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At The Money: Profiting from Dividend Growth · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios. Podcasts. Radio. News.
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Speaker 2: I was a wizard.
0:09
Speaker 3: Of finance Speculating every day on Wall Street.
0:25
Speaker 2: How often do you think about dividend investing and in particular,
0:29
Speaker 2: dividend growth investing? Dividends are one of the oldest and
0:33
Speaker 2: most highly regarded forms of equity investing. But in an
0:37
Speaker 2: era of mega cap growth, should you be chasing dividends
0:41
Speaker 2: or buying growth? David Bonson is the author of a
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Speaker 2: new book, Profit from the Profit. the past, present, and
0:48
Speaker 2: future of dividend growth investing. He's also the founder and
0:52
Speaker 2: chief investment officer of the Bonson Group, managing over $ 10 billion.
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Speaker 2: So David, let's start with just the title of the book,
1:01
Speaker 2: Profit from the Profit. Explain the difference between profiting from
1:06
Speaker 2: a company's underlying economic activity versus merely profiting from a
1:12
Speaker 2: change in stock price.
1:14
Speaker 3: Well, my view, Barry, is that all investing comes down
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Speaker 3: at some form or another to the underlying profits of
1:21
Speaker 3: what is being invested in. And you could say, well,
1:24
Speaker 3: what about pre-profit companies, pre-revenue, venture capital? All of those
1:30
Speaker 3: things still are being invested in out of some outlook
1:33
Speaker 3: on future profitability. And to the extent you want something
1:37
Speaker 3: that's more liquid and a little more stable and diversify
1:41
Speaker 3: the types of things that usually are found in public markets,
1:44
Speaker 3: then you're dealing with underlying profits and some sort of
1:47
Speaker 3: discounting of those future profits into a present valuation. And
1:52
Speaker 3: what I'm suggesting here in the prepositional phrase, the out
1:55
Speaker 3: of profit from the profit, is I'm saying let's take
1:59
Speaker 3: those profits that we own the company for and let's
2:02
Speaker 3: allow the individual investor to participate in those profits in
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Speaker 3: the way that throughout history they often did, which is
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Speaker 3: the receipt of a dividend. Now, of course, I recognize
2:14
Speaker 3: companies cannot pay all the profits out to their risk
2:17
Speaker 3: taking investors. They need to hold on to some profits
2:20
Speaker 3: and retain some for a rainy day. They need to
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Speaker 3: pay down debt. They need to reinvest in capex and
2:26
Speaker 3: growth of the company. but there has to be some
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Speaker 3: reward to the risk taker and dividends represent a palatable, tangible,
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Speaker 3: repeatable profit from those profits.
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Speaker 2: So let's dive into that philosophy, which you describe as
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Speaker 2: really a philosophy of ownership rather than simply an investment
2:47
Speaker 2: strategy or even a tactic. I really like that framing.
2:52
Speaker 2: Explain the foundation of thinking of your ownership of a
2:56
Speaker 2: stock is owning a company.
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Speaker 3: I believe it's an underlying business that has a market strategy,
3:03
Speaker 3: that has a management team, right?
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Speaker 1: It's a real company.
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Speaker 3: Every company we own is effectively a lemonade stand and
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Speaker 3: there's different levels of complexity and all of those things
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Speaker 3: and it's goods or services or both.
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Speaker 1: But at the end of the day, it's a business.
3:19
Speaker 3: And one of the problems is with the success of
3:23
Speaker 3: index investing is we do start to think something that
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Speaker 3: isn't true, that we made our money from the market,
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Speaker 3: from the index went up. Companies go up and you
3:34
Speaker 3: can aggregate that and the math gets very complicated, but
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Speaker 3: there's only value being created when there are underlying businesses
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Speaker 3: that are adding value and that there are customers of
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Speaker 3: businesses that are buying goods and services that meet the
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Speaker 3: needs of humanity. So this underlying first principle drives what
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Speaker 3: I believe about value creation and therefore the generation of
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Speaker 3: profits and from the generation of profits.
