society, not only bond yields moving in sympathy with that, on the investment grade side, (like treasury yields across the curve), but it's happening in terms of spreads. It's happening in mortgage spreads, and from the personal level, me and you, going out and obtaining a mortgage. It's happened in auto financing, I think the average 48-month lease on an auto loan is something like 7%. It was four and a half percent in recent memory. Credit card rates are up at 19%. That was 14.5% there for a long time, on average, and so it's happened across all swathes of society. That's one of the things that would be a risk for dividends. I think that the next natural question, Greg is, is corporate America— I'm going to make American comments here for the pod, but we can of course speak internationally— what is corporate America's view with respect to cutting dividends in some adverse scenario? If that's what you're alluding to, a recession that is run of the mill or recession that is deep. And the funky thing about it is, when you look at dividend cuts from our database— we can get back to 1957 with our Jeremy Siegel stuff— most of the time if you have a really punk year like we had two in a row in the early 1970s, where dividends were cut. You may recall we had that ugly recession there, we had a bear market from ‘68 to ‘70, and we had to come up into the nifty 50. And that bear market in ’73, ‘74. And I think we had dividends cut in— I think it was the 72 and 73— And it was two or three percentage points each year if memory serves. But then you've got this big, big one off— I'm picturing the1957 to present bar chart, it's floating around on WisdomTree website somewhere— you have that 20-some-odd percent cut in the global financial crisis. And is that the one-off anomaly that we can just draw a line through and move on? And go to, for example, the COVID dividend cuts, which were in the low single digits and quickly recovered by the first summer of COVID, when it was realized that the economy was not in a state of collapse and that there was the fiscal money splash. So, you end up with this time series from ‘57 to the present, yet six calendar years with dividend cuts, but you have that one, where was 20-some-odd percent, and that is the tail risk. I don't know that that's what's coming, but certainly, it's worthy of debate.

Greg Denewiler:  

I would just add here that we've looked at the decade of 1970 to 1980. Even though we had a severe recession in ‘73 to ’75, we've looked at the dividend growth rate of the S&P 500 and it was actually one of the higher decades. It grew, even though you had that big cut in there. And then I'm going to piggyback a little bit with your comment about 2008-09. The S&P, the dividend declined by about 23% but it recovered extremely rapidly. And most of that cut actually came from the banks, the big major banks, which were significant contributors to the S&P 500 dividend at that point. So even if you look at what happened in that period— JP Morgan, JP Morgan Chase was forced to cut their dividend, even though they could have continued to pay it. But because the other major banks were told to cut, they weren't going to let JP Morgan alone pay a dividend. But that was a big piece of that 23% decline in 2008-09. Personally, I don't think that's coming in the near future, because we're not going to have the banking crisis that we had back in 2008.

Jeff Weniger:  

Two things you just mentioned were the 1970s dividend policies, and then the banking crisis from ’08-‘09. So let's start with the 1970s. And let's just think out loud here. I pay you dividends in nominal dollars, whether you like the inflation scenario or not. And I pay you $1 per share on XYZ Corp. And we have a deflationary society, like Japan, just to use the quintessential deflationary society. Now, it's going to be very difficult for me to raise my revenues in such a society and get your dollar dividend up to $1.05 or $1.10, just by the nature of our operating environment. In contrast, it's the 1970s. And though the economic backdrop is moribund— nobody associates the 1970s with any kind of go-go economic growth— I'm in a nominal inflation situation where if I'm just treading water as a business— I'm in Purgatory, my business isn't doing great, but it's, it's moving along— and I am raising prices every year, and maybe my operating margins are not changing. I can get the dividend back to you at $1.05 a lot easier than in the Japanese scenario. And so in the ‘70s— and I'd have to double-check this, I want to say, again, because we have all these exhibits, I'm just going through my brain right here— I want to say that CPI through the decade of the 70s was something like 6%. And dividend growth was something like 6%. And so you didn't end up beating inflation in that decade, even though over the long haul, you beat inflation by about 2%. If the past is prologue, it wasn't the end of the world if your objective was dividend growth. That is one of the things about stagflation and or inflation that is peculiar. Your PE ratio is probably retrenching, you're probably not in some raging bull market. Remember that the Dow from 1966 to 1982 was a zero in price returns. The Dow had a series of bull and bear runs, we were just talking about it. You had that ugly bear market from ‘68 to ‘70, you had the ugly bear market and ’73, ‘74, which had some intermittent bull markets. But once you got to I think it's August of ’82, you were unchanged on a price level in the Dow Industrials from where you were 16 years prior. That's one of the interesting things about inflation. 

