Creating portfolio income is one of the main reasons we all invest. There are many ways to create that income. One of the best ways is utilizing dividends. These payouts from your investments are one of the leading ways to create portfolio income for your retirement or hopefully, before that.
Tonight we have the extreme pleasure to have a conversation with Ben Reynolds of Sure Dividend. Ben is one Andrew’s and I’s favorite writers and his work is a must-read for anyone even remotely interested in dividend investing. The writing is very easy to read and he provides tremendous value with each analysis that he does. Ben focuses on companies that pay dividends and his real passion is helping investors create portfolio income through these dividend payers.
- Having a long-term horizon
- Discovering the important ratios of dividend investing
- the importance of dividend aristocrats
- A new take on dividend reinvestment
- ETFs or individual stocks
- How to start dividend investing
- 8 rules for dividend investing
He has two newsletters that he writes that focuses on different aspects of the dividend investing world. Sure Dividend is for his subscribers that have a longer time horizon and the Sure Retirement that is for those who are looking for higher yields. We will discuss these in much more detail in our interview.
This was a treat for me as I was able to be the moderator and ask the questions. Then just sit back and listen to Ben and Andrew go back and forth.
Here is our interview with Ben.
Dave: How did you get interested in dividend investing?
Ben: I have been interested in investing, since basically when I finished college. I have always been interested in finance from a very early age. I got interested in dividend investing in particular when I started researching market anomalies. You probably have heard of some of them. Like the value investing effect or low price to earnings stocks. Or the low-volatility effect where low-volatility stocks have outperformed high-volatility stocks.
There are all these market anomalies and one of them is that dividend-paying stocks have outperformed non-dividend paying stocks over a very long period of time.
And that really stood out to me. And I thought it would be interesting to combine dividend investing with some of the other market anomalies that I was just discussing.
Dave: How did you come across that information?
Ben: One of the courses I took in college was on market anomalies. And it was a really interesting course and that’s what really got me interested in it.
Dave: Tell me a little bit about your background.
Ben: My degree in college was in finance and then after graduation, I worked a couple of different jobs. One of them was in logistics in a third-party warehouse. I did sales there, it wasn’t quite with my degree but my passion was with investing and I was constantly reading about investing.
And from there I started writing a lot about investing and then started Sure Dividend from there. It has really been my outlet for learning about investing and hopefully telling people about it.
Andrew: So you escaped the academic route of efficient market hypothesis? So you were able to somehow avoid that trap?
Ben: Yes, that is when I really started to get interested in it. When seeing that wasn’t really accurate because to me investing is as interesting if you can’t or only do average. That doesn’t sound exciting. But when you discover that there are lots of inefficiencies and you have seen people that have exploited them. It makes it a lot more exciting to me.
Dave: Tell me about some of the people that have influenced you or directed you to your philosophies about investing.
Ben: I will go with one that is lesser known and one that is really well known. I mean these are both bigger names. To start with the lesser known one, he is Tobias Carlisle, he used to run the Greenback’d blog and he’s written a lot of great investing books.
And the one that influenced me the most was Quantitative Value by Carlisle and a co-author named Wesley Gray. It is a phenomenal book that talks about how you can apply quantitative screens to value investing. And how you can generate returns doing that.
So that quantitative approach and the scientific approach really influenced me.
And before that my other big influence was, I guess I started first with value investing. So I first read Intelligent Investor by Ben Graham and Security Analysis was really influenced by that work. And then I read a lot about Warren Buffett and read his annual reports and a lot of books about him.
So that also really also influenced me was the quality that you have with long-term investing.
Those would be my two influences on my investing philosophy.
Dave: Tell me about some of the important ratios for dividend investing?
Ben: What a lot of people think of first is dividend yield. And of course, the yield is important if you’re investing for income.