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Speaker 1: The ability to reward shareholders with those.
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Speaker 2: So some of the writings you've put out over the
4:04
Speaker 2: years that I've seen really draws a distinction between what
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Speaker 2: you just described as value creation and as opposed to
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Speaker 2: buying a couple of numbers on a screen and the
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Speaker 2: numbers go up. And you've been pretty blunt about describing
4:22
Speaker 2: there isn't a difference between owning a company and speculating
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Speaker 2: in the market. Discuss that difference. How do you draw
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Speaker 2: the line between economic investing and just speculation and gambling?
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Speaker 3: Well, I think that by definition, the easiest line is
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Speaker 3: things that are zero sum versus things that are not.
4:44
Speaker 3: And so when you place a wager with your friend
4:47
Speaker 3: on the Mets game, first of all, if you took
4:50
Speaker 3: the Mets, you're probably going to lose the bet.
4:52
Speaker 1: Second of all, there's one winner, one loser.
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Speaker 3: But when you invest in Procter & Gamble, I don't
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Speaker 3: believe that's the case. You're investing in them creating new wealth,
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Speaker 3: new profits, new.
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Speaker 1: Opportunities, etc.
5:04
Speaker 3: And so that by definition, de-speculates the investment to some degree.
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Speaker 3: But also there's just a lot of investing that is
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Speaker 3: based on a guess of a price.
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Speaker 1: In a certain period of time.
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Speaker 3: One of the reasons that we don't do option investing
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Speaker 3: at my firm is because even if I have a
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Speaker 3: lot of conviction in a company and I can go
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Speaker 3: buy a call option on it, but I can't make
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Speaker 3: any money doing that unless I also attach the time
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Speaker 3: value to it. But I'm not interested in speculating on
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Speaker 3: when an announcement may come or when the company may
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Speaker 3: be honored in the market with a higher valuation. Long-term
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Speaker 3: value creation is not necessarily going to be within a timeline.
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Speaker 3: And so there's different ways people can get to this.
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Speaker 3: But our view is that the speculation, you know it
5:52
Speaker 3: when you see it. And at the end of the day,
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Speaker 3: we're right now in a speculative mode. I never thought
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Speaker 3: I'd see speculation like we saw in the 90s.
6:01
Speaker 1: When I was starting my investing.
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Speaker 3: Career and what we saw going into real estate with
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Speaker 3: the pre-08 period. There's been a lot of moments of
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Speaker 3: speculative mania and fervor in my career. Right now, the
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Speaker 3: instrumentation that exists for speculation with literal speculation and draft
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Speaker 3: kings and sports markets. And now these prediction markets, single
6:23
Speaker 3: day option ETFs, all of this stuff, it's unbelievable. They're
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Speaker 3: all consciously geared towards speculation. A dividend portfolio is saying, hey,
6:31
Speaker 3: I really believe people are going to buy soda pop
6:34
Speaker 3: or they're going to continue needing oil and gas to
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Speaker 3: heat their homes, et cetera.
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Speaker 2: Yeah, it's really becoming a problem, especially to the current
6:43
Speaker 2: generation of young men who pretty much have become gambling junkies,
6:49
Speaker 2: who was bad enough when people were betting on the
6:51
Speaker 2: outcome of games. But if you're betting on, is he
6:54
Speaker 2: going to hit this free throw? Well, you know, you're
6:56
Speaker 2: just throwing a dice. You might as well go to Vegas.
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Speaker 2: Related to this, you've discussed in the book the difference
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Speaker 2: between endogenous and exogenous returns. Dive into that a little
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Speaker 2: bit and explain what those differences are and what it
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Speaker 2: means to an investor, not a speculator.
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Speaker 3: Well, essentially, we're just talking about the difference between trying
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Speaker 3: to get your return from factors that are external, that
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Speaker 3: are outside of your control, that are outside the underlying
7:30
Speaker 3: reality of the business. So in this particular case, we're
7:34
Speaker 3: sort of referring to investors the what what you believe
7:39
Speaker 3: others psychology will be, what how.