Now you mentioned the global financial crisis, the 20, you would have just a 23% cut in broad market dividends at the time. Now. First off, to get it to that order of magnitude, you'd have to have a crisis of that magnitude. And I don't think that that's anybody's high-probability event. What do we want to call that a 5 or 10% probability? The other thing is, is that— and this what this where we could do a whole pod on this, Greg, it's what our memories serve— in prior cycles, I oftentimes think of that era, from the turn of the century into the peak of that bull market that ended on October of ‘07. I oftentimes think of that as commodities, commodities, commodities, oil and gas. And you forget, to some extent how much the financials had come to dominate. It was a value cycle from 2000. Well, from 2000 until ‘07— And when we go back and we look at financials as a percentage of total dividends in the billions, financials walking into blindfolded into that crisis, we're paying 30% all dividends. And if you recall— because back then, I mean, I just associate The debt market with China's insatiable appetite for commodities and oil going into the triple digits, which is one unheard of, from ’98, ‘99, when oil was under $10. And you just think about all that. But remember, we had some giant financial institutions that are now a shell of their former selves, at least in my view. HSBC, for example, HSBC— because we have all this data because we launched these ETFs back in ‘06, which was on the eve of the crisis. And HSBC was something like the third or fourth-largest global dividend payer, at the time, Greg. And somebody else, not JP Morgan, it was something like BNP Paribas, which is the big French operation, and people know, BNP Paribas and SocGen were paying huge dividends at the time. Of course, the European banking giants have fallen by the wayside over the last generation, and so now and I diverted there to a developed market commentary, but at the time, when we were clipping coupons from the Citi’s, and Morgan Stanley's of the world, it was 30% of all S&P dividends was the financials. And financials, of course, include asset managers, insurers, and so forth. Berkshire is in there, that's not a dividend operation. But now it's— call it financials as the 16 or 17%. So if the thesis that the listener may have is that what we've seen from SVB, and Signature Bank, which as we record here was a month ago, is the beginning of something like that, if that's the thesis of the listener, then the starting point would be a significantly lower proportion of all dividends being paid by the sector with which that viewer believes is the risk sector. So, and most of those dividends were just a total, you said it, you were paying a dividend, you took that thing to zero, no questions asked, you either did it in solidarity with the system or you did it because you were functionally bankrupt, which was the situation with the entire banking system. Nobody will convince me otherwise, I don't care where you were domiciled. you were basically bankrupt in the fourth quarter of ‘08.

Greg Denewiler:  

