The Future of Dividends with Daniel Peris

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To start our fourth year of The Dividend Mailbox, Greg is joined by Daniel Peris, author of The Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market and Head of the Income and Value Group at Federated Hermes. Daniel's deep historical perspective and expertise offer valuable insights into the future of dividend growth strategies and the importance of sustainable dividend investing.

Their conversation covers a range of topics including:

• Historical context and the evolving dynamics of dividend growth investing.
• Challenges and opportunities in the dividend space, including the impact of interest rates and market cycles.
• The role of stock buybacks and their effectiveness in shareholder returns.
• Strategies for managing dividend cuts and maintaining a high and rising income stream.
• The foundational importance of cash flow for all investors.

Follow Daniel on X/Twitter @HistoryInvestor

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Transcript

Greg

This is Greg Denewiler and you are 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. When they grow over time, a funny thing happens, you create wealth. 

Welcome to episode 36 of The Dividend Mailbox. This is a little bit of a special episode because we are starting year four. I can remember back when I was kind of putting the whole concept together, I approached a friend of mine who had a financial podcast, which is actually quite successful. I was talking to him about, you know maybe doing a joint project with him in regards to dividends, and his comment was kind of point-blank: “I don't know how many times we can talk about dividends.” Well, apparently, it's at least three years. So today you're going to get something that is a little different. You may recall for those of you who listen to the podcast, a few episodes ago, I had mentioned a book that I had read:  The Ownership Dividend by Daniel Paris. Sometimes it's amazing just how small the world is because, through a friend who had another connection who knew Daniel Paris, I was actually able to meet him. After that conversation, he agreed to do an interview with me and be on the podcast. I think it's, it's something that is worth listening to for a couple of reasons. Number one, he does manage over $10 billion in the dividend growth space. He has a fairly big presence. And number two, one of the things that always comes up is, “Okay, is this strategy going to work going out into the future?” And that is part of our conversation today. So I hope you enjoy it. Now, here is my conversation with Daniel Paris. 

Today we have Daniel Paris. I really appreciate, Daniel, you being on the show. It's great to have somebody who has been in this space for a long time. You've written several books, you manage over $10 billion dollars in the dividend space, and it's not something that you just started doing in the last few years because you thought it was a great place to be right now. You're truly committed to it and you have managed money for dividend income and dividend growth for more than a decade. We have mentioned in several podcasts in the past that we believe the dividend space is alive and well, and it's going to continue to be a major component going forward in the market. In your book,  The Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market, you go into the very reason why you think dividend growth investing is going to become a more popular strategy out into the future. So, I do want to say at the outset that the dividend space has been challenging, and whether you're in a little higher yield or starting out at a little lower yield and trying to pick up a little bit more of your total return coming from growth, it's been a tough space to be in. Well, strategies come and go, they cycle. This is not about where the puck has been or where it is right now, but we're going to look at where we think things can potentially go in the future. So with that, what I'd like to do is just let Daniel give a little bit of his background and kind of where he's at in the dividend investing space. 

Daniel:

Greg, thanks for having me on this show. It's a good kind of setting of the context of why I'm doing this. My background is as a historian, and I was actually trained in a completely different field as a historian and made my way into business 25 years ago. But my historical sensibility really stayed with me. And after I settled into the industry and took my CFA exams and got the CFA credential and did whatever else the hamster wheel asked that I do, jumping and running through all the hoops and this, that, the other my training as a historian came back to me and said, “Well, a lot of this doesn't make sense to me.” For instance, all of the training is still basically about cash flow-based investing. The cash flows to the investor determine the present, the value of the future, and the discounted cash flows, future cash flows determine what you would pay for it, et cetera, et cetera. And the business, if you're an equity owner, you want a rising income stream and so forth. All of which is still in chapter 1 of everyone's textbook and it was obvious over the last couple of decades, completely and utterly ignored. And I wrote a couple of books about this and highlighted really just saying the same thing that Irving Fisher said, and John Burr Williams said a hundred years ago, 80 years ago, about business ownership through the stock market and those before boards. So the book that you have in front of you, very correctly,  The Ownership Dividend, which came out earlier this year, really asked two questions: why were the prior books wrong and has anything changed? And it turned out that the answer is the same. And that's why when you reference the products that I manage, the dividend products that I manage by day and have for the last 20 years, why they have, in effect, even though they're very dividend-focused, dividend growth-focused, they've lagged the broader market. That's a truism. It's clear if you look them up. And so why has what we're all taught, but conveniently ignored for the last couple of decades, why has that been the case? That's what the book addresses. And if you step back from our day jobs in the markets and studying what's the fed going to do today? Or what's the job numbers going to be due today? Or whatever particular little bit of news is driving the markets today. Dell's comments about backup servers, who knows, whatever it is. You step back, you see a theme over the last several decades, and that's really the theme that holds the book together and makes the argument as to where the puck is going, as opposed to where it's been. Where's the puck been? Last couple of decades, the puck has been in dry, declining interest rates. And we've had 40 years of declining interest rates. And the book makes the argument that in that type of environment, two generations of investors growing up and coming of age, you have products, developments, return calculations, all occurring in an environment of declining interest rates. You also have an environment of the emergence and dominance of buybacks and you also have without any critical sense of the emergence of NASDAQ and Silicon Valley really transforming the world, and you also had a very benign regulatory and geopolitical environment. The march of global neoliberalism. So why were the first couple of notes ignored? And why has dividend focused investing been lagging in effect over the last 30, 40 years? There's a good reason for it now. It doesn't mean that the basic tenets of business ownership have changed. We see that in private markets all the time. It's still cash flow based, but in the stock market, 40 years of declining interest rates really, really made a difference on the cash that investors were expecting - The preference for buybacks and all the other factors that have made it kind of a dividend light or dividend free stock market.