7:42
Speaker 1: Other investors are going to respond. I think the P.E.
7:45
Speaker 3: Ratio is going to get bid up because this stock
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Speaker 3: is going to be popular. That would be an example
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Speaker 3: of an exogenous factor. And I think it is by
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Speaker 3: far the most, shall we say, prevalent way of thinking
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Speaker 3: about investing.
8:01
Speaker 1: But when you're talking about stuff that is.
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Speaker 3: Within the business, that my return is going to come
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Speaker 3: from the performance of the company, from their success in
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Speaker 3: growing profits and competing and creating value, then that's endogenous
8:16
Speaker 3: and it is an entirely different mentality and approach. I
8:21
Speaker 3: do not suggest everyone's self-aware of this. I don't think
8:23
Speaker 3: it's total self-conscious, but I think that the implicit mentality
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Speaker 3: or objective of many investors today is that they're betting
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Speaker 3: on what others are going to do as opposed to
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Speaker 3: betting on how a company is going to perform.
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Speaker 2: Really, really, really interesting. So this book, Profit from the Profit,
8:41
Speaker 2: is a follow-up to your 2019 book, The Case for
8:45
Speaker 2: Dividend Growth. It's been seven years. I'm curious... What has
8:50
Speaker 2: changed either in the economy, the markets, or your own
8:54
Speaker 2: thinking that made an update of the book necessary?
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Speaker 3: I think that you had basically the S & P
9:02
Speaker 3: nearly triple in seven years, which is crazy, by the way,
9:06
Speaker 3: crazy to think about. But we had had a bit
9:08
Speaker 3: of a dip in 2018. And so there's a little
9:11
Speaker 3: bit of convenient timing here. The S & P, I think,
9:15
Speaker 3: was down 5% in 2018 from the combo of a
9:19
Speaker 3: little bit of Fed tightening and President Trump's trade war then.
9:23
Speaker 3: And then it rallied huge at the very beginning of 2019.
9:25
Speaker 3: We had a hiccup in COVID, but then really that
9:28
Speaker 3: only lasted about a month and ended up having a
9:31
Speaker 3: very robust period.
9:32
Speaker 1: There was one bad year.
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Speaker 3: It's really the only bad year we've had since the
9:36
Speaker 3: financial crisis in 2022. But then NVIDIA, three 100% years
9:42
Speaker 3: in a row, you just have had a massive rally.
9:45
Speaker 3: So it's worth saying, hey, David, was your thesis from
9:49
Speaker 3: seven years ago, is it become antiquated? And you look
9:53
Speaker 3: at it and say, well, actually, Barry, I don't want
9:56
Speaker 3: to jinx myself for 2026, but when Dick.
10:00
Speaker 3: Growth was up 5% in 2022 and the S &
10:01
Speaker 3: P was down 18%, And dividend growth did fine in
10:07
Speaker 3: the three years in between, not as much as the
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Speaker 3: Nvidia stuff, but still did fine. And now a year
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Speaker 3: like this year where dividend growth is beating the market
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Speaker 3: by 400, 500 basis points, I think you're going to
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Speaker 3: end up with a five-year number that's better than the market.
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Speaker 3: But that's because of that first 2022 year. This story
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Speaker 3: to me is very probable for the next three, five,
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Speaker 3: seven years. At a 23 times entry multiple on the
10:33
Speaker 3: S & P, earnings growth is great. But unless you
10:37
Speaker 3: think you're going to get a 29X, if you're going
10:40
Speaker 3: to actually have to fight against multiple contraction for the
10:44
Speaker 3: next few years, the math of the index return is
10:47
Speaker 3: what it is. I'm not being bullish or bearish here.
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Speaker 1: I'm just being a mathematician. It's going to be.
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Speaker 3: Very hard for the S & P to deliver continued 15% returns.
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Speaker 2: Yeah. And in the past few years, we've had 25% returns.
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Speaker 2: Good luck keeping up with that.
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Speaker 1: Exactly.