So, Jeff, you're probably not even this old, But when I started in the business in 1979, the yield of the S&P 500 was about 5.5%. And I was working for a regional firm at that point in Kansas, and PE ratios were about eight. And the market had been going nowhere for a while, in fact, for quite a while, and I can remember cold calling— something you had to do back then— and the comment was, from a prospective client, “My money market fund is paying 16 to 18%. Why in the world would I want to invest with you?” Well, we all know now, looking in the rearview mirror, that you should have sold your house, and put everything you could into just the S&P 500 in 1980, And you'd be worth a lot more money. You just can't focus entirely on today, because you have to look at the environment and what's going on. And a big piece of this is about why things are priced the way they are, and where you perceive there's value. And there was definitely value in 1979 and 1980. That's one of the things that we try to do. And another comment, you talked about yield spreads, and higher-yielding debt and the problems that you can get into there. But the whole dividend strategy, I think, tends to keep you out of a lot of that. Looking at the consistent dividend growers, they tend to be a little bit more mature. They tend to be— they just tend to have more experience; they've been in the marketplace longer. They tend to have more discipline. And usually, they're not going to be a double or single B-rated credit. So, you've got lower risk there. And that sort of profile is really what comprises most of your funds. And even if there are a few names in one of your portfolios, they usually have very small weights, so, their impact is somewhat minimized anyway. And finally, I would say the great thing about cash flow, and this was or is one of Jeremy Siegel's big points in one of his books, is you actually really even want to stock that goes nowhere for 10 years, and it pays a dividend and you continue to reinvest that and ultimately if the stock does finally reflect its dividend growth rate, that's where you can make really a lot of money because the dividend has allowed you to compound at a lower rate, and then the entire position has moved higher. A great example of this is Microsoft back in back in the early 2000s when it was paying 3-4%, the stock wasn't moving much. And it was trading at a PE of around 10 to 12. But then look what happened, the stock took off, and it's become one of the best performers. And that's a little bit of an outlier, but when you compound money, and you have a good dividend yield, over time, that's how you create wealth. Now, I would like to bring up just the foreign space for dividends. And we don't— this a personal thing— but we don't really spend much time there at all. And the biggest reason is just simply, not because they're not good dividend payers, actually, the foreign market tends to yield more than the S&P 500. But we're after the annual predictability of dividend growth, and they tend not to be near as predictable or as predictable. So, what are your thoughts about foreign space? Give us your thoughts there. 

Jeff Weniger:  

Sure, well, you hit on like five different things that I think are so topical, I'll see if I can remember which ones, as I as I'm flowing. I was thinking about a concept with hand grenade-type stocks. There is a cultural aspect to dividends that is different in the US compared to some overseas horses and not to belabor it if this a US-centric conversation, but generally speaking, there is a sanctity to dividends in the United States. The factory could be on fire, and you are going to convene your C-suite together and say how do we protect this dividend? As soon as we signal these shareholders that we're cutting this dividend, it's Katie bar the door. That is a corporate America cultural aspect which is why it's the last thing you do and that's how you know that your firm is really against the wall. When you catch that announcement, it's usually bad news, which is why at WisdomTree we have a policy inside the ETF that when the dividend is slashed to zero, that company gets kicked out of the index, and we liquidate it from the ETFs because it's usually a signal, not usually but oftentimes, the signal that chapter 11 or chapter 7, is the next stop for that firm. That's how much the dividend is coveted. Just think about the type of company that gets put in their portfolio as an individual name has held through the generations like MaBell, that type of thing. Now, overseas it's a different situation. A good example here would be the British sensibilities with respect to this. We saw this in recent years. There is a view that you cut your dividend because everybody else in the banking system is cutting their dividend. You can see variability in dividend programs. It's not as much of a red splotch on you when you do cut in a place like Britain, or Germany, or what have you, because it's known and so when we have these time series of dividend programs, and we're overlaying the US with Europe, or the US with Japan, you can see the COVID dividend cuts coming in ferociously in those other countries and then coming back. Whereas the line is pretty much just moving sideways in dividend policy in the US. So, we didn't see the dividend cuts during COVID here as we saw overseas but you didn't necessarily have an adverse reaction in those overseas markets because it's kind of a wink and a nod because the state will oftentimes tell you what to do with your dividend policy when you have one of these social comeuppances. As was the case with the global financial crisis, and COVID and you know, you hearken back to Microsoft, Greg, that was pretty cool. Because that was a good example of you have to be cognizant of the difference between a good company and a good stock. For my entire existence, Microsoft has been a good company. And there were just times, and this goes back to the turn of the century, there were times when it just wasn't a good stock. It got very, very expensive and I think that's something that people sometimes struggle with. There are a ton of great companies out there, but do I want to pay 50 times earnings? Which I believe was something like the peak multiple of Microsoft, maybe 100 times, at the turn of the century. And that stock spent a dozen years in the wilderness. And then yes, it came firing back once we realized that it was time for that stock to have its day in the sun again, and that has been the case for the last 10 years or so. The other thing that you said, well, at least one of the things I interpreted you saying I guess, Greg, is that you know in recessions, in earnings declines, in periods of turmoil, or problems that can front your portfolio and take years to recover, where are those problems coming from? They come from companies that have gotten themselves over-extended. Companies that were unable to anticipate the years of scarcity during the years of abundance, that type of thing, and we have not necessarily inside the S&P 500 but inside the US stock market— definitely inside the Russell 2000 which is the best-known index of small caps— seen a ton of unprofitable companies. And it was when you were, Greg when you're talking about the stages of development. By the time you have gotten your corporation to a point where you have decided as a firm that you're going to pay a dividend, you're no longer at an early stage. You're an established firm. And you find that when the tide goes out and you're not an established firm and you just caught the bad luck of walking into a recession, and you are a smaller firm that's trying to be a larger firm. You don't even have earnings yet maybe and you turn and you see that the primary conduit for venture capital for lending to startups is now defunct. I'm referencing Silicon Valley Bank which has been taken over by another operation and you don't know whether or not that other operation is going to be the voracious lender and provider of credit that the bank, the precursor bank, was. What does that mean for all of these companies that have not been able to survive on their own business merit? Right? It’s not that there's anything wrong with those corporations. They are just relying on earnings that are coming in some future year, but the credit spigot is either tightened or turned off. Whereas the established firm that is generating enough cash flow to service that dividend, to service that buyback program, that's the company that can get through this and I think it brings the concept of 2022’s downside capture. We use these phrases in the industry to sound really, really smart. Downside capture and upside capture. Downside capture basically says okay, the S&P is down 10 And your fund is down 6. Your downside capture is 60% You're hoping that you have a good downside capture relative to your upside capture. And that's what we saw with the quality dividend growth concept last year when the S&P decided to go down 18% and people were getting exposed in speculative ventures. We sold that the downside capture was famous at WisdomTree pretty much across the board because by the nature of screening for these dividend companies, we were not doing the fly-by-night operations and the spec plays. We just didn't get caught up in it.

