At The Money: Can Dividend Investing Give You Yield AND Growth?

Investors who want to reduce risk but still maintain equity exposure may want to explore dividend equities. David Bahnsen is founder, managing partner and chief investment office of The Bahnsen Group, a national private wealth management firm. His new book is “Profit from the profit: the past, present, and future of dividend growth investing.” Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:46Speaker 00

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• 2:05Barry Ritholtz?

  Dividends are one of the oldest and most highly regarded forms of equity investing. But in an era of mega-cap growth stocks, should you own dividend-paying equities? To help us unpack all of this and what it means for your portfolio, my extra special guest is David Bonson. He is the founder and chief investment officer of the Bonson Group and author of a brand-new book, Profit from the Profit: The Past, Present, and Future of Dividend Growth Investing. Well, welcome, David. Thank you so much for joining us.

• 2:39Speaker 04

  So good to be with you, Barry.

• 2:41Barry Ritholtz?

  So let's start with first principles. Given the current environment with AI and semiconductors and tech, which tend not to pay dividends, why should investors care about dividends when really it's all about total return these days?

• 2:57Speaker 04

  Well, I don't think it's ever a matter of dividends versus total return. It's a way in which people get to total return. And I think that you bring up a great point that the big tech moment caused some people to believe they don't need dividends. They don't need value. They don't need valuation. We think that the way the dot-com tech moment ended is somewhat of a rebuttal to that thinking. It didn't end very well. We are in a moment in this AI period where some of the largest free cash flow generating companies in history are now negative free cash flow because the capex is so high. We don't want to make a call on how that's going to play out. We would just simply suggest that there's a different risk profile

• 3:41Speaker 04

  when companies are returning capital from free cash flow to shareholders. Still profitable, still growing profits, healthy balance sheets. And by the way, there are some great dividend growers even within the AI world. You know, our ownership of Broadcom over a seven-year period is one of the most profitable investments we ever had. You can't really have the AI moment without data centers. Blackstone is one of the great dividend growers of the last decade. So it just takes the research to go find the right names that fit into the narrative.

• 4:13Barry Ritholtz?

  So let's stay with that point. What does it reveal about a company and its business when they're willing to consistently pay a dividend, consistently increase that dividend? What does that tell us that sometimes earnings reports might not catch?

• 4:30Speaker 04

  Well, the dividends don't lie. They're cash. And a line I've used many times over the last 25 years, Barry, is that there are plenty of people that their tax return shows an income that's lower than what they really make. But there's nobody whose tax return shows an income that's higher than they really make. People don't pay taxes on income they didn't make. A dividend is real, and it reflects something real. And in EBITDA, you have a lot of opportunities for, let's just say, not totally verifiable growth of company. And so free cash flow is pure. A dividend from it reflects management's confidence in the growth of the business. A slowing growth of dividend maybe reflects management's own view.

• 5:14Speaker 04

  But there's nobody who should have a better view of things. And you could trust their press releases if you want. You can trust the 10 Qs and what they say. But I really trust cash they put in my bank account.

• 5:25Barry Ritholtz?

  So let's distinguish between companies, especially mature businesses, that continue to grow their dividends versus those companies that seem to be running out of ways to manage their cash.

• 5:40Speaker 04

  Well, and that's a very important distinction. And it's not just managing their cash, but it's growing their business. You know, look, there's no company that should never get to a point of cash flow productivity. When you're growing and you have infinite reinvestment opportunities where you're getting a higher return on invested capital than the investor can get, you should be continuing to reinvest your own cash. But eventually, there is no infinity of what a company can do with that cash. So what do they end up doing when they don't want to return it? They either just hold on to it and manage it in their own cash management vehicles. Apple's been doing this forever. So do you want Apple holding on to hundreds of billions of cash

• 6:22Speaker 04

  in their own cash management vehicles? Or what really companies end up doing most of the time? CEOs are notorious for M&A. And I would suggest that most M&A is served to be vanity projects and capital destructive. Now, not all. There are some that have been very synergistic. But when you look at the kind of return on equity that is generated from the great dividend growers over time, when they mature to a point that they can do it, there are returns that are unlike anything we've ever seen in history.

• 6:57Barry Ritholtz?

  So I'm glad you brought up Apple, which has become very well-known for a massive stock buyback program over the past 10, 15 years. How do you compare the usage of free cash flow to either issue a dividend or to buy stock back? They're both return of capital to investors, but in a very different structure.