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Speaker 3: And I think that the story of my first decade
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Speaker 3: professionally managing money is what I'm now coming back to saying, look,
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Speaker 3: the market can retreat here, even with good underlying fundamentals.
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Speaker 3: It's just that the Intels, Microsoft, Ciscos of the 2000s,
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Speaker 3: all of them grew.
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Speaker 1: Their earnings, their.
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Speaker 3: Profits, their cash flows, all of them were lower at
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Speaker 3: the end of the decade than the beginning of the decade.
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Speaker 3: And I don't know that's going to happen with Nvidia.
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Speaker 3: I'm not making a bearish AI call, but I am
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Speaker 3: asking investors to realize that things are not as easy as.
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Speaker 1: They might have seen the last three or four years.
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Speaker 3: And I think that the update of the book was
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Speaker 3: my attempt to restate, update the argument, new charts, new numbers.
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Speaker 1: But then also, Barry, I think it's a little bit
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Speaker 1: more philosophical.
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Speaker 3: I'm adding a little more as to where I think
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Speaker 3: about doomsday investing in dividend growth. And then I am
12:00
Speaker 3: encountering some of the objections. There's folks like Mel Faber
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Speaker 3: that are notoriously talk about how a dividend is totally worthless,
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Speaker 3: that all you're doing is taking from one part of
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Speaker 3: the company, the balance sheet, giving it to someone else
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Speaker 3: at zero sum. And I'm contending with that argument, contending
12:16
Speaker 3: with stock buybacks, contending with tax efficiency. Some may not
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Speaker 3: find my arguments persuasive, but I am making an argument
12:23
Speaker 3: on all of those points.
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Speaker 2: Typically, dividend-paying stocks are often concentrated in mature sectors, financial, energy, utilities, staples,
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Speaker 2: things like that. How do you prevent a dividend growth
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Speaker 2: portfolio from being an unintended either sector bet or value
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Speaker 2: factor bet?
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Speaker 3: Well, the value factor bet is harder to avoid than
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Speaker 3: the sector side. For us, it is true that we've
12:49
Speaker 3: always been very limited in our exposure to consumer discretionary
12:53
Speaker 3: because the consumer discretionary names, by definition, it's hard to
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Speaker 3: pay a sustainable dividend when you're depending on 16-year-old girls
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Speaker 3: liking your.
13:02
Speaker 1: Clothes at the mall. It's a very discretionary sector. A
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Speaker 1: little bit fickle. Exactly. But there's actually a lot of durability.
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Speaker 3: And all of the cool kids from the 90s are
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Speaker 3: now dividend growers today. You know, your Qualcomm's and Cisco's
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Speaker 3: and even Microsoft, it looks like a low yield because
13:20
Speaker 3: the stock price.
13:21
Speaker 1: Has gone up so much. But after George W.
13:24
Speaker 3: Bush's second tax cut changed the tax rate on dividends,
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Speaker 3: Microsoft all of a sudden became a great dividend payer.
13:31
Speaker 1: Right.
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Speaker 3: So I suspect that a lot of these tech names
13:36
Speaker 3: could end up becoming good dividend growers, and some of
13:38
Speaker 3: them already are. Texas Instruments, Broadcom, but they're kind of
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Speaker 3: old tech. They're not the cool tech stuff. But you
13:46
Speaker 3: want to keep benchmark agnosticism, in my opinion, but you
13:50
Speaker 3: still want to be sector diversified. So we own basically
13:54
Speaker 3: every sector to some degree or another, but my weightings
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Speaker 3: to those sectors, I'm agnostic to what the benchmark is.
14:01
Speaker 3: We've been overweight energy and underweight consumer discretionary for most
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Speaker 3: of my career.
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Speaker 1: It's worked out just fine.
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Speaker 2: Yeah, to say the very least. Let me throw an
14:09
Speaker 2: interesting curveball at you. One of the most interesting companies
14:14
Speaker 2: that does not pay a dividend has been Berkshire Hathaway.