Greg Denewiler:

I'll give you one of my big aha moments, and this happened after I completed the CFA program. And I had been in the industry actually, for more than a decade before I did go through the CFA program, and I know you've been through it too. You know, one of the great things the program teaches you, and this was my big aha moment, is it's really better just to try to steer down the middle of the road because it's extremely difficult to go after those high-growth situations and be successful as a long-term investor there. Because the risk is just higher, and it's a lot higher, and it's more than what the average investor really thinks they're assuming. And you really saw that in SVB bank where you know on the surface, it looked like a really— a very successful bank and it was growing extremely fast. But there was a dent in the armor. People just— they didn't see it. And I think partly they didn't really want to see it, but these tail events tend to happen more than we think. And one of the things I've noticed about the dividends space is it tends to help keep you out of trouble and it's definitely helped me. And another thing I have come to realize is that people just think dividends are boring, that there isn't just a whole lot happening in that space. But have you guys ever looked at Philip Morris?

Jeff Weniger:  

Certainly, it’s essentially the example given for long-term compounding. And they found, oh, I want to say what's it with British American Tobacco— if you're going to mention Philip Morris— somebody did a study that I have to pull it, 100 years’ worth of stock market returns with the Philip Morris's of the world. Philip Morris International, Altria, British American Tobacco, that over the last 100 years that has been the sub-sector that has been the highest returning group because it's a business model— you know where the business model is going to be tomorrow. It's going to be smoking tomorrow. Even in a state of decline. What are Western smoking rates in traditional tobacco, -1% or -2% annually? I mean, I don't see a lot of people smoking anymore. But remember, it was a cigarette on every counter. The fact that you can manage to grow that dividend and that is despite the fact— when was the settlement, ’98? They had to settle that, the American Tobacco firms, had to settle for 10s of billions of dollars back then and were able to grow dividends, notably through time. And that's the whole vice thing. Some people don't really like vice investing and that type of thing. I don't know they're moving to— I don't really know the firms that are moving— towards these vape pens. I don't really study it very much.