But I think other ratios that are important but don’t get quite as much attention from dividend investors as yield. One would be payout ratio. The payout ratio is really important because if you have a high payout ratio and something goes wrong with the business, you are going to have a dividend cut because you just don’t have the earnings to support their dividend. So, the lower the payout ratio the less chance you have of a dividend cut.
And also the less chance you have the management decides we have a 30% payout ratio right now and maybe our investment opportunities have changed a little bit for our business reinvestment prospects. And we are going to bump that up to 50% in the next five years. So you might see dividend growth that is well ahead of earnings growth. And so you can watch how quickly your dividend grows, which can make a big difference.
Another one is which I think is the most important metric in investing. It is the price to earnings ratio. You can go down a rabbit hole with a price to cash flow, or enterprise value to EBITDA. But in general price to earnings ratio is a quick way to determine value. And valuation is extremely important to any type of investing. Especially dividend investing. So that would a very important one.
And finally, another one that doesn’t get looked at as much. Probably because it is a little harder to track is dividend history. And if you look at dividend history, one of my favorite examples is the dividend aristocrats index. And it is composed of entirely of business that have paid consecutively 25 years of dividend increases. When you think about it. For a business to have increased its dividends for two and half decades in a row. It’s gotta have some kind of strong competitive advantage. And, paying attention to dividend history can help lessen risk. And also with returns investing in great businesses.
Dave: So where would you go to find the payout ratio?
Ben: You can find that on most data providers. I am sure Yahoo finance has it. But I like Finviz as a stock screener.
Dave: You mentioned earlier the dividend aristocrats. Tell me more about the dividend aristocrats and kings. I read a lot about them on your site, that is where I was introduced to them.
Ben: Sure, that is one of the things that really attracted me to dividend investing as well. When I started reading about the dividend aristocrats. As I mentioned earlier, it is companies that have had 25 consecutive years of dividend increases that are in the S&P 500. And there are only 51 companies that meet those criteria. They are generally household name stocks like Coca-Cola, Johnson and Johnson, and 3M. Companies like that. I know that sounds nice, but why does this matter?
Well, the dividend aristocrats index has outperformed the market by just under 3% every year for over a decade. And they have done it with lower volatility than the market. So, that is very impressive.
And it shows there is something there to it.
The dividend kings are even more exclusive. Those are stocks with 50 years of dividend increases and there are only 19 stocks that meet that selection. They are some of the stocks that I already mentioned. They are some of the most well-known stocks that have long histories. Some of them would be Proctor & Gamble and Colgate-Palmolive.
To increase your dividend for 50 years in a row shows that you can withstand anything. That business model has been able to withstand pretty much everything that can be thrown at it. From recessions, inflation, deflation, and everything else you think of. It has been able to continue to increase its dividend. Dividends aren’t going to grow over a long period of time unless earnings have continued to grow as well.
Andrew: And that is where you really get the major compounding that you see. When you see examples of people that have made fortunes. You see countless examples of ordinary people putting a little bit of money from small salaries into dividend aristocrats or kings. And being able to have these extraordinary gains over a long period of time. Because as you said these companies that are growing their rates over a long period of time. It is going to be in a company that has been able to grow its earnings over a long period.
You are automatically getting yourself into a great company with a great business model. As long as you get in at a good valuation. And secondly, as you reinvest those dividends, which a lot of people with these success stories have tended to do. As you reinvest with these companies with these great returns you will only continue to increase your returns from when you originally purchased that stock.
You are talking about 10, 20, or even 30% on your original purchase every single year in a dividend. So, the amount of dividends and shares of the company that you have just kind of balloons up. And that is where you see people turn tens of thousands into millions of dollars.
Ben: Absolutely it is. It is a long-term perspective. I think a lot of people shy away from investing in those types of companies because it is boring and I can only make 10% a year. But it is reliable, but there is no guarantee what you are going to make. The likelihood of growing your wealth over time with a 3M or Coca-Cola, with the caveat that you buy in at the right price. Is very high because they have proven their success over such a long period of time.
