Transcript

At The Money: Profiting from Dividend Growth

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1:36 News. Often do you think about dividend investing and in particular dividend growth investing? Dividends are one of the oldest and most highly regarded forms of equity investing. But in an era of mega cap growth Should you be chasing dividends or buying growth? David Bonson is the author of a new book.

2:15 Profit from the profit. The past, present, and future of dividend growth investing. He's also the founder and chief investment officer of the Bonson Group. Managing over ten billion dollars. So so David, let's start with the the just the title of the book. Profit from the profit.

2:33 Uh explain the difference between profiting from a company's underlying Economic activity versus Merely profiting from a change in stock price. Well, my view, Barry, is that all investing comes down uh at some form or another to the underlying profits of what is being invested in. And and you could say, Well, what about Pre-profit companies, pre-revenue, venture capital. All of those things still are being invested in out of some outlook on future profitability.

3:05 And and to the extent you want something that's more liquid and a little more stable and diversify the types of things that usually are found in public markets, then you're dealing with underlying profits and some sort of discounting of those future profits into a present valuation. And and and what I'm suggesting here in the the prepositional phrase the out of profit from the profit is I'm saying let's take those profits that we own the company for, and let's allow the individual investor to participate in those profits in the way that throughout history they often did, which is the receipt of a dividend. Um now, of course, I recognize companies cannot pay all the profits out to their risk-taking investors. They need to hold on to some profits and retain some for a rainy day. They need to pay down debt. They need to reinvest in CapEx and growth of the company, but there has to be some reward to the risk taker, and dividends represent a palatable, tangible, repeatable.

4:05 Profit from those profits. So so let's let's dive into that philosophy, which which you describe as really A philosophy of ownership. Rather than simply an investment strategy or or or even a tactic, I I really like that framing. Explain the foundation of thinking of your ownership of a stock as owning a company.

4:28 I I believe it's an underlying business that has a market strategy, that has a management team, right? It's a real company. Every company we own is a effectively a lemonade stand. And there's different levels of complexity and and and all of those things, and it's goods or services or both. But at the end of the day, it's a business. And one of the problems. With um the success of index investing is we do start to think something that isn't true. That we made our money from the market. From the index went up.

5:02 Companies go up and you can aggregate that and the math gets very complicated, but there's only value being created. When there are underline businesses They're adding value, and that there are customers of businesses that are buying goods and services that meet the needs of humanity. So this underlying first principle drives what I believe about value creation and therefore the generation of profits, and from the generation of profits, the ability to reward shareholders with those. So some of the writings you've put out over the years that I've seen really draws a distinction between

5:39 What you just described as value creation As opposed to buying a couple of numbers on a screen and the numbers go up. Um, and you've been pretty Um blunt about describing there isn't a difference between

5:54 Owning a company and speculating in the market. Discuss that difference. How do you draw the line between Economic investing and just Speculation and gambling.

6:06 Well, I think that um by definition the easiest line is things that are zero sum versus things that are not. And so um when when you place a wager with your friend on the Mets game, first of all, if you took the Met, you're probably gonna lose the bet, second of all. Uh there's one winner, one loser. But when you invest in Procter Gamble, it I don't believe that's the case. You're investing in them creating new wealth, new profits, new opportunities, et cetera. And so that that by definition de-speculates the investment to some degree um, but also there's just a lot of investing that is based on a guess of a price in a certain period of time. One of the reasons that we don't do option investing at my firm is because even if I have a lot of conviction in a company and I can go buy a call option on it, but I can't make any money doing that unless I also attach the time value to it. But I'm not interested in speculating on when an announcement may come or when the company maybe honored in the market with a higher valuation.