Greg Denewiler:

Well, we don't own it, but that's really just a personal choice. But I will throw out other things that started out as 3% or so dividend payers 10-15 years ago. Names like Microsoft, Apple, Accenture, and Lockheed Martin. These are all boring dividend stocks that in the last 10 or 15 years have gone up roughly 10 times or more. So sometimes boring is really good. Now, I don't want to get too far off on that. But just, do you have any general comments as far as where you think value is? And it doesn't even have to be a dividend. I would say that we try to position ourselves as dividend growth, that's our core, but we do other things. So where do you see value right now either in the dividend space or just anywhere you want to go?

Jeff Weniger:  

Absolutely. And I oftentimes will say that when my wife, who was my girlfriend at the turn of the century, asked me what I wanted for Christmas one year, I said I wanted Graham and Dodd which is essentially the official handbook for the lifetime value investor. So, I may be biased on this Greg. Years ago, I was reading a study, and I think that this might be a pretty good parallel. It's something you alluded to, and I don't even know if you knew you were alluding to it. But there is a lottery ticket effect in growth stocks. And it's really very simple. Greg, you and I are going to— tonight, we're going to go to an event and we're going to chat it up with people who are in the industry. And I got news for you. I got this, this biotech company, and it's got the next big thing and it's going to get FDA approval, it's going to be up 20-fold. And I'm going to explain it to you at this function that we're going to go to, and you are all ears. Because I got this company is going to be a 20-bagger until you buy the darn thing, and it ends up being a zero. And it's a great story. It's the lottery ticket effect. And it's so much better than the forestry company that you’re clipping a coupon on. Forestry is boring. I'm going to find an excuse and say, “I need to go to the men's room,” and get out of the conversation with you because I don't want to hear about your forestry company. Because I like everyone else, I want to hit that lottery ticket. Once you can get away from this lottery ticket mentality, and hyper-growth, super-growth, and unprofitable garbage, then you're going to end up being a better investor. I would hypothesize and for many of the recent years, it paid to have this lottery ticket effect. Dogecoin became a $7 billion cap and it was a joke. Its rightful value was zero. But the lottery ticket effect— and they did a study one time, I thought it was fascinating, on horse racing. And they said, and I'm going to back of the envelope these numbers, they won't be exact and I’m trying to do this from memory, but when a horse is 100-to-1 odds down at the racetrack, you would expect its probability of victory being something like 1%. That's what 100-to-1 basically is. But those 100-to-1 horses only win something like one out of every 1000 races. But, boy, what a great payout, 100-to-1. So people wager, the general public wagers, on those 100-to-1’s at disproportionate rates. The fact is— why horses don't ever come in and pay 1000-to-1 is because there's always some guy willing to plunk two bucks on the thing. And it's a lot more fun to hit that thing and have the story of a lifetime but it's a horrible venture. As if horse racing in general is not a losing venture. And the best price horses are the short-priced ones, the favorite over the long haul. But nobody wants to hear your story about how you went down to the racetrack, and you wagered on a favorite. Well, that's what buying a dividend stock is. You’re wagering on the favorite, and it's boring, and it makes sense, and if the year is 2021, nobody wants to hear it. Everybody was picking, but they were buying meme stocks, buying all the stuff— you're sitting over there and you're saying: “Just wagering on the favorite over here, I can't get it right.” And now that's ended. And I would point out in terms of value versus growth. You're talking about when you entered the industry back in ’79, I believe the year was, the year you entered the industry, we'll think about the beginning of the growth cycle from 1993. That growth cycle ended in the year 2000. By and large, aside from the window of 2000 to 2007, growth stocks have been eating value since 1993. And that only ended at the end of 2021. The growth stocks have had a favorable beginning to 2023 but I think that will prove fleeting and we got to the point where we were rewarding— as a stock market— rewarding those who are engaging that proverbial