As you might have read about it here, I now do live webinars and certainly have fun doing so. I have been surprised by the positive interest attendees had towards many of my stock picks. This is how I came to the idea of sharing here some of my “Video of the Week”, during wich I go through a company recent news or results and explain why I believe it is currently a good or a bad pick for a dividend investor.
Today, I’m taking on the challenge my daughter laid down to me and I’m answering to Michael Kandolin’s video in which he said that Dividends Are Overrated. Let me explain you the 3 simple reasons why Dividend Stocks Rock!
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00:00 Speaker 1: Hey fellow investors, this is Mike from Dividend Stocks Rocks. I hope you’re doing well today. You probably wonder why I don’t wear those nice shirts that I usually do, and then instead I have a rock band hood. This is basically because of two reasons. The first one is my daughter, Amy, who wear hoods all day long even summertime, put it there on me because she said I was afraid to put my favorite hood on the video. So here we go Amy, I just did it. And the second reason why I decided to wear that hood, is because I wanna make an answer to Mike Kindellan who is an investor like me. He shaved, wear a beard and did actually his video with a hood on it. So I thought it would be interesting to put an answer because he was telling investors that dividend are overrated. And in this video, I wanna prove him wrong, and I wanna prove him that Dividend Stocks Rock actually.
00:53 S1: So the point was, according to financial theory, when a company making a dollar of profit, it has two options. First one, it keeps the money invested in the company to make acquisition, invest in R&Ds, improve sales, marketing, whatever, basically it just reinvest its profit to make the company grows and grows over and over. The second option is to take that dollar out of the company and give it back to shareholders. Now, the point is you have the options of either investing one dollar in a company and make it grow to two, three, and four dollar later down the road, or you’re just giving back one dollar to shareholders, which they cannot enjoy additional growth from that dollar, they have to do something else with it. So basically, the point of Michael was keep that money inside the business, make investment, make it grow and eventually down the road, your stock value will go up instead of just distributing your money and do anything with that.
01:55 S1: I can totally understand that point. And if we had a company that is always making more money with its investment, that would make total sense but we all know it’s not the case. Plus, the story is like having a mortgage and saying, “You know what, I just bought a house. I have a huge mortgage, so now, no more vacation, no more restaurant, no more new cloth, I’m just gonna put all my money down in my mortgage and pay it down as fast as possible.” It’s definitely not a bad strategy, but the problem is everybody enjoys a treat once in a while. So the dividend is like having a vacation, it’s like a treat. And the other point is, I don’t necessarily trust CEOs that much with my money. We all remember what happened with some Microsoft acquisition like Nokia where they spent billions of dollars and they ended up with not much. So thinking that the company always knows what is best for you is not always the right mindset. I know that in most time, the company will do well, but some others they will just flush the money down the drain.
03:02 S1: Now, it’s important to understand where the dividend is coming from as well. The dividend is coming from basically what I call the dividend triangle. So it starts with revenue growth. We need to find a business with a strong business model that is a leader in its market and that has growth perspective. So then, year after year, revenues are increasing because sales are getting better because the product is good or the service is good. Then, the second point of the dividend triangle is earnings, the more revenue you generate in theory, the more earnings you will generate as well. So you wanna make sure that you find a company that is growing its revenue and then not increasing its expenses that much. So, earnings are growing year after year at the same time. And then this all leads to the third point of the dividend triangle, dividend growth. When you have a company that is very solid, that has sales increasing year after year, generating more profit then, management feel confident enough to use a part of that money to distribute it back to shareholders. The reason why I like it so much, it’s because it’s helped me selecting great companies. So if the dividend grows years after years, there’s a good chances that earnings is following the same trend and then revenue as well. And then it’s an easy way to start your research by looking at companies that have solid business model and growth perspectives.
04:32 S1: The other thing I really like as well is it’s very easy to track. So instead of spending so much time going through all the quarterly reports, I can focus on specific items. I don’t have to calculate the return on investment on each stocks, I don’t have to take a look at what the company did with their money, and if I think if my assumptions are right, that it’s going to be a better choice in the future, all I have to do is to make sure that the company is growing its dividend, that it has enough money so the payout ratios are in line and the company still shows revenue growth so they have enough other growth vector that will ensure the business’ future. Finally, I wanna close this video in the census by showing that stats have proved us right. If you look on Google, look for Ned Davis research, he conducted tons of researches and basically shows that dividend initiators, so companies starting to pay dividend and dividend growers keep speeding the market over and over and over again. And this totally makes sense because once the company has enough confidence to distribute a part of its profit with shareholders, it also means that it has enough confidence, it’s going to keep growing later down the road. And I actually believe in balance, I would not and those who follow me knows that I’m not a guy who’s looking at companies distributing most of their income in term of dividend.
06:05 S1: I’m not an income seeking investor. I’m a dividend growth investor, so I’m looking for growth more than anything else. So by using a part of their money to invest in marketing, another one in R&D or in acquisition, then you still have money to invest in… To distribute money in dividend and there you go, you have a great balance. Plus, when we’re trading in the bull market right now as we did, we are going to soon celebrate 10 years of bull market. Because the crash happened in 2008. Don’t you think that if a company had spent all its money right now on acquisition, they will probably overpay? Look at what happened with Disney, Fox and Comcast saga, where there was overbid, and at one point Comcast decided to not go ahead with a huge acquisition for Fox assets, mostly because it would have put the company in a very delicate situation because there were more debts to be contracted over there. So I think that acquisition is not always a good solution, and reinvesting in a company might be good, but sometimes you can just distribute a part of that profit to shareholders and then everybody will be happy.
07:18 S1: And at the same time, when I receive money, I can turn around and buy other companies with it, so when there’s a market downturn, I still have cash building up naturally, I don’t even have to save money, I just receive that money from my current holdings, and then I turn around, take that money and buy others. While, if I select companies that are not paying dividend, I’m stuck waiting and trusting CEOs that I don’t even know, to make sure that they will make the good decision. So I rather keep a little bit of power on my side, a little of control over my portfolio, receive that dividend, and then keep investing in dividend growth stocks. But don’t forget, the key here is not to look at dividend yield or high income, it’s to look at dividend growth. So if you have any questions, go there in the comment below, if not, follow me on the YouTube channel, and also at my blog, dividendguyblog.com, register as newsletter, and you’ll get more videos and webinars about dividend investing topics. So here you go Mike, I’m looking forward to your answer now.