That's where the puck has been. Where's the puck going? Almost a simple assertion, maybe too simple - we can discuss that - interest rates have stopped going down. I say that very carefully. I don't mean to make a claim as to where interest rates and when I'm speaking about interest rates, I'm referring to the 10-year that's the equity based interest rate.  I don't know where the 10 year's going, but it's not going back to 1%. I know where it's not going. When the 10 year settles at 3, 4, 5, 6, the answer's yes. That's kind of a historical range. I've seen some very long-duration studies, like 800 years of declining interest rates, which suggests that interest rates for a variety of reasons, demographic and technological will actually continue to come down, but over a longer period of time. So over the next 100 years, maybe interest rates do go back down, but for the next 5 years, interest rates are not going back to 1 percent on the 10-year. It's just not. And if you consider the implications for business ownership, capital allocation, business decision making, of interest rates not going back to zero. You do have the return of the cash nexus. That is, investors for the foreseeable future are going to increasingly insist on a cash return. You see that in money market funds, you see that in fixed income, you're going to see it in equities. And you saw the first few months, I think you commented or others have commented. I got very lucky. My book came out a day before Facebook or Meta announced its dividend. And we've had a couple of other big tech companies introduce dividends, so that the tech space is going to have to start paying cash as well even. They've gotten away for years without having to pay cash. Now they're going to. And so that's where I think that if you do contrast the relative to a lackluster total return of a dividend focus portfolio. Now, you, I know, Greg, you do your dividend-focused portfolio slightly differently than I do in my day job. And you probably did better with that. And I applaud you, but let's call the relatively lackluster performance versus information technology for the last 10, 15 years, if not the last 30, 40, that's duly notable. But over the next 5 to 10 years, the argument in the book is that the return of the cash nexus is going to be a paradigm shift fundamentally driven by the fact that interest rates have stopped going down and the sensibility and the structure of the market associated with interest rates no longer going down is going to change and it's going to lead, I would say, not say back, but lead forward to the return of the cash nexus. 

Greg:

So one question I have is in light that it's been a tough space to be in for several years. You have stayed true to your discipline, to the strategy. What has kept you grounded and kept you really to stay the course, even though it's underperformed to continue to do the same thing day in and day out? 

Daniel:

Yeah, it's a great question. So 15 years ago, 20 years ago, we had a lot of competitors who did something pretty similar to what we did. I'm going to say a lot — a half dozen over the last 10, 15 years. They didn't care for the environment, and they moved down the yield so that they could basically include Apple and Microsoft in their portfolios, to be blunt about it, which was a good move from them for a total return perspective. They gave up yield and cash flow for it and it was fine with them. And it may be fine with you and your clients as well. It became an interesting dynamic. that dividend growth space that you and David Bahnsen inhabit very successfully and happily is a bigger space. Why were we able to continue at the higher dividend yield focus, even though we, as a result, had lower dividend growth is that although it was perhaps a smaller space in terms of market preferences, we have a larger market share. So we've been able to stay in business because there are enough people out there who want a high and rising income stream. You also and your clients want a high and rising income stream, but we just define high a little bit differently. We're at the high end of high. You're the middle end of high and it turns out there's there are enough clients for you and enough clients for us. We have stuck to what is perceived to be a very high equity income ratio — talk about gross yield portfolios of 4 to 5% and try to grow the dividend by 4% or more. That's before various fees, we products in various envelopes. They all come with different fees, et cetera. But that's a high number compared to most people who in the dividend growth space, are very comfortable with 2 and 3% starting even maybe a little higher some a little lower. Keep in mind these are all good numbers because, as you well know, the yield of the U.S. stock market is right now is around 1.4% 1.5% and it's been below 2% since the mid-1990s. So these are all well above market yields. But we have been able to stay our course, including through periods of unpopularity because there's enough demand for it. Obviously, otherwise, we won't be in business. And because the math works, I make the argument for the higher yield because of the net present value of those cash flows. And in an environment where I want as low duration in an equity portfolio as possible, that is as much money upfront as possible, lean in the direction of the upfront yield, many other investors have said, yeah, that's fine in theory, but in practice, a 2.5 or 3% yield is just fine too. It ticks those boxes and turns out there's, there's, there's room for both. 