lottery ticket, that 100-to-1 horse at the racetrack, the Dogecoins of the world. And the thing that changes, that not always has but often does, is some shift in the regime. And that regime shift is oftentimes created by the Federal Reserve and now we suddenly have this 475 basis point shock to overnight money. And we saw what that did to growth stocks, to the NASDAQ. For example, in 2022 we had reminiscences of the NASDAQ from 2000 to 2002, which that Index declined 77% in that bear market. And we had a handful of dividend indexes that had black ink on them for 2022. The peak went up marginally during that year. And do we have this new cycle like the one from 2000 to 2007 kicked off by a tech wreck? Well, it was a tech wreck. It's a Federal Reserve that is no longer accommodating. And it's one where all the historical data on that cocktail party stock, that lottery ticket effect, falls by the wayside. Bear markets and subsequent tepid bull markets, which is what we have from 2000 to 2002. That bear and then that kind of tepid bull market from ‘08-‘07 often results in new leadership. That's the key and I'll end with this Greg. Every time you have a memorable bear market— not something like if you recall, wasn't really a bear, but remember that when Greece was going under and we had a 19% retracement in the S&P in the summer of 2013, 2011, I’m trying to remember. Well, there was a summer there, the Flash Crash year. I think it was 2013 when Greece was the headline— and the market will always find its headline, that was a rightful headline, by the way. I thought Greece was going to leave the European Union. And the stock market went down 19% That summer, but it's forgotten. It's done so much that— I'm the strategist, I can't remember whether it's 2011 or 2013, and I should know better— but it's forgotten! And so your leadership in that bull market— because remember the bull market was from March ’09 up until January 3 of 22, notwithstanding the COVID bear. It was a forgotten retracement and the leadership was able to continue. So yeah, the Facebook IPO in 2012, and Facebook was able to stay on top of the heap for 7, 8, 9 years thereafter. But when you have the memorable ones, like the dot-com implosion, like the global financial crisis, new leaders come. Maybe I've made this long-winded but essentially we had tech, media, and telecom dominating in the latter part of the 1990s. A bear market came along, and it was now time for crude oil to be the place to be, for energy to be the place to be. Remember you had the Saudi oil minister in 1998 ruminating on maybe $3 per barrel. $3 per barrel was what he was thinking might be the case for crude oil right before crude oil decided to go up 115% or whatever it was. And then in the global financial crisis, what we started the pod on, it was the end of that commodity supercycle. It was the end of 30% of all dividends being paid by financials. It was the end of HSBC, and I want to say it was BNP Paribas patching allocations. And it was the beginning of a rotation back, it goes back to, in fact, Greg, it also goes back to what we were talking about when Microsoft had been dead money in the 2000s. And now we've had this shake-up. Maybe it's the transition from disinflation into inflation, or maybe it's simply as easy as Jay Powell has hiked rates more in the last 13 months than Greenspan and Bernanke did in their hiking programs move for 206, which we went on to catalyze that that bear. And it's time for new leadership, and what was the leadership? It was tech, which was not a dividend-paying group, by and large. It was discretionary, which had come to dominance because they classify Amazon and Tesla, also not dividend payers, they call those discretionary. It was communication services because that's what they— when they in 2018 when Standard and Poor's lifted up all the social media and gaming companies out of tech and put them in there with the phone companies they renamed Telecom, communications services. Those were the dominating groups. And what was not dominating was the type of stuff that we own. Staples, dividend payers, dividend growers, stuff that typically, past tense, has not declined by the same order of magnitude as the market during bear markets. Lower vol., that's the other part of it. We own dividend stocks because we want a long-term return on our capital. But also, when that guy who buys that horse that's 100-to-1, that has a one-in-1000 chance, we don't own that thing. And I think that that's why we own the dividends because we don't have the bloodbath when the proverbial NASDAQ decline of 77% comes along, which comes along every once in a while.