7:10 Um long term value creation is not necessarily gonna be within a timeline. And so, you know, there there's different ways people can get to this, but but our view is that the speculation, uh, you know it when you see it. And At the end of the day, we're right now in a speculative mode. I never thought I'd see speculation like we saw in the nineties. When I was starting my investing career and what we saw going into real estate with the pre-08 period, um, what there's been a lot of moments of speculative mania and fervor in my career. Right now, the instrumentation that exists for speculation. with d literal speculation in draft kings and sports markets and now these prediction markets, single day option ETFs, all of this stuff. It's unbelievable. They're all consciously geared towards speculation. A dividend portfolio is saying, hey, I really believe people are gonna buy Soda Pop or or they're gonna Bu you know, and uh continue needing oil and gas to heat their homes, et cetera.

8:10 Yeah, it's it's really becoming a problem, especially to the current generation of young men. Who pretty pretty much have become Um Gambling junkies, it was bad enough when people were betting on the outcome of games. But if you're betting on is he gonna hit this free throw, well

8:26 You know, you're just throwing a dice. You might as well Go to Vegas. Related to this, you've discussed in the book the difference between Endogenous and exogenous returns. Dive into that a little bit and explain what those differences are and what it means to an investor, not a specul.

8:47 Well, essentially we're just talking about the difference between trying to get your return From factors that are external, that are outside of your control, that are outside the underlying uh reality of the business. So in this particular case, we're sort of referring to um the what what you believe others psychology will be, what uh how other investors are gonna respond. I think the PE ratio is gonna get bit up because this uh stock is going to be popular. That would be an example of an exogenous factor, and I think it is by far um the most uh uh shall we say prevalent way of thinking about investing.

9:31 But when you're talking about stuff that is within the business, that the the the my return is gonna come from the performance of the company. From their success in growing profits and competing and creating value. then that's endogenous and it is an entirely different mentality and approach. Um, but I do not suggest everyone self-aware of this. I don't think it's total self-conscious, but I think that the implicit mentality or objective of many investors today is that they're betting on what others are gonna do as opposed to betting on how a company is gonna perform. Really, really, really interesting.

10:09 So this book, Prophet from the Prophet, is a follow up. to your twenty nineteen book, The Case for Dividend Growth. It's been seven years. I'm curious. What has changed either in the economy, the markets, or your own thinking? that made an update of the book necessary.

10:28 I think that um you had basically the S P nearly triple. In seven years. Which is crazy, by the way, crazy to think about. But we had had a bit of a dip in twenty eighteen, and so there's a little bit of uh convenient timing here. Uh the SP I think was down five percent in twenty eighteen from the do the combo of a little bit of Fed tightening and Trump's uh President Trump's trade war then. And then it rallied huge at the very beginning of 2019. We had a hiccup in COVID, but then really that only lasted about a month and ended up having a very robust period. There was one bad year. It's really the only bad year we've had since the financial crisis in 2022. But then NVIDIA three one hundred percent years in a row, you just have had a massive rally. So it's worth saying, Hey, David, was your thesis

11:18 From seven years ago is it become antiquated? And you look at it and say, Well, actually Barry, I can't I don't want to uh jinx myself for twenty twenty six. But when dividend growth was up five percent in twenty twenty two and the S P was down eighteen. And dividend growth did fine in the three years in between, not as much as the NVIDIA stuff, but still did fine. And now a year like this year, where dividend growth is beating the market by four hundred, five hundred basis points, I think you're gonna end up with a five year number that's better than the market in a cr but that's because of that first 2022 year.

11:54 This um story to me is very probable. for the next three, five, seven years. At a twenty-three times entry multiple on the S P Uh earnings growth is great. But unless you think you're gonna get a twenty nine X, if you're gonna actually have to fight against multiple contraction for the next few years, the math of the index return is what it is. I'm not being bullish or bearish here. I'm just being a mathematician. It's gonna be very hard for the SP to deliver.

12:24 continued 15% returns. Yeah. And in the past few years we've had 25% returns. Good luck keeping up with that. Exactly. And I think that the story of my first decade professionally managing money is what I'm now coming back to saying, um, look, the the market can retreat here even with good underlying fundamentals. It's just that the Intel's Microsoft Cisco's of the two thousands All of them grew. Their earnings, their profits, their cash flows.