14:18
Speaker 2: They've created enormous value without ever paying a dividend. They occasionally,
14:24
Speaker 2: when the stock gets quote unquote cheap, they'll do some
14:28
Speaker 2: buybacks and And they're sitting on this massive, what is it,
14:31
Speaker 2: $ 300 billion cash pile. How do you distinguish between a
14:35
Speaker 2: company that should retain its earnings so it can make
14:39
Speaker 2: those opportunistic acquisitions versus one that really should be paying
14:45
Speaker 2: its shareholders some form of dividend?
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Speaker 3: You know what's fascinating, Barry, is that Berkshire Hathaway is
14:50
Speaker 3: the company that proves my point, not the exception to
14:54
Speaker 3: the point. They are not a company. They are a
14:57
Speaker 3: holding company. And what do they hold? A whole bunch
15:00
Speaker 3: of companies that pay dividends to them. Now, they may
15:04
Speaker 3: choose not to return that cash to the shareholders because
15:08
Speaker 3: that's what the investors consciously bought was a holdco that
15:12
Speaker 3: you are asking Mr. Buffett and Munger in the years past,
15:16
Speaker 3: now a new management team, to invest that capital. It's
15:20
Speaker 3: much more like a mutual fund of private and public companies.
15:25
Speaker 3: But the Coca-Cola's and Wells Fargo's and Apple's and by
15:29
Speaker 3: the way, even the private businesses have made the railroads
15:33
Speaker 3: and seized candies have made massive cash payments to the holdco.
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Speaker 3: So it isn't really contradictory to it. There are companies
15:43
Speaker 3: out there that are operating companies that also have not
15:45
Speaker 3: been dividend growers that have been very successful. But I
15:48
Speaker 3: would argue that I could find 100 examples of ones
15:52
Speaker 3: that didn't return capital to shareholders and set money on
15:55
Speaker 3: fire for every one I could find that proved to
15:58
Speaker 3: be a better steward of that capital. In the appendix
16:02
Speaker 3: of the book, I talk about the comparison of Viacom.
16:06
Speaker 3: And now that Sumner Redstone is no longer with us,
16:08
Speaker 3: I make him the foil here. Because the amount of
16:10
Speaker 3: money these people set on fire over the years, they
16:13
Speaker 3: wouldn't pay a sustainable dividend.
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Speaker 1: A lot of their competitors did. And then they just
16:18
Speaker 1: did these media.
16:19
Speaker 3: M & A orgies and all of them were capital destructive.
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Speaker 3: That to me is much more common than a company
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Speaker 3: that by not paying a dividend is creating more value.
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Speaker 2: When we go to lunch, remind me to tell you
16:32
Speaker 2: the story of a company I was affiliated in that
16:34
Speaker 2: had an opportunity to do a special giant one time
16:38
Speaker 2: dividend and instead they lit the money on fire. But Berkshire,
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Speaker 2: as the exception that proves the point, raises an interesting question.
16:49
Speaker 2: Do dividends and continually paid and actually increased dividends, does
16:54
Speaker 2: that impose a discipline on management? And how could you
16:59
Speaker 2: distinguish when having to meet the dividend is a positive
17:04
Speaker 2: thing versus when it might discourage investment or innovation or
17:08
Speaker 2: intelligent risk-taking?
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Speaker 3: You know, it's such a thoughtful question and I'm not
17:13
Speaker 3: just saying this to blow smoke here, but I very
17:15
Speaker 3: much doubt that very many other interviewers are going to
17:18
Speaker 3: ask that to me because it's really an important question
17:20
Speaker 3: and you get it. Barry, that's a trade-off that exists, right?
17:24
Speaker 3: There is a sense in which A opportunity might get
17:28
Speaker 3: missed because the faithfulness to the dividend causes someone not
17:33
Speaker 3: to pursue a risk that might have ended up paying out.
17:35
Speaker 3: What I would suggest is that's a risk worth taking
17:38
Speaker 3: for most investors, not those with a highly speculative or
17:42
Speaker 3: high risk, high beta, high octane part of their portfolio.