Greg Denewiler:

I would just like to do a little exercise here, going forward. You know, there's a lot of unknowns out there. And that's, I think, a thing that people forget. There's always uncertainty. There are always unknowns. There's always a period of time when the market doesn't provide a return. Yeah, that's an issue, but we won’t go into that any further. If you just take a 2.5% dividend, and without naming a name of one of your large ETFs, it more than doubles in 10 years— which actually it's doubled in eight years. But going forward, will that happen again? Well on one level it really doesn't matter. Because if you double the money in 10 years, it's 7.2%., that's the rule of 72. You go from two and a half to a 5% yield. Well, that's simple enough and just to keep it simple, in 10 years, if you put $10,000 into a fund like that, you'll probably have received close to $4,000 of cash. And that's without reinvesting anything. It just gives you a lot of options. It gives you a chance to dig out of a hole and if your investment hasn't gone anywhere, it's going to help give you a positive return. And really, I hate using Warren Buffett because his name is used a lot, maybe too much, but you know, he doesn't pay a dividend, but he really loves cash flow. And he receives cash flow from dividends from companies so he's really doing the same thing that we're doing. Well, that works for him and he's done a great job. Better, obviously, better than any of us put together. He's looking for that same cash flow. He buys whole companies for cash flow. Most of his public portfolio pays a dividend. So you know, it just works. It's not for everybody, but it does work. A lot of investors seem to use investing as a form of entertainment or a game. But I think the sooner you get cured of that the better off you're going to be. Anyway, any closing comments?

Jeff Weniger:  

Well, I appreciate the time of course, Greg, and anything to get the word out for WisdomTree what we're doing here, you know, it’s pushing 17-year anniversaries on a lot of the original dividend concepts. We have a big 10-year anniversary on one of the quality dividend growth concepts that you were referencing here. There are a million ways to find us. I'm all over Twitter. There are several WisdomTree People on Twitter, or on LinkedIn. We have the blog on the website. We have white papers on the website. We believe that our research is really really robust. I mean, you get a lot of wisdom. A lot of ETF websites, it's just kind of like the fact sheets and stuff, but we have papers digging into a lot of these concepts. 50, 75-year dividend studies, that type of thing. It's the foundation of the firm, so, if the listener enjoys WisdomTree and enjoys these concepts, then please go engage us more.

Greg Denewiler:

Well, thanks, Jeff. And it's always good to swim with a big fish. But the more things change, the more they seem to stay the same. I really appreciate you being on and one of your funds is one of our larger holdings. I've learned to not stray too far from the middle because it's just extremely challenging to really be successful there long term and unfortunately, most people learn it the hard way. But anyway, really appreciate your time, and good luck.

Jeff Weniger:  

Thanks, Greg, my pleasure.

Greg Denewiler:

To wrap up this episode, normally we take listener questions, but since this episode went fairly long, we'll save that for the next edition. So, I hope you enjoyed this episode and the interview with Jeff. I have to tell you, even after being in the marketplace for 40, more than 40 years now, every time I have some version of this, I either read an article or have a discussion or listen to an interview. It just really continues to remind me of the discipline of looking at dividends. They're really a core of the stock market. They're just a significant piece to investing. They may not be for everyone, but most people think— “sure I understand cash flow.” But I also think even a lot of professionals don't really understand the power of compounding because it does take time and that’s what I think is the downfall with a lot of investors regarding dividends and just the whole concept. It really is, to some degree, a multi-decade progress. I think Jeff did a pretty good job of kind of going through the whole concept, the whole story. It works globally. We don't use it so much foreign, and just because the dividends are not quite as predictable, but the yields are there, the story makes sense. And another thing is I think, you know he alluded to it a few times, quality is important. In order to get compounding you need a quality company that can survive the downturns and not have to dilute by issuing shares or more debt. So, there's no single simple answer. It's very easy to do but it's also very easy not to do and that's what seems to trip a lot of people up. Even I struggle with, every once in a while, you see a shiny nut out there and you start running towards it because “here's a great opportunity, I think there's a great return here.” But it is like vitamin C it, doesn't work unless you take it every day. It's really a mindset and discipline is really key in dividend growth investing.

Greg Denewiler:

If you enjoyed today’s podcast, please leave us a review and subscribe. If you would like more information regarding dividend growth or our investment strategy, please visit growmydollar.com. There you will find previous episodes and also our monthly newsletter. If you have any questions or anything to add to today's episode, please email Ethan— ethan@growmydollar.com.

Past performance does not guarantee future results every investor should consider whether an investment strategy is right for them and all the risk involved. Stocks, including dividend stocks, are volatile and can lose money. Denewiler Capital Management may or may not have positions in the publicly traded companies mentioned herein.

Transcribed by https://otter.ai