12:56 all of them were lower at the end of the decade than the beginning of the decade. And I don't know that's gonna happen with NVIDIA. I'm not making a bearish AI call, but I am asking investors to realize That things are not as easy as they might have seemed the last three or four years. And I think that the update of the book was a meant was uh my attempt to restate, update the argument, new charts, new numbers. But then also, Barry, I think it's a little bit more philosophical. I'm adding a l a little more as to where I think about doomsday investing in dividend growth, and then I am countering some of the objections. Um there's folks like Mel Faber that are notoriously talk about how a dividend is is totally worthless, that all you're doing is taking from one part of the company the balance sheet, giving it to someone else at zero sum, and I'm contending with that argument, contending with stock buybacks, contending with tax efficiency.

13:49 Some may not find my arguments persuasive, but I am making an argument on all of those points. So typically dividend paying stocks are often concentrated in mature sectors, financial, energy, utilities, staples, things like that. How do you prevent a dividend growth portfolio from being An unintended either sector bet or value factor bet. Well, the the value factor bet is harder to avoid than the sector side. For us, um, it is true that we've always been very limited in our exposure to consumer discretionary because

14:24 They um the consumer discretionary names, by definition, it's hard to pay a sustainable dividend when you're depending on sixteen year old girls liking your clothes at the mall. It's just it's a very discretionary thing. Yep. Exactly. But but um there's actually a lot of durability. And and all of the cool kids from the nineties are now dividend growers today. You know, your Qualcomms and Cisco's and and even Microsoft, it looks like a low yield because the stock price has gone up so much. But after George W. Bush's second tax cut changed the deck. tax rate on dividends, Microsoft all of a sudden became a great dividend payer. So I suspect that a lot of these uh tech names, you know, could end up becoming good dividend growers, and some of them already are Texas Instruments, Broadcom, but they're kind of old tech. They're not they're not the cool tech stuff. But but you you how you wanna keep um uh benchmark agnosticism in my opinion, but you still wanna be sector diversified. So we own basically every sector to some degree or another, but my weightings to those sectors, I'm agnostic to what the benchmark is.

15:31 We've been overweight energy and underweight consumer discretionary for most of my career. It's worked out just fine. Yeah, to say the very least. Let me throw an interesting curveball at you. Um one of the most Interesting companies that Does not pay a dividend. has been Berkshire Hathaway. They've created enormous value without ever paying a dividend. They occasionally

15:54 When when the stock gets quote unquote cheap. They'll do some buybacks. And they're sitting on this massive, what is it, three hundred billion dollar cash pile. How do you distinguish between a company that should retain its earnings so it can make those

16:10 Opportunists to acquisitions Versus one that really should be paying its shareholders some form of dividend. You know what's fascinating, Barry, is that Berkshire Hathaway is the company that proves my point, not the exception to the point. They are not a company. They are a holding company, and what do they hold?

16:30 A whole bunch of companies that pay dividends to them. Now they may choose not to return that cash to the shareholders because that's what the investors consciously bought was a hold code that you are asking Mr. Buffett and Munger in the years past, now a new management team. to invest that capital. It's much more like a mutual fund of private and public companies. Um but the Coca-Cola's and Wells Fargo's and Apples and by the way, even the private businesses have made the railroads and C's Candies have made massive cash payments to the Holdco. So it isn't really contradictory to it. Um, there are companies out there that are operating companies that also have not been dividend growers that have been very successful, but I would argue that I could find a hundred examples of ones that didn't return capital to shareholders and set money on fire.