Andrew: You talk about the numbers. I think you said about 19 dividend kings currently and 50 dividend aristocrats. You could buy an aristocrat and not every aristocrat is going to turn into a king. But to go from 50 to 19 is a pretty good ratio as far as having that continue. So, it is not like you have to be ahead of the game and pick some undiscovered stock to get these sort of compoundings. A lot of times, like you said with these kings that have been going for decades. You could buy in after seeing ten years of history and still see another 10, 20, 30 or even 40 years of compounding afterward.
Ben: Absolutely. That is one that I have looked into is around 1988 or 1989 there were close to 48 of them and almost half of them became kings. So over a 25 year period close to 24 of them raised their dividends every year. And those that did, over that time period, greatly outperformed the market. And I have an article on that on my website. A study.
But you have a high chance of success when you invest in great businesses.
Dave: That sounds a lot like a Warren Buffett quote.
Ben: I have read a lot of Warren Buffett quotes so it is bound to come out. I didn’t consciously decide to include those ideas when I created Sure Dividend but it just naturally fell into place.
Dividend growth investing is very close to the Warren Buffett strategy.
Dave: What do you think of DRIPs?
Ben: I like DRIPs. There are pros and cons to them. On the plus side. For those of you not familiar. DRIPs stands for Dividend Reinvestment Plans. So basically when that company pays a dividend it is used to repurchase more shares of that company that paid the dividend. So a number of shares that you own steadily grow over time.
The benefit to that is that you build huge positions in companies with rising dividends every year. So you get more shares from a higher dividend every year which really creates a snowball effect.
The downside is that you might have a company that is trading at a very high valuation. I will give you an example, say like Coca-Cola which in the late 90s was trading at an absurd valuation so if you are dripping you are buying at a bad valuation.
What I think makes sense is to collect dividends into your brokerage account. And then reinvest them into your best dividend growth idea at the time. Instead of going back into the company that paid the dividends.
Dave: If you are a beginner would it be better to start with ETFs or to start with individual stocks?
Ben: That is a really great question. And as the dividend growth guy, you would think that I would say you gotta buy the dividend stocks.
But it really depends on the person. And just using the DRIP I am not against investing in low-cost ETFs is an amazing way to start for most people. And what it means for me is the amount of time you want to put in. If you want to spend 30 minutes a year investing and you just want to dollar-cost average into a low-cost S&P 500 ETF. You are probably going to do pretty well over time and you will be able to spend that time doing something else that you like to do better.
So there is nothing wrong with investing in low-cost ETFs. It is a much better alternative than actively managed mutual funds. Something that you will learn in the investing arenas is avoiding high fees. Avoiding high fees is one of the most important things you can do.
Going on. I feel there are a lot of advantages to investing in individual stocks and dividend growth stocks. So, for example with investing in dividend growth stocks or any individual stocks, you know what you own. That’s one big advantage that I think comes in handy a lot during recessions.
As an example, if you own Proctor & Gamble and a recession falls and you see their shares fall 30%. But you see that they keep raising their dividends and their earnings maybe fell just 10%. Hopefully, your comfortable with the knowledge that Proctor & Gamble isn’t going anywhere. They are not going to go bankrupt tomorrow because we are in a recession. Proctor & Gamble have been around for a long time, they were founded in the late 1880s or 1890s. They are not going anywhere and hopefully, that gives you the ability to hold during recessions because you know what you own.
And for me, if I own a basket of securities like and ETF. For me, I don’t know what is in it all the way. I am not going to research all stocks in the S&P 500 when you buy it. So, I feel that is more difficult to get comfortable with when you see the price falling. It is more abstract.
So that is one advantage to individual stocks.
The other is the fees. ETFs have low fees, but individual stocks have no fees. There is no management fee because you are the manager. And you get to pick what you own. Again going back to a low-cost ETF, they are going to be holding some overvalued securities because they are investing in everything, depending on the ETF of course. But if you are buying into securities yourself, hopefully, you are not buying into really high prices, which you can control.