Greg:

I do see these comments, people recommending yields that are 8%, 10%, 12%, and I just have to shake my head because part of what you're after and what I'm after is sustainable dividend growth and I just fail to see how a lot of that stuff is sustainable. So I am going to give you credit there where there is a space that's higher in dividend yield than where you're at. One of the great things about focusing on dividend growth is that it helps keep you out of those situations where they're just not sustainable. It's just a key part of the whole dividend growth strategy. 

Daniel:

Yep, and there are yield traps, and we occasionally, because we're closer to those traps than you are, we do occasionally step into one. We try not to do that, that's the challenge. When you have a yield as high as we do, that's really the key challenge is to avoid your traps. We have in our portfolios, depending on the portfolio, 30 to 50 different securities. So there's always some, as I said, we take dividend risk to generate dividend return. There will always be that environmental risk. It's what we're paid to avoid and trying to maximize the income stream but avoid those traps. And every once in a while one happens, but the portfolios in general are able to maximize the income stream, not just head off into the yield traps. 

Greg:

Well, there were a couple of reasons why I really enjoyed your book. And one of them is just the whole historical context that you give. You mentioned the Commercial and Financial Chronicle, and I actually looked it up last night through the St. Louis Federal Reserve. I happened to pick the March of 1902 issue. Just looking through the quotes and looking through the bond section, one of the things that really stood out, the yields were around 5% on a lot of the higher quality bonds. So, lo and behold, we've seen 5% before and we've lived through it. So just having a context of financial history, I think a lot of people, it would really be worth their time to just get some background of kind of where we've been before. We've also experienced, there's just been several times in history where we've had these big emphases on growth. There was the big tulip bulb speculation that was just several centuries ago. There was the South Sea Bubble and the Mississippi Company. Then you get into 1998 where you had two Nobel finance prize winners that basically almost took the economy down. The Federal Reserve had to come in and bail out long-term capital management. So everybody thinks they're smart, but it is about cashflow and your book really does, I think a great job of just going through the discipline of cash flow and how important it is. So that leads me to the next question. You seem to be down on buybacks for the most part. I mean, I'm not a huge fan of them. I do think there are cases where they're relevant. Overall companies, I think, tend to pay too much, but tell us why you're not a fan of buybacks and why you don't really think they are probably part of shareholder yield. 

Daniel:

Yeah, no, I'm not that strident, but it can often sound that way. So let me highlight where I think buybacks have a role. So an environmental hazard of these large publicly traded companies is stock based compensation. It just is what it is. It's a very complicated way to pay your employees, and part of the complication is, in most cases or many cases, companies buy back the number of shares they've just issued to their employees, and eventually the accounting caught up and stock based compensation is now considered compensation, and you have to deal with it on the, because it's not on the income statement, it's on the cash flow statement. You do the work, it's compensation. If you wish to, as a business owner, have a very complicated form of compensation, it's free country. Welcome to do it. So that is just compensation. Companies shouldn't be getting any credit for it. Or only, they should get the same credit for just paying their employees every week and the check's not bouncing. You also do occasionally see buybacks where a company announces a large acquisition, for whatever reason, issues shares, to finance the acquisition and over the 3 or 5 years subsequent to it uses the cash for the acquisition to buy back the shares. If they do get back to the original share account, it's fairly benign. It's it is what it is. It's a way of managing an acquisition. Now, most large acquisitions fail if you're issuing shares for an acquisition, it's probably a large acquisition, probably not going to work, but the buyback portion of it is a relatively benign one. I'm actually kind of sympathetic to it because I operate in the very large cap space and some companies have come to the conclusion that their dollar dividend payments are just too big. There's an energy company based in Texas that has a $15 billion dollar a year. outflow commitment. There is a company in Basking Ridge, New Jersey, a telephone company that has an $11.4 billion dollar outgoing commitment. Those are really big numbers. We have a big economy. These are nominal dollars. We're inflationary times, but those are still really big numbers. And the company in Texas has said  “We are in a cyclical industry. That's a really big number. We think that it's not reasonable to pay more than $15 billion dollars a year in dividends because it's just too big of a number. We can get caught short in a single industry.” So what we're going to do is for a per share basis — if we buy back shares steadily and actually push the share count down, actually push, that's the tricky part, actually pushing the share count down. Because that depends on price, whether you're issuing shares to employees, et cetera. But if you push the share count down and you keep the aggregate dividend payment flat, the per share dividend goes up. So the shareholders, the you and I of said company, benefit from a rising per share dividend, even though the company has reasonably said, boy, 15 billion is a big number. There’s an energy company in France that does the same thing. It's about $8 billion euros. The phone company in New Jersey doesn't have the luxury, but they may get to the point where they can say,  we're going to get there and start doing this on a per share basis, just because the $11 billion is a really big number. So for management of dollar dividend outflows, buybacks can be a reasonable tool and you do have occasionally, tends to be limited to some places like tobacco where you will have ample cash flows, but very high yields because everyone's negative on the stock. And if the company buys back shares that have a 7 or 8 or 9% yield and it has cash flow to do so and extinguishes those shares, then in effect, the company is safeguarding the dividend for shareholders. The share sellers move on when the share count is reduced and the shareholders, even though it may be a declining business have a more secure dividend going forward. So those are a couple of the instances where a share buyback is helpful for another goal. And I'm at peace with those, but this is the nature of the business, but where I wouldn't disagree with you, and with pretty much everyone on Wall Street, is the large announced buybacks, which are declared independent of compensation, independent of curing acquisitions, independent of maintaining a specific dollar dividend payout, but are announced as returning cash to shareholders. Which they're not. They’re returning cash to share sellers and which are designed to help the shareholder push the share price up, et cetera. Those are the uses of capital that I don't see great utility for and I'm alone in that regard. I'll just have to kind of bear that cross. I don't see that as helpful. I see — you have a widget manufacturer. A profitable widget manufacturer, it's good at widget magic widget manufacturing. Now, it thinks it's good at timing the purchases of its shares. I disagree. Now, there's a famous line, which I'm sure you've heard from Ken French: “Buybacks are divisive.” They divide people from who understand finance from those who do not by Ken French's standard. I do not understand finance. I would add an addendum or corollary to that and say: “Buybacks are divisive. They divide people who understand academic finance, not finance, academic finance from people who own and operate businesses through the stock market.” And if you are in the latter category, as I am, then buybacks are not a particularly good use of company profits. So it's a mixed, mixed story. I know wall Street is in love with buybacks. You're right, I'm not. They have a role. They have a place very targeted, very specific, but those $100 billion announcements by large tech companies that are rewarding shareholders, that's not for me. 