17:46
Speaker 3: But ultimately, if someone had said, you know what, I'm
17:49
Speaker 3: not going to do this AOL Time Warner merger because
17:51
Speaker 3: we're not going to be able to sustain the dividend
17:53
Speaker 3: doing it, that would have protected about $ 300 billion of capital.
17:58
Speaker 3: And I could go on and on. Those are not
18:00
Speaker 3: nut-picking examples. They're the norm. Now, there's been plenty of
18:04
Speaker 3: good and healthy M & A. Exxon's deal... with Pioneer,
18:08
Speaker 3: Chevron's deal with Hess, Exxon's deal with Mobil. They didn't
18:12
Speaker 3: cut the dividend during COVID, for God's sake, when oil
18:14
Speaker 3: was negative. They didn't cut the dividend during Valdez, during
18:19
Speaker 3: the financial crisis. Having the social contract where your cash flow,
18:23
Speaker 3: your payout ratio, your balance sheet enabled you to sustain
18:26
Speaker 3: it doesn't mean you can't do M & A.
18:29
Speaker 1: But it should mean you can't do reckless M & A.
18:33
Speaker 1: And I would.
18:33
Speaker 3: Suggest that Comcast has been a more faithful user of
18:37
Speaker 3: M & A than Viacom and Paramount were.
18:41
Speaker 2: I saved my favorite question for last, which is, you
18:46
Speaker 2: argue dividend growth allows investors to benefit from volatility and
18:52
Speaker 2: rather than merely having to endure it. Explain what you
18:56
Speaker 2: mean by that. What's the philosophy behind benefiting from volatility?
19:01
Speaker 3: So when we say endure volatility, an S & P
19:04
Speaker 3: investor who is an accumulator, not a withdrawer, does not
19:08
Speaker 3: suffer from the volatility. And ultimately the premium return they
19:12
Speaker 3: get is a trade-off to the volatility that they're expected
19:16
Speaker 3: to deal with.
19:17
Speaker 1: So that's all what it is.
19:18
Speaker 3: However- A dividend growth investor has an automatic purchase going
19:25
Speaker 3: on across a diversified portfolio. You assume volatility is a given.
19:30
Speaker 3: It's going to happen. So there is therefore no way
19:33
Speaker 3: to escape the fact that you are mathematically benefiting because
19:37
Speaker 3: you are already compounding. Your return goes where it goes
19:40
Speaker 3: and then you're getting more.
19:41
Speaker 1: The next year, the next year.
19:43
Speaker 3: Now you're getting more purchases of the thing that is compounding.
19:47
Speaker 3: So it creates an automated compounding machine within a compounding investment.
19:53
Speaker 1: And that leverage over time is monumental. And it ought
19:57
Speaker 1: to excite.
19:58
Speaker 3: People that are 30, 40, 45 years old, accumulating long
20:02
Speaker 3: term that Because you can say to yourself, every time
20:05
Speaker 3: the market's down, I am buying more shares of the
20:09
Speaker 3: things that are in the future are going to be
20:11
Speaker 3: creating cash flow for me.
20:13
Speaker 2: And that's how you end up with the sort of
20:15
Speaker 2: stocks that are paying 30, 40, 50% of the original
20:18
Speaker 2: purchase price annually, which sounds crazy, but the math makes sense.
20:24
Speaker 1: Yes, sir. That's exactly right.
20:25
Speaker 2: So to wrap up, If you're interested in dividend growth investing,
20:30
Speaker 2: if you'd like to try and generate market equaling portfolios
20:36
Speaker 2: with less volatility and a higher wealth creation, check out
20:40
Speaker 2: the new book, Profit from the Profit, The Past, Present,
20:44
Speaker 2: and Future of Dividend Growth Investing by David Bonson. I'm
20:48
Speaker 2: Barry Ritholtz. You're listening to Bloomberg's At The Money. Just
20:54
Speaker 2: be the guy Just another guy Just be the guy
20:58
Speaker 2: Another guy Just be the guy