• 7:24Speaker 04

  The problem, Barry, is that more often than not, they're not a way to return capital to shareholders. How do you have record levels of share buybacks and yet more shares that exist now than did before all these share buybacks? The math is what it is. And so you have to look to net share issuance. And if they're doing share buybacks, the net share issuance should be negative. But why is it growing leaps and bounds? Because for the most part, I'm not picking on Apple here, any particular company, but across the spectrum, and Silicon Valley is notorious for this, share buybacks are executive compensation. They are not return of capital to shareholders.

• 8:07Speaker 04

  Now, where companies are reducing their share count, that is a way to return capital to shareholders. And I'm all for it as a both and. But my argument is that to the extent many investors need to go, they're retirement-oriented, they're cash flow-oriented, they need periodic income. You can't eat a stock buyback. And so there is still something that is just tangible about receiving the cash of it. But the other issue is share buybacks go first whenever a company runs into trouble. And dividends tend to be last because of that social contract that has been created by great dividend growers over long periods of time. So from the financial crisis of '08 to the COVID moment, we saw this.

• 8:52Speaker 04

  Share buybacks all but evaporated for the great dividend growers. And I can speak to the portfolio we manage. We had zero dividend cuts through that horrible period. So it isn't 100% immune from the risk, but it's far more immune from it than share buybacks.

• 9:09Barry Ritholtz?

  So I'm so glad you brought that up because the question always comes up, when is a dividend sustainable? So what measures do you look at? Is it free cash flow or growth rate or earnings stability? Why not just buy the stocks with the highest dividend yield?

• 9:27Speaker 04

  Well, the sustainability of the dividend is a very different question than why not buy the ones with the highest yield. Because the highest yield often could be a very imminent dividend cut, what I refer to as accidental high yielders. It's just math, right? You have a 4% yield, $100 stock price. You're getting $4. Then the stock goes down to 50. You're still getting $4, but now it's 8%. Did you really get anything better? No. Did you lose 50% of your value? Yes. That's not what we want. We want the yield going higher because the dividend's going higher. And so there's a big difference between a high yielder and a dividend grower. Now, what do we look to? You mentioned three or four quantitative metrics.

• 10:11Speaker 04

  The answer is all the above and then some. But where I just simply do not believe this can be quantitatively done exclusively or passively is in that qualitative element of when a company wants to pay the dividend, not when they've been dragged into doing it. So there is a cultural propensity to grow the dividend. Some C-suites do not like it, and we want to avoid those. Some where you have heavy founder ownership. I think of like a company like Lamar Advertising or Enterprise Product Partners, which is still heavily owned by the family that started the company. They're receiving just billions of dollars of dividends each year. They want to keep growing those dividends.

• 10:53Speaker 04

  So we like those stories where the alignment of management and shareholder is there.

• 10:58Barry Ritholtz?

  So you mentioned the stock that got cut in half, and it appears the dividend yield has doubled when in reality it's $4 either way. That's a classic yield trap, a classic dividend trap. What are the warning signs investors should be aware of when, hey, this looks like it's high yield, but really it's a dividend cut waiting to happen?

• 11:21Speaker 04

  Well, one of the issues I believe has been a career saver or career maker for me, Barry. You, of course, were a prolific writer at the time of the financial crisis. I sold Citigroup stock at $51 a share when they announced they weren't cutting their dividend in October of 2007, and it went to 97 cents. And so I don't want to confuse everyone if they're looking at charts now. Reverse stock splits have confused everything, but I'm talking in 2007 numbers. This stock really did go down 99%, as you know. So why did I sell the stock at $51 and then spend the next few years bragging to clients we did? Because they said, we're not cutting the dividend, but we just borrowed $10.5

• 12:04Speaker 04

  billion from the Saudi Arabians and Kuwaitis at, I think it was a 10% coupon on the debt. Borrowing from your credit card to pay your bills is not how a dividend gets sustained, as you and I know. The Citi was a great example. So you have to look to the qualitative realities of the business. And when a company is at $4 and they're, we're growing it for 20 years, and then they stop growing it, but they haven't cut it yet. That's a warning sign. When the rate of growth slows, that's a warning sign. So we look to the free cash flow, the business model, the competition that's come in, the investment thesis. It requires fundamental research. It is true. The Procter Gambles, the Exxon Mobils, the

• 12:49Speaker 04

  McDonald's, the Johnson Johnsons, they've managed to a payout ratio, a balance sheet, a cash flow that's enabled them to continue growing through thick and thin. Other companies are too tight. They're paying out 90% already, and there's no margin for error. So we have to take that a little more seriously. But this is why I believe it requires some active management. We've done it well over the years. A lot of people that really are invested in this have done well with it. But it isn't foolproof. General Electric cut their dividend. AT&T cut their dividend, but there were clear warning signs. Those were coming for those paying attention.