17:26 for every one I could find that proved to be a better steward of that capital. Um in the appendix of the book, I I talk about the comparison of Viacom and now that Sumner Redstone's no longer with us, I make him the foil because the amount of money these people set on fire over the years. They wouldn't pay a sustainable dividend, a lot of their competitors did, and then they just did these media M<unk>A orgy's and all of them were capital destructive. That to me is much more common than a company that by not paying a dividend is creating more value. When when we go to lunch, remind me to tell you the story of a company I was affiliated in that had an opportunity to do a special giant one time. Dividend and instead they lit the money on fire. But

18:11 But Berkshire as as The exception that proves the point. raises an interesting question. Do dividends and continually paid and actually increase dividends, does that impose impose a discipline on on management?

18:28 And how could you distinguish when Having to meet the dividend is a positive thing versus when it might discourage investment or innovation or intelligent Risk taking. You know, it's such a thoughtful question and and I'm not just saying this to blow smoke here, but I very much doubt that very many other interviewers are gonna ask that to me, because it's really an important question and you get it.

18:51 Barry, that's a trade off that e that exists, right? There is a sense in which Um a opportunity might get missed. because the faithfulness to the dividend causes someone not to pursue a risk that might have ended up paying out. What I would suggest is that's a risk worth taking for most investors. Not those with a highly speculative or high risk, high beta, high optane part of their portfolio. But ultimately, if someone had said, You know what, I'm not gonna do this AOL Time Warner merger because we're not gonna be able to sustain the dividend doing it.

19:24 That would have protected about three hundred billion dollars of capital. And I could go on and on. Those are not nutpicking examples. They're the norm. Now there's been plenty of good and healthy M<unk>A. Exxon's deal with Pioneer, Chevron's deal with Hess, Exxon's deal with mobility. They didn't cut the dividend during COVID, for God's sake, when oil was negative. They didn't cut the dividend during Val D's, during the financial crisis. Having the social contract where your cash flow, your payout ratio, your balance sheet enable you to sustain it. Doesn't mean you can't do M<unk>A. But it should mean you can't do reckless MA.

20:03 And I would suggest that Comcast has been a more faithful user of M<unk>A than via common paramount work. Huh. I I save my favorite question for last. Which is You argue dividend growth allows investors to benefit from volatility. Rather than merely having to endure it. Um, explain what you mean by that. What's the philosophy behind benefiting from volatility?

20:30 So uh and when we say endure volatility, an SP investor who is an accumulator, not a withdrawer, does not suffer from the volatility. Um and and ultimately the premium return they get is uh trade off to the volatility that they're expected to deal with. So that's all what it is. However, A dividend growth investor has an automatic purchase. going on across a diversified portfolio. You assume volatility is a given. It's going to happen. So there is therefore no way to escape the fact that you are mathematically benefiting because you are already compounding. Your return goes where it goes, and then you're getting more the next year, the next year. Now you're getting more purchases of the thing that is compounding. So it bi it creates an automated compounding machine within a compounding investment.

21:23 And that leverage over time is monumental. And it ought to excite people that are thirty, forty, forty five years old accumulating long term, because you can say to yourself, every time the market's down. I am buying more shares of the things that are in the future gonna be creating cash flow for me. And and that's how you end up with the sort of stocks that are paying thirty, forty, fifty percent of the original purchase pri price. Annually, which sounds crazy, but the math makes sense.

21:54 Yes, sir. That's exactly right. So to wrap up If you're interested in dividend growth investing, if you'd like to try and generate uh market equaling Portfolios with less volatility and a higher wealth creation, check out the new book Profit from the Profit, The Past, Present, and Future of Dividend Growth Investing.

22:16 David Bonson. I'm Barry Ritulz. You're listening to Bloomberg's At the Money. Get essential news on the people and companies pushing the tech sector to new frontiers. Hi, I'm Ed Ludlow. Join me for Bloomberg Tech, a daily podcast focused exclusively on technology, innovation, and the future of business. Every weekday, we bring you the latest insights on Silicon Valley's top companies and conversations with tech's biggest. decision makers. Listen to Bloomberg Tech on your commute home and stay ahead of the news cycle. Subscribe today on Apple, Spotify or anywhere you listen.