Andrew: And also depending on what the markets doing. IF you are buying at the tail end of a bull market you’ll tend to have an ETF that has more overvalued stocks at a higher extreme in that ETF. It depends on how the ETF is weighted. If it is market cap weighted the chances of that are even greater. Because it is going to hold a basket of stocks but it is going to hold the companies with a higher market cap. It is going to hold a greater percentage of those. So, if the market is in a bull market there is a good chance that some of those might be overvalued.
So, at the same time when you could look at a Proctor & Gamble and understand that you bought a better price and you have a larger margin of safety and your downside is lower. You contrast that with an ETF with one position that has a higher valuation or maybe even a whole basket of them. Those will tend to have a greater downside when a recession, or a depression or a stock market crash hits.
And I think another thing to think about when you are considering an ETF versus a stock is that we are talking about dividend aristocrats and kings and I know that I don’t personally constrict myself to those. But I do tend to prefer them when the price is right. When you are tilting your portfolio towards those you will tend to have a greater proportion of your portfolio having dividends that are growing.
Though like in an ETF, you could even invest in a dividend paying ETF but you might have those dividend payments fluctuate throughout the years. So, a great example would be the S&P Index, which goes by the ticker symbol SPY. If you look at that dividend history it is all over the map. And so there is no guarantee that if you buy certain dividends now that they will continue to grow tomorrow. But your chances are greater if you have the right techniques and the right mindset of trying to buy these stocks and are looking like they will grow them for the long-term. More stocks and a great percentage of your portfolio is going to give you that result, rather than an index which there is no guarantee five years from know you will be seeing lower dividend payments than when you started.
Ben: Those are excellent points and I think that right now is probably one of the worst times to invest in broad market ETFs. Just because of where valuation multiples are today.
Dave: Tell me about dividend growth investing?
Ben: Well, it is just like it sounds you are investing in companies looking for dividend growth. What that means is that you are basically looking for your dividend income to rise over time. And you are looking at stocks that have a history of paying rising dividends. Or at the very least you feel like will be paying rising dividends.
I think the advantage that dividend growth investing has is that it can put your focus on the dividend income you are receiving and how that grows. Instead of what the stock price is.
And that has a big advantage when the stock prices fall and you can look at the dividend payments you are receiving and see that it is still up. And maybe be less inclined to sell at the wrong time.
Dave: So along those lines, does that mean you ignore the other aspects of the business or are you still looking for a strong business?
Ben: Absolutely you are focused on the business. The business is first. A weak business will not be able to increase its dividend for very long at all. It is just impossible.
The focus has to be on the business and the byproduct of a strong business with a shareholder friendly management. Once it’s mature, is that it is going to be paying rising dividends. The focus first should be on great businesses and the outgrowth of that would be the dividend growth that comes from it.
Andrew: So, I am a really big quant guy. You are talking about value stocks and the value philosophy camp. I kind of diverge from the normal path you’d say and I don’t look at qualitative measures at all. You are talking about companies that are either growing their dividend or you perceive them to grow their dividend in the future. Do you have any methods qualitative or quantitative, either way, whether a management is likely to have that mindset to grow their dividend over time?
Ben: Absolutely, I am very quantitative myself. My ranking system is entirely quantitative as well. So I analyze businesses qualitatively just to make sure there is not something weird hiding in the numbers. And the business is about to fall off a cliff, for a reason very obvious to a human but where numbers don’t see.
But, my rankings are entirely quantitative and I have a system called the Eight Rules of Dividend Investing to look into that.
Andrew: Do you want to give us the overview of that?
Ben: Absolutely. The 8 rules of dividend investing have five buy rules, 2 sell rules, and one general portfolio management rule.
I will quickly go through the rules.