Greg:

Well, I do agree with most of what your thoughts are regarding buybacks. If I had to say yes or no, I would say, no, I'm not a fan. It's just companies just tend not to be very price sensitive when it comes down to them. So now let's move on to one of the challenging parts of dividend investing, that is, what do you do with a company if they cut their dividend? In your book, I was a little surprised at how you dealt with that. You know, the big challenge is, is it financially better to just sell it if a company cuts their dividend? Or why don't you just go through how you deal with dividend cuts? 

Daniel:

Yeah. And here's again, the difference between business ownership and kind of stock market ownership and marketing versus actual investment management. There a bit of a difference if the goal is to deliver a high and rising income stream from a low-yielding investment platform. The U.S. Stock market is low-yielding. It's been low-yielding for decades. It's just it is what it is. It's going to change over the next couple of decades, but for now, it's a low-yielding investment platform. And if you're trying to deliver a quality 4 to 5% yield or some number that's well above the market's yield and dividend growth on top of that. What I say is that we are dividend investors in a stock market, we take dividend risk in order to deliver dividend returns. If you're not taking enough dividend risk, you're probably not delivering enough dividend returns. My prior book was a critique of modern portfolio theory, part of modern portfolio theory, which is very common and sensible and still makes sense, that there's a spectrum of risk and return. Normally we apply that spectrum of risk and return to just total return or share prices, whatever the case may be. But you can also apply it to almost any human endeavor. You can apply it to being a business person saying in terms of cash flow as well. We take cashflow risk in order to deliver cashflow returns. We take dividend risk to deliver dividend returns. And part of that is in the U S stock market, you take some dividend risk and you own names that it may or may not work out. Now, most of us operate in an environment of owning  30, 40, 50 different income streams so that the risk is actually really small from a portfolio level. But at an individual income stream level occasionally we'll get it wrong or the company will get it wrong or there'll be an environmental change. And we wanted to maximize the income stream. We wanted the high yield, but the circumstances changed. It becomes a really interesting question. What do you do when that happens? That is when there's a dividend cut from a holding. You don't want to have that happen, but if it does, what do you do? We've been doing this now for more than two decades. For roughly the first decade, we had a very simple rule. If, if a company that we own, we got it wrong, cuts the dividend, we move on. Very simple from a marketing perspective, very clean, salesforce loved it, but we did the math and the math was ambiguous at best and it's just, well, you know what, actually, yeah, we take dividend risk in order to deliver dividend return. Occasionally a company will get out ahead of its skis. We still like the company. We like the future income growth. They've cut the dividend by 25%. The damage to the share price has already been done. And in many cases, they rebound after dividend cuts. If the company's in good health, we want to at least reserve the right to review the situation. And so now it's a case-by-case analysis. Again, it was easier when we had a, “if they cut it, it's gone,” but we're doing some damage to the portfolio by that approach. Now, if they cut it, sometimes it's gone. Sometimes we keep it. Sometimes we might, I can't think of an example where we doubled down, but in theory, that would be possible. It's a matter of where's the puck going, not where it's been. Yes, we are responsible for some costs from where the puck has been, but the question is what's right for the portfolio for the income stream going forward. And it's not always a clear cut case that you should hold it or get rid of it. And so now we're, we are kind of flexible on that. 