• 13:25Barry Ritholtz?

  So I like the example of Citigroup, and I, you and I can swap war stories over lunch. But you raised a really interesting question. A company consistently paying dividend, if purchased at the wrong time, or even more importantly, the wrong price, can be a total disaster. How do you think about valuation and price when you're making a purchase of a dividend stock?

• 13:52Speaker 04

  Well, it's interesting that a lot of people's valuation metric, which is very important to us, both for margin of safety, but also just because we think total expected return is relevant to entry price. You know, people with a calculator should be able to verify that I'm right about that. What you pay matters for your total expected return. So the P/E ratio is the most common, and people can use forward or backward, and people look at CAPE, and you can look at price to cash flow, you can look at price to book. I think all these valuation metrics matter. But why is dividend yield itself not a valuation metric? Its own historical dividend yield. So there's companies we own right now that

• 14:35Speaker 04

  have a 2% dividend yield, and they've been growing it like crazy, and yet they've historically had a 3.5% dividend yield. It's just that the stock price is so high. You know, it pained me, Barry, to sell Walmart about a year and a half ago. I'd owned it my whole career. We made a fortune. Walmart went public the year before I was born and grew the dividend every year of my life. They didn't do anything wrong. They just happened to go up 60% in one year in stock price. And what had been a 3.5% dividend yield on average for decades was now 1.5%, basically an S&P 500 level yield. So from a valuation metric, we sold the stock. Same with Broadcom, you know, the stock was up 16 times. They

• 15:20Speaker 04

  had grown the dividend 8% per, you know, 14% per year for eight years in a row, but the yield got to be 1%. So we use the yield as a valuation metric itself.

• 15:32Barry Ritholtz?

  So we're recording this the day the book comes out, August 25, 2026. And this is an era of relatively sticky inflation. We've seen 10-year rates and yields come up to almost 5%. We haven't had a recession in a while, and we certainly haven't had a major bear market in a while. But I'm curious, how do dividend yielding stocks and how do dividend growth stocks do in the sort of environment of rising interest rates and high inflation? How do they do during recessions and bear markets?

• 16:12Speaker 04

  Well, when you have a beta that is about 0.6 to the market, you naturally have less sensitivity by definition to the market itself. The only two stocks in the Dow that were up in 2008 were Walmart and McDonald's, which were two of the great dividend growers of the last 50 years. They tend to be much more defensive. However, I will also point out that in terms of the offense against inflation, there is no inflation if oil prices aren't going higher, if cheeseburgers don't cost more, if soap and towels and Pepsi soda pop doesn't cost more. So there's an inherent inflationary benefit, and the fact that the

• 16:54Speaker 04

  dividend growth has always, in every calendar year, been higher than whatever the growth of prices or the inflation rate. If you're getting a portfolio that's growing dividends from 6% to 9%, and inflation is somewhere between 2% and 5%, then you are by definition beating inflation in that cash flow. That is, to me, a very important element of the portfolio itself. Whether or not we go into recession, I think that this speaks to the sort of all-weather nature. There's offense and defense involved in dividend growth. The last time we had a bad market that was long-term, not just the 30 days of COVID

• 17:36Speaker 04

  or the five days of Liberation Day, but you recall very well, both dot com, that lasted two and a half years from 2000, 2002, the financial crisis, the market drop was 18 months. And in that period, S&P was up from 2000, 2009, 0%. Most dividend growth portfolios would have been up somewhere in the range of 7%, 8% per year. So I think that it is a very good time to be looking at it. Now, what's a fair question is, hey, but how much did I lose in opportunity cost? The 2009 to 2026 bull market, S&P's compounded 15% a year. It doesn't do me any good to make 3% or 4% in your stupid dividends while I'm missing that. The fact of the matter is, about half of those years, dividend growth

• 18:21Speaker 04

  has done better than the market. Half of them, not as much. But it's right there in the same range in a screaming bear market for the index, a screaming low volatility period, where the yield of the S&P is at the lowest it's ever been.

• 18:36Barry Ritholtz?

  Really, really interesting. One of the criticisms I've heard that made about dividend growth investing is sometimes investors confuse receiving cash with creating wealth. You know, classic example is buying a stock right before the dividend issuance, and when it goes X dividend, the price falls by the amount of dividend that gets paid. Tell us what this criticism misses. What's the mistake there?

• 19:05Speaker 04

  Yeah, but when people do that, they fail to understand how markets work. It's almost like a Treasury Secretary thinking he can buy 30-year bonds and the bond market won't figure out how these things work.

• 19:17Barry Ritholtz?