The first one is a dividend history screen. This only looks at companies with 25 years of rising dividends. So, businesses that haven’t cut their dividends in over 25 years. That really limits the universe of stocks that we are looking at. To businesses that really have shareholder friendly management and a strong competitive advantage. At least they’ve had that for the last 25 years. Which makes it probably likely they still do now.
So right now there are about 180 to 190 companies that fit that criterion right now. So that is the first hard screen. That’s not to say that there aren’t some really great companies that this screen will reject fairly. But the goal isn’t to be as inclusive as possible but it is to try to minimize errors. It is a high bar to pass but once you pass it they are generally very high-quality companies.
So that is the first rule and from there the other four rankings for the buy criteria are dividend yield. Obviously the higher the dividend yield the better, everything else being equal. The payout ratio, and all things being equal the lower the payout ratio the better because it gives you more safety. A lot of dividend investors want to see a high payout ratio because they feel that company is more shareholder friendly. But I look for a lower payout ratio, all things being equal. Just because, like I said earlier it provides more safety and gives more room to grow dividends above earnings.
The third is growth potential. Which is really growth rate, which is a mix of historical numbers and estimates. And finally of volatility and we look for a lower volatility over high volatility.
And those criteria are chosen because different studies have shown they either increase returns or decrease risk on average. They weren’t just picked out of a hat because I thought they sounded good.
And then from there. The two sell rules. My philosophy on selling is to sell as rarely as possible. There is a recent study where the study tons of individual investor accounts. They find that when an individual investor sold a stock and bought another stock. The stock they sold tended to outperform the stock they bought. So basically it says that people sell at the wrong time and buy the wrong thing. To avoid that I try to sell as little as possible. That also has the added advantage of limiting portfolio churn where your taxes are minimized and your taxes are minimized.
The two sell rules are one when the stock becomes ridiculously, absurdly overvalued. I choose a price to earnings ratio of 40 plus for that because when you are over 40 you are kind of in the stratosphere when you are talking about blue chip stock. That happens very rarely.
The other sell rule is when a company cuts its dividend because at the end of the day we are practicing dividend growth investing. And if a stock cuts its dividend it is doing the exact opposite of what it should be doing and it doesn’t belong in the portfolio.
And finally the eighth rule is a general portfolio rule and it says to be reasonably diversified. You get most of the diversification benefits of owning around 20 stocks in different sectors and industries. And can’t own 20 oil and gas stocks and be diversified. You can own 20 stocks in different industries and be diversified. I prefer a smaller portfolio because it’s easier to track and you are more invested in your best ideas. You don’t want to have a super small portfolio is my opinion.
Dave: Would you ever buy a stock that doesn’t pay a dividend?
Ben: That is a great question and in theory, I certainly would. I think there are a lot of great investments out there that don’t pay dividends.
But I run Sure Dividend and I invest the way that I recommend other people do. I would feel almost dishonest investing in a stock that didn’t pay a dividend just because if I am recommending investing in dividend growth stocks. Instead, I was out here snapping up all the Snapchat or Facebook IPOs.
I don’t want to be a hypocrite and I believe in dividend growth investing. I’m not extremely dogmatic where I think that is the only way that someone can be successful. That is of course not the case.
So, yes there are lots of great investments that don’t pay dividends. I wouldn’t invest in them personally because running Sure Dividend would make me feel like I am being honest or in line with my readers.
Dave: Andrew, what are your thoughts on that?
Andrew: I completely agree. In my opinion, investing 101 means you receive an income and you reinvest it. Whether you do it in a DRIP or other opportunities that you have found. So, yes you can buy stocks that don’t pay a dividend, but in my opinion, you’re losing one of the big points of an investment. And for that reason, I only buy dividend stocks as well.
Dave: What would be the best way to begin investing in dividend stocks?
Andrew: I would say for beginners you should at least get a basic grasp of everything we are talking about. I know some of the discussion can seem kind of high-level. But really I know that Ben makes his 8 rules available and I have my 7-steps available. I also talk about the payout ratio, looking for growth potential. All those things, I mean I and Ben put our own unique take on this thing. But really it’s two slices of the same pie.