Greg:

Well, I thought that was a great answer. We've had a few dividend cuts and the big challenge is to get away from simply running a portfolio or your strategy just purely on income. Because in the end, I try to remind myself that it is about total return, and you have to look at a company and also try to figure out, “Well, okay, going forward, what does it look like?” Is it really in our best interest to just sell it? Or especially if they just cut their dividend and they still pay something, maybe it becomes a dividend growth story going forward. 

Daniel:

There's a funny — if you kind of follow through from a process perspective — if you take, in the portfolio, the security with the highest yield and in theory, the highest rate of prospect of a dividend cut, then there's another security that's right after it, which now has the highest yield and the highest chance of a dividend cut, you get rid of that one. Until you're down to a portfolio with a 1.5% yield. You might as well just get an S&P 500. So again, in order to deliver and maximize cash flows, you do have to take some cash flow risk. Most times it works out. Sometimes it doesn't. It's just in the nature of risk and reward. 

Greg:

So now is probably a good time to move into really what a big part of what your book is about. It’s  why is dividend growth going to continue to be relevant and why is the next decade possibly going to be a much better period for the dividend growth investor? The S& P 500 for the last century, basically dividend growth has been about 6%. And you have a pretty strong feeling that we're going to stay on that track and actually performance is probably going to revert somewhat back to the mean. What does that really mean for us? 

Daniel:

So a couple of things that I think bode well for this exercise going forward. True, we've had 40 years of declining rates and implicit in that is sort of disinflation or deflation. And that made dividend growth at 6%. Much higher real terms. What we now have is some level of background inflation. I don't know what the numbers are. The Fed is going to die on the Hill of trying to make it 2%. Maybe they succeed. Maybe they don't, but it appears to be a little bit higher than that. But if real inflation, it clearly is 2 or 3 or 4%. So, if you think in terms of how we operate, you and I operate in our business of nominal dollars. So, the dividend growth, for all intents and purposes, should grow a little bit more just because we're back into to a inflationary environment. That's kind of a given. I don't know if there's too much cleverness associated with that, but it's also one of the reasons why S& P 500 earnings are probably going to be higher than you might normally expect because we're now back into an environment where they get an extra couple of percent a year just from inflation, where previously it had to be almost real growth. So you have bad factors to why dividends will continue to grow. But the main one, that's kind of from the perspective of the book and the paradigm shift in the market is that where have those dividends gone? Those dividends have gone over the last 40 years, basically into buybacks— close to a trillion dollars a year in buybacks. S&P 500 dividends are running around 600 billion — that was last year. About 800 billion last year in buybacks and the buybacks announced year to date are going to push that number. Well, towards a trillion dollars, you got half the difference just from Apple. That's a lot of money that can be used to fund investment in this country re: vertical integration, onshoring, friend-shoring, resiliency, redundancy. We're facing a lot of threats - where I was just on the phone with a large utility. They're going to be spending a lot of money in the next 5, 10 years hardening the grid. They're not using that money from buybacks because utilities don't engage in that, but you get my point, there's a lot of investments to be had in the next decade. And I think where that money is going to come from is from the buybacks. It is an argument in the book, a controversial argument in the book, that the bloom is off the buyback rose. And that trillion dollars is money that could be better spent than on buybacks. The argument will make me no friends on Wall Street or in corporate boardrooms where buybacks feather the beds and provide a lot of the drinks money and bonus money. But that's still my view and the reason I think it is again that interest rates have stopped going down and buybacks going up. We're part of the same phenomenon. The more important of those two phenomenon is the interest rate structure. Now that interest rates have stopped going down, a lot of things are going to change. They haven't happened yet, but they will. And I do believe that you're going to see a shift from buybacks to dividends and that's going to help also propel continued growth in S&P 500 dividends, along with inflation. It won't take much — a couple hundred billion. Hey, listen, it's Everett Dirksen. You might remember the U. S. Senator, “A billion here, a billion there. Soon we're talking real money.” Well, we're now at the trillion level and 100 here $100 billion there, can make a huge difference. There's just this large pool of money that is seemingly reserved for buybacks. And I think it's going to end up being used to fund both investment and dividends in the decade ahead. 

Greg:

My simple assessment of dividend growth really just comes from the back of the envelope approach, you've got 400 of the 500 companies that pay dividends. Although, a lot of them are very small, but if you just believe in a growing economy, then you look at payout ratios and their near historic lows, you've got a margin of error here that if we just return back to the mean, which is close to 50%, a 50% payout, then there you have it. It's simple math. You've got dividend growth for the next decade. 