  I just had that conversation earlier today. I'm like, aren't you the world's biggest issuer of debt? How is a tiny announced buyback going to do anything to the long end of that? But go on.

• 19:30Speaker 04

  But of course, our Treasury Secretary was himself a global macro trader, and the mentality you bring up about trying to arbitrage dividend payments is something that short-term traders would do as well. So it's a fine mentality for traders, but it's a silly mentality in terms of the long-term impact in macroeconomic reality. It doesn't arbitrage anything to go buy a dividend when markets are pricing in those realities and the algorithmic nature of things can pick up on it ahead of time, et cetera. You're not buying the timing of received dividend. You're buying the company's underlying growth. You can't fool the fundamentals. So I would argue, Barry, that non-dividend investors are doing this far more than dividend

• 20:13Speaker 04

  investors. That fundamentally, most people that right now believe, I want to buy the market because there's someone else who thinks the market's going to do well. I want to buy Nvidia because there's someone else who thinks Nvidia is going to do well. Even if it's not fully self-conscious, the portfolio strategy of many investors today is dependent on what they think other people will do. Dividend growth investing says, I'm isolated to it. I don't even really need to look at the prices on my screen that much. I believe in the companies executing, growing profits, and growing what they return of that to me over time. And all these other arbitrage things, day by day, week by week, or in some

• 20:53Speaker 04

  cases, nanosecond by nanosecond, are irrelevant to the long-term value creation. And so you look at a company like McDonald's that has literally created, with reinvested dividends, 400,000% return. You look at a company like Simon Property Group, it's the most value, the most profitable for investor REIT ever concocted. After going through a couple 60% drawdowns with COVID and financial crisis and so forth, this long-term compounding of capital results in a mathematical thing where old guys like you and me wake up one

• 21:31Speaker 04

  day, and companies that we bought a couple decades ago are returning 50%, 100% per year of what we paid for the stock to us in dividend. And that's for nothing other than just your normal market return level compounding. And yet, your return on original cost from Procter Gamble, Johnson Johnson, Coca-Cola, Exxon, these types of companies is massive. Blackstone only went public at the time of financial crisis. I bought it in 2011. We're getting 30% per year on what I paid for the stock in dividends. So the math of this transcends trying to game the system.

• 22:13Barry Ritholtz?

  And our final question, for someone who wanted to build a dividend growth portfolio, what sort of rules would you give them for selecting holdings, determining position sizes, reinvesting dividends, and then the big question, when, if ever, do you sell?

• 22:32Speaker 04

  Well, I think that the answers to how to select the names is to be diversified. I personally own in between 30 and 35 companies, generally speaking, in our portfolio. So we'll have companies that are 4% of the portfolio at purchase and some that are 1.5 and 2%. We don't go lower than that because we want it to matter. We don't go higher than that at purchase because we're trying to stay diversified. But you don't need a 70, 80, 100 company portfolio to be diversified. 30 names is plenty well diversified. And by the way, you're not going to find 80 names in the S and P 500 that are growing their dividend anymore. So that's how much the culture's changed is you want conviction, you want concentration, but you want diversification.

• 23:15Speaker 04

  And then again, the characteristics that matter are quantitative, cash flow, leverage, you know, growth of earnings, the qualitative side, is the business model defensible? Is there a durability to what they're doing? And then, and then that cultural propensity to grow the dividend. As far as the issue about when to sell a name, there is always the bad side. We've had to sell names for bad reasons. The thesis has changed. Something is broken. Something on a risk reward basis is unattractive. We want to get out of it. So I mentioned I sold Citigroup before they cut the dividend. We sold BP when the oil spill was going on because I just didn't believe that the Obama

• 23:59Speaker 04

  administration and other regulators were going to end up letting, you know, there was just too much political heat around a name like that. So you see things like that from time to time. But then there's a really good reason to sell sometimes. And I mentioned Walmart before, Apollo, Broadcom. These are names we sold just because they did so well that the opportunity cost was now we needed to move from what had become a 1% yield to a new name at a 3% or 4% yield. And so those are the sell disciplines we bring to the process, Barry.

• 24:28Barry Ritholtz?

  Really, really interesting stuff. So to wrap up, if you're interested in a portfolio that more or less keeps up with the broad index, but tends to do much better during downturns, consider a dividend growth portfolio. You have to be aware of yield traps. You have to be aware of things look like they're high yielding when in reality it's just their price coming down. Have a set of quantitative rules to help you both select and manage the portfolio, but recognize that this continues to be an ongoing source of both income and wealth creation. I'm Barry Ritholtz.

• 25:06Barry Ritholtz?

  You're listening to Bloomberg's At the Money.

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