There are general investing practices that are really simple. It’s common sense stuff. And a lot of people that are successful use the same principles.
Number one I don’t think you should blindly jump in. We talked in a previous session about getting your feet wet and buying your first stock. That’s a great thing to do. And then from there, once you get serious and start to put some serious money in making sure you have a solid foundation to start from.
Then make sure you have all the technical things in order. You’ve got to have a brokerage account. You gotta make sure you’re doing this regularly. You don’t want to be a person that saves a bunch of money over a long period of time. Throws it into the market right when the market crashes and feels completely traumatized by the whole experience and never goes back to it again.
In my opinion, you want to set up a system where you are putting a reasonable amount of money away. Something you can afford, and just doing that consistently. And then picking up stocks, building your wealth. Kind of like a brick by brick thing.
And you don’t have to be an expert to make money in dividends. And if you’re doing dividend growth stocks. I am a big advocate of dividend growth stocks. A big portion of my portfolio for the eletter are dividend fortresses. And those are all dividend growth stocks.
So you don’t have to be an expert. You can buy these stocks and they will do the work for you. But you do want to make sure you get some sort of solid foundation that’s based on principles that work.
And lucky for you, you have guys like me, Ben and Dave out there who provide those type of things. So just do that and understand that just like you’re dividends will grow. So will your expertise and your skill set. Really, the likelihood that you will find big winners will only grow with time as well.
Ben: I think that is a great answer. I don’t have too much to add to it. I completely agree that learning and getting the right mindset and knowledge beforehand or at least when you start is very important.
Investing can have a very high tuition cost. If you put a lot of your money in and you don’t know what you are doing. At the same time, it makes it sound scary and difficult and it’s not difficult at all.
It is fairly easy if you study what works, study people that have done well and like Andrew said. There are lots of good resources out there to learn how to do this very well. And it doesn’t take as much time as you think.
One thing I would like to add is that you need to develop a long-term mindset. And don’t invest and say that this stock needs to go up in the next month or I am going to sell it. No one has control of that. No one knows what a stock is going to do a month from now. It could be extremely under, it could be the next best buy of the decade. Not Best Buy the company but the best purchase of the next decade and you might sell it because you want to see a return in a month.
With a long-term mindset, you are looking years into the future and you’re holding for the long run. And I think that’s really important to think about before you start investing.
Andrew: So Ben I mentioned my eletter and you have several services as well. Could you tell us a little about them?
Ben: Absolutely. I have two newsletters.
One is the Sure Dividend newsletter and that focuses on high-quality growth stocks. And it uses the 8 rules of dividend growth investing that we discussed. It systematically ranks dividend growth stocks to find the top ten every month. And it also includes an easy to follow portfolio building guide to help you build your portfolio quickly and easily. And it has a detailed analysis of the top recommendations.
The second newsletter which is more recent. I had a lot of readers saying they liked the Sure Dividend newsletter but the yields for the average newsletter is around 3%. And all of my readers are in or near retirement and they were looking for higher yields. I personally invest the way the Sure Dividend newsletter does, but I am not in retirement or near it. I am building my income stream. If you’re there and looking for higher yields or higher income I have the Sure Retirement newsletter. Which follows a similar plan with the 8 rules for dividend investing tweaked a little bit to look specifically for stocks with a 5% yield. So it’s more for high current income.
The goal for my website is to help people build high-quality dividend portfolios.
Well, folks that is it for our interview with Ben from Sure Dividend. As you can see from above it was a great learning experience. Ben really knows his stuff and he communicates it in a very easy to relatable way. I hope you learned as much as we did.
If you would like to learn more about dividend investing or get a great spreadsheet that lays out all the dividend aristocrats that we discussed in today’s session. Ben provided us with a link to get that great info. Believe me when I say you want to take advantage of that offer.
As always thanks for taking the time to listen tonight. We do appreciate it.