Daniel:

Yeah, it depends on how you calculate them, but we're 30, 35, 40% max. The historical average for these companies, prior to this paradigm that's on its way out, was more than north of 50, in the 60% range. You don't have to go back to that. In the book, I just did some simple back of the envelope, math on what would be involved for the S&P 500 to go to a 50% payout ratio. And that's a lot more. The answer is it's a lot more dividends. 

Greg:

So now, I'm going to pull a few quotes out of your book, and you can just do a quick response of  really, however, you want. So, the first one is: “All but a small coterie of investors now look almost entirely to share price gains as a measure of their business success. Not cash dividend distributions they received from their ownership stake.” 

Daniel:

Yeah, and again for some people, I would without judgment refer to them as speculators just strictly from a dictionary perspective. If you go look it up in the dictionary — commodity prices and Horse racing. It's a speculation based on price or some specific outcome, but almost all business endeavors are judged by the cash flows, even if it's the cash flows derived from the speculation. Let's say you're a commodity trading house. And at the end of the day, you're a shareholder of a commodity trading house. Either you get a check at the end of the year or you don't. It's either the speculation has been successful or not. And it's the check at the end of the year that is the measure of the success of the business. Real estate, agriculture, private business, Greg Denewiler’s asset management business, Daniel Paris's job for an asset manager, at the end of the day, in any form of private enterprise, the way we're set up the measure of success is if it generates distributable cash to company owners. The U.S. Stock market is a little confusing because there are businesses underneath all of those prices, but you are confused. I think, or too many people are confused by the fact that it has a price on it or reprices daily. The closest analog to this, I think is real estate. Yes, you want a liquid market when you go in, you want to know what the price is. You want to maybe have some flexibility around the price 20 years later. When you sell real estate, you want a liquid market, you want to have some flexibility around the price. You want a reasonable price, but in the interim, if you own a franchise, a business or rental apartment, real estate of any sort, of the primary residence, or rental real estate, what matters in that 20-year period is how the businesses vary. And that's measured in terms of the cash flows. And so I think treating, I don't know, call it Verizon or Duke or Southern or Coca-Cola, whatever company you want, because it's publicly traded, differently than you would treat it as an asset owner of any other type of business is a choice not a necessity. There are legions of people on Wall Street who couldn't care less what Coke does, they just want to trade the stock. They have no idea what it does or don't care. They look at the screen and make their calls, but it's not unreasonable to view yourself or ourselves to be a minority business owner, just of a company that happens to be publicly traded. And it gives us the virtue of getting in and out if we wish and in the interim. As business owner, we are measured or penalized by the cash flows that we receive from said business. So that's what's really behind that, quote. I think the pendulum has swung from many people viewing the stock market as a business ownership platform to just being a speculative platform. And part of the reason, again, back to the decline of interest rates, when there's no cash component to your ownership, what are you left with? Just the share price. When there is a cash component, there's the cash component, and then the share price is secondary. 

Greg:

This piggybacks that question: “We have all become accustomed to paying more cash for less cash.” 

Daniel:

Yeah, that's just the interest rates going down. You know, the market had a higher yield. Interest rates were higher over a long period of time. The market’s yield, the payout ratio, and interest rates all came down. Interest rates were too high in the late 1970s and early 80s. You may remember that. That's not the norm— mid-teens for the 10-year, that's not right. So I'm not saying that that was right and everything since then has been wrong. The interest rates shouldn't have gone down for 40 years. They were abnormally high for a reason, but they got over the last 15 years abnormally low. And in that environment, you have people paying too much for too little in terms of the cash returns. And I think that now that interest rates have stopped going down again, it doesn't matter where they really go, but they've stopped going down. You're going to see a normalization of cash returns for cash investment. 

Greg:

This one I really like because even I occasionally struggle with this. And I also think most investors just are not clear on this. And that is: “What do you want from your stock market investing dollars?”

Daniel:

Uh, I want — and on behalf of our clients, and hopefully they're in agreement, if they're in agreement, then there's peace, if they're not in agreement, they'll eventually move on — is a high and rising income stream from stable investments. If you make 30 or 40 or 50 of them, that becomes a very stable income stream from companies that as an individual, you can't otherwise access. These companies are very large. They're located elsewhere. I'm based in Pittsburgh. So the Pittsburgh glory days of industrial superiority are long gone. If I want to have a stake in industrial enterprises, I have to take a minority share someplace else, and I want to be paid in cash for it. Also, there are also degrees of sleep at night associated that risk. And so what do I want? I want a high and rising income stream. I also want to sleep at night. And so on the spectrum of dividend risk and dividend return on the spectrum of risk and return the portfolios where I have an input into is the high and rising income stream, but also the sleep at night. So we're not aiming for the fences or for the parking lot. We are trying to maximize incomes up until the point where we can still sleep. And then that ends up being a certain range of numbers of yield and dividend growth. We do our best to achieve that and that translates. Those yield and dividend growth numbers translate into total return figures. That is total return figures in an albeit non-dividend-led stock market— the last 10, 15 years have lagged the stock market. Most people in your chair, Greg, I find have customers who cannot stand that. All they want… they don't care about income at all. And if you've lagged the S&P there's something wrong with it. That's fine for them. They're not good customers for this type of portfolio, but there turns out that what do we want? It's income rising income, relatively low volatility, stable growth in the value of the portfolio, and we're able to do that. That's the nature of what we do that satisfies a certain coterie of investors and is not satisfactory to another coterie of investors and that's fine. They have that other much larger coterie investors has access to NVIDIA. And, and whatever else they want to have access to. And they're not that concerned about those virtues of a high and rising income stream or sleeping at night. So there's a clientele effect. For the type of investing that we do, there are certain clients that are very suitable for it and others that are not. And that's fine. 

