Podcast Summary
Dividend stocks: Historically, dividend stocks have performed well during low yield periods, offering potential contrarian plays with strong long-term fundamentals
Despite underperforming the S&P 500 in recent years, dividend stocks remain an attractive investment option due to their ability to instill discipline on management and provide steady income. Dividend-paying companies have historically performed well during periods of low yields, and while interest rates can impact their short-term performance, their long-term fundamentals remain important. The current low dividend yields in the market may make dividend stocks seem less appealing, but the historical resurgence of interest in dividend-paying stocks following market downturns suggests a potential contrarian play. Ultimately, the long-term success of dividend stocks depends on their competitive advantages, resilient earnings, and long-term pricing power.
Dividend Stocks for Younger Investors: Dividend stocks from companies with strong fundamentals and reliable earnings, even for younger investors, can offer potential outperformance, lower volatility, and long-term earnings growth, despite interest rates and common beliefs.
Investing in dividend-paying stocks, even for younger investors, can be a wise decision despite the common belief that growthier stocks are the way to go. Dividend stocks often come from companies with strong fundamentals, reliable earnings, and resiliency. While interest rates can impact asset prices, they can also signal a strong economy and earnings growth, leading to higher dividends over the long term. Companies pay dividends to attract and retain investors, show financial strength, and return cash to shareholders. Tech companies, in particular, have been choosing to pay dividends recently due to their high cash reserves and relatively expensive stock prices. Dividend stocks not only have the potential to outperform but also tend to have lower volatility, making them a less risky investment option. Contrary to popular belief, a company's decision to pay a dividend does not mean its growth days are behind it.
Dividend Evaluation: When considering a dividend investment, evaluate the company's earnings visibility, fundamentals, and balance sheet, and consider the payout ratio and earnings growth trajectory.
While companies paying dividends can be attractive investments, not all companies should pay dividends. Those with weak earnings visibility, poor fundamentals, or a weak balance sheet may not be able to sustain a dividend or may be better off allocating resources to growth. When evaluating a dividend, investors should consider the payout ratio, which is the percentage of earnings paid out as dividends, and the trajectory of earnings growth. A high payout ratio may not be a red flag if earnings are expected to grow significantly. Companies like Hershey and FedEx, which have historically high payout ratios, are still able to sustain their dividends due to strong earnings growth. Ultimately, a dividend can be a sign of discipline and commitment to shareholders, but it's important to evaluate the company's financial health and earnings potential before making an investment decision.
Dividend Consistency: Consistent dividend payers with a history of increasing dividends are generally more attractive than companies with high but uncertain payouts or a history of dividend cuts due to poor business fundamentals
While high payout ratios aren't always a red flag, it's crucial that the business is a consistent cash generator with a track record of raising dividends at a high rate. Companies that temporarily suspend or decrease their dividends due to unforeseen circumstances, like the pandemic, can be exceptions. However, if a dividend cut is due to management's control, it's usually a bad sign and often indicates further dividend cuts to come. Companies like Full Corp, which have a reliable dividend growth history, can be attractive despite short-term challenges, such as interest rate hikes or economic downturns. The key is to focus on the long-term fundamentals of the business and its ability to generate earnings and cash flow.
Dividend continuity during economic downturns: Companies with strong market positions and earnings visibility, like Pool and Nike, often maintain or even increase dividends during economic downturns, demonstrating their financial stability and ability to navigate through economic cycles.
Companies with strong market positions and earnings visibility, like Pool and Nike, often continue to pay and even raise dividends during challenging economic conditions or business downturns. These companies, which may be seasonal or cyclical in nature, have a clear understanding of industry trends and the ability to navigate through economic cycles. For instance, Pool, with its leading market share and good earnings visibility, raised its dividend despite recent challenges in the housing market. Similarly, Nike, which has consistently paid dividends since 1986 and raised them since 1997, is currently experiencing a significant downturn but has historically bounced back. Despite management concerns, the dividend is considered relatively safe for Nike. Starbucks, another company facing uncertainty with a new CEO, has paid dividends in the past, but the impact on the dividend policy under the new leadership remains to be seen.
REIT management quality: Strong management and a disciplined approach to capital allocation are crucial for REITs like Simon Property Group to maintain or increase dividend payments during economic headwinds.
The quality of management and a strong balance sheet are crucial factors for a REIT like Simon Property Group to weather economic headwinds and maintain or even increase their dividend payments. The speaker emphasized Simon's leadership, with CEO David Simon having decades of experience, and the company's disciplined approach to capital allocation, barely taking on new debt during difficult times. Despite facing challenges such as the Great Recession, e-commerce, and COVID-19, Simon's business has continued to perform well, with nearly 96% occupancy and a stronger tenant roster today compared to pre-pandemic levels. For investors evaluating REITs, it's essential to consider the quality of management and their incentives, as REITs are required to distribute a large portion of their income to shareholders through dividends.
Dividend investing: Considering individual company selection capabilities, investing in dividend ETFs or index funds like Schwab US Dividend Equity ETF (SCHD) or Vanguard Dividend Appreciation ETF (VIG) can be effective strategies for building wealth through dividends
Investing in dividend-paying companies can be an effective strategy for building wealth, but it's important for investors to consider their own capabilities and resources when it comes to picking individual companies. If an investor is unsure about their ability to select the best dividend-paying companies, they might consider investing in dividend ETFs or index funds instead. Two options mentioned on the show are the Schwab US Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG). The former focuses on larger dividend payers that can grow their dividends over time, while the latter is more growth-oriented and focuses on companies that are growing their dividends at rates above inflation. As always, it's important to remember that the people on the program may have investments in the stocks they discuss, and The Motley Fool may have additional recommendations.