Greg:

I thought this was another good one, and it's where a lot of people get tripped up, I think. It's almost as if they want to view investing as a form of entertainment. “Very few people buy rental real estate or pizza parlors or franchise businesses expecting only to flip them for a higher price down the road and never taking a penny from the business in the interim.”

Daniel:

Yeah, and that's back to the first question about what is business ownership. It’s about taking risks, putting capital to work, and getting an income stream out of it. And if the income stream grows over time, then your capital will grow. You'll be able to sell it to somebody later when you're ready to leave. But in the interim, the success or failure of the business is through the income stream. And that's just kind of a core component to the business owner,  The Ownership Dividend, as it were the title of the book for, for reasons, as I mentioned. People kind of, I'm not going to say take leave of their senses, but they treat— because their owner, the pizza parlor doesn't have a publicly traded stock. You are necessarily pushed into viewing it as a business in the cash flow. But because a publicly traded pizza company has a daily price— American trading hours, during the trading day from 9:30 am to 4:00 pm, you can lose sight of the fact that there's an underlying business and you're just looking at the share price. And again, that sensibility over the last couple of decades of interest rates coming down has shifted more in the direction of, “Well, you know, it's a stock, it's not a business.” We saw the maximum of that I think during the internet bubble in 1999 and 2000. It's not quite that bad, but for the last 15 years where interest rates were zero from the financial crisis up until just a few years ago, it got awfully close. And I have to say the SPACs and the meme stocks are back in the 1999 manner of thoughts. And boy, that manner of thought is, is, is not for me. 

Greg:

I have a story about that, but anyway, let's uh, final question or quote: “Measuring long term business success with a figure that comes out daily isn't really measuring success at all, it is measuring speculation.” 

Daniel:

Yeah, there's a whole chapter in the book about charts, which some people might find of interest. The price charts, which we're all used to are exactly what they describe their price. They are not total return charts. You can ask your computer or your screen or your system to give a total return chart of a company stock that pays a dividend. It will look very different from the price chart. But one of the challenges of being a dividend investor in the stock market is people are just looking at price charts, not looking at total return charts, and you get this anomaly where you can have a relatively low-sloping price chart, but a pretty high total return chart — curved, nice total return chart if the company is a large dividend. People don't see it that way. I have had conversations with advisors and say they look at one of the holdings and say, look at that, look at that price chart. Well, that's terrible. It's not the total return chart. I think this is something quite structural a two-dimensional representation of a kind of three-dimensional reality, and I use that metaphorically as well as literally. It doesn't serve us all well. And I suggest that it's time to reconsider this chapter — its probably I think a neat counting in the book, it's time to consider how we view these things. You have to look, if you're an investor, you have to look kind of in the back pages of your quarterly report or your website to figure out what the total return was, but right up front is the NAV and is the price chart of whatever you're looking at. I just think it's very misleading and the gap between a company with a high dividend, rising dividend, and total return, the gap between what their price chart looks like and what their total return looks like can get really, really wide. That's a source of frustration and it's gotten worse over the last couple of decades as stocks have shifted from having to do, to not having dividends. I think that's going to shift back again. And we'll again, have more people looking at total return, not just price charts in the decade ahead. 

Greg:

About a year ago, I was really surprised when I was looking at some railroads,  several of them are dividend payers. A couple of them met our hurdle rate. They're around the below the 3% level, but your first thought is, well, they're boring businesses. Why do I want to own something like that? Because I want total return. Well, lo and behold, when you look at them long term, they've actually beat the S&P 500. It's by a lot. So even on a price basis, long term, a couple of them have beat the S& P 500. So it all comes back to cashflow. It's another reason why I think your book is, is worth reading. Dividend investing is really a mindset. And I thought you really did a good job of presenting how an investor should look at cashflow. So as we wrap up, do you have any closing remarks or anything else you want to say? 

Daniel:

Yeah, I appreciate the opportunity given to discuss the book and the opportunity to once again, reach out to fairly conservative investors. Which you would, I'm guessing fall into, in terms of their client portfolios and say, “You’re not crazy.” This is a perfectly reasonable way to run a railroad based on cash flow. The fact that that, gamestop or SPAC or NVIDIA is doing what it's doing doesn't invalidate what you do. On accepting one circumstance. If your reason to exist is to beat the S&P every call it week, month, quarter on a relative total return basis. Then you, you absolutely care about the NVIDIA’s of this world. But if your business, if your goal is to deliver nice inflation beating total returns in cash, driven by cash from conservative businesses focused on cashflow management, then no, you're not crazy. It's actually consistent with running a lot of other businesses, including your own as whatever you happen to be doing as a business. And this is a way of doing it at scale for businesses that you don't, you don't run. You didn't create beverage, food, beverage, tobacco, hassle, product, utilities, pharma, et cetera. So no, you're not crazy. This is perfectly reasonable. It's at an extreme point of appearing unreasonable. Because of interest rates have been going down for so many decades and these other types of investments having become so dumb buybacks and meme stocks and the magnificent 7 and so forth. But I do think that that conservative approach to investing is going to with the end of interest rates declining is going to make a return. And the virtues of this type of business ownership through the stock market will be increasingly rewarded. 

Greg:

I really appreciate you doing this and you know, I am a little bit humbled. You have a few more zeros behind your assets under management than I do, but I think it is good to get different perspectives and just get a little different take, or if nothing else, just to kind of reaffirm, hey, this is what I do, it does work over time. I do have one final question for you though, and you may not be able to answer this, but the compliance department at Denewiler Capital is a little looser. So if you had to bet $1 on which will have the highest total return in 10 years, which would you pick, Chevron or NVIDIA? 

Daniel:

I will naturally go from today's recording date, which is, we'll call the middle of 2024 — I am willing to state that I believe based on valuation matters, cash flows matter and while industry trends for artificial intelligence are very, very impressive and I don't dispute that and, and probably Chevron will have to benefit from the emergence of artificial intelligence and doing its business over time, et cetera, that valuation and entry points matter— And as of this time, that the more conservative traditional investment will be just fine going forward over the next 10 years. Again, one of the characteristics of being a dividend investor in stock market were often accused of is, “Hey, you're kind of a bear market person or you're poo-piling on things.” Absolutely not. I like Microsoft products. I use Microsoft products. I’m not a big Netflix fan, not a big Amazon or Apple fan. I get the NVIDIA. What are the other companies I should be thinking of — Google? I'm a big on Google. I'm proud to say that I am on Facebook. I post, I watch dog videos. I'm not a cat person. I'm a dog person. Family, friends, vacations, dogs, that's what matters. So I'm all in favor of these companies. But from an investment perspective, do they, do they have cash flows? Do they distribute cash flows? Nvidia has cash flows. They don't distribute them in any material way. Therefore, it's not even part of our opportunity set. So no shade towards these companies that are real. You can compare that with the Internet companies in 1999. Many of them were not real. So, the companies, these FAANGs or Mag7 are a real business is doing very well. I wish them well, but from a business ownership perspective in the stock market, based on cash and minority shareholders, they're not comparable. They're not part of it. It's really, in a sense, you can't compare Chevron and NVIDIA. One has a cash flow that's distributed. The other, NVIDIA, has like a tiny, tiny, tiny dividend, but we're going to call that 0. They're not even really comparable. So, yeah, from an investment perspective, I lean, in the direction of we'll call it even a more limited opportunity set and stocks, with income streams. One of those two companies that you mentioned has an income stream. The other does not have. It has an income stream, but it's the de minimus, so it doesn't really count. I wish them well, however. 

Greg:

Well, I'm sure the audience knows which side I would put my dollar on, and one of the things that you just have to look at — the valuation of what you have to pay for Nvidia. It's like 10 years out history says it's hard for those companies to really maintain that kind of valuation long term, but we will see. Anyway, I do appreciate your being on the show. I thought it was really great to hear your perspective and thanks for taking the time to do this. Good luck in the dividend growth space. 

Daniel:

Thank you, Greg, for having me on. I appreciate it. 

Greg:

Well, I hope you enjoyed the interview and got something out of it. I'll just give you a few takeaways that I thought were important. A big takeaway is the dividend strategy is alive and well, and it's going to continue on. Whether it's popular or not, it works. And it works for one major reason: cash flow and a growing income stream always has been, it is, and it always will be important. I don't think that's ever going to change. The only thing that's going to change is how much people are willing to pay for cashflow. It's very easy to be tempted and seduced into following some of these other hot topics, and there's nothing wrong with doing it with a small part of your portfolio, but I'm a firm believer in the core of investing, whether it's in real estate or stocks, should be in a growing cashflow stream. When you get into times when there's stress in the system, cash flow is always king and everybody falls back to it. So I look forward to the next episode of the Dividend Mailbox. 

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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.