Keeping Your Dividend Edge

Available here.

Before I get to the book I want to share a little story. Something positive actually happened on Twitter. It turns out that Twitter doesn’t have to be carnage pit filled with trolls. There’s a nice guy on it and his name is Todd Wenning (@ToddWenning).

A while back I read Harriman’s New Book of Investing Rules. The book is 500 pages of wisdom by some great investors.  There are some well-known names and less familiar names like Todd. The investors profiled range in style and strategies. One of the articles in the book was written by Todd Wenning (@ToddWenning). I really enjoyed Todd’s piece and I reached out to him on Twitter to let him know. 

Todd was a man of his tweet. I did received his book, Keeping Your Dividend Edge, and I was more than happy to read it. See, something positive came out of Twitter.

I like Todd’s philosophy on investing and dividends. His thinking really resonated with me. Invest like you are buying a business. Study the business, study the fundamentals, figure out the competitive advantage, and can you make a reasonable assumption that the company will be able to maintain its success for a decade or more to come. Focus on the long-term and get paid in growing dividends and capital appreciation.

Todd’s book is about dividend investing. It’s a short read with approximately 120 pages. There’s nothing wrong with a small read. It’s actually refreshing. The book doesn’t waste your time. It’s delivers on content. It goes straight to the point. It’s concise and clear. Just the plain blue cover signals no b.s., no hype.

You will become a better investor if you read this book and actually apply it’s principles. You will. Todd didn’t reinvent the wheel here. Dividend investing has been a staple strategy. But what Todd did is to remind us of the art of dividend investing.

I feel that dividend investing is a lost art. Or investing for income in general. Most income investors are doing it wrong. It’s like health. Everybody wants to be fit and healthy but they are doing it wrong by buying into trends and taking short-cuts. I feel it’s the same with income/dividend investing. People are approaching it the wrong way.

Investors are turned off by blue chips dividend payers because of the low ~2% yield so they chase high-yield stocks. We live in a world where investors are buying bonds for capital gains. The world has turned upside down. The most probable cause is the 10-year plus of ultra low interest rates is distorting financial markets. It’s been a tough stretch for savers in need of yield. Another cause is buybacks as the preferred way to return money to investors.

You can’t just invest for the dividend. If you don’t do your homework it could led to trouble. Dividends should be part of a grander strategy. A good strategy should include dividends as a part of total performance. It’s a key component of long-term share price movements. You can’t guarantee a dividend because a company doesn’t have to pay one, but with the right analysis you can have pretty good idea if they will pay one and raise it over time. If you aim for let’s say a conservative 6% to 7% annual return (S&P Index has returned 10%+ in the last ten years). With a 3% yield you have accomplished half your returns. One aspect of dividends I like is that it’s a tangible returns. It’s a real return. It’s real cash that you receive. And I like cash because it allows me to allocate more capital.

Dividend investing is about patience. Focus on the long-term. Focus on the business. Focus on the fundamentals. Focus on the cash flow because that’s where dividends are from. Dividends need to come from cash produced by the company (not accounting earnings).

Dividends are not a magic pill. A company can’t guarantee a dividend because unlike a bond, there’s no obligation to pay. Dividends can be cut. We have seen blue chips like GE, Pfizer, and more recently Vodafone slash their dividends. A company might take on too much debt and get in trouble. The share price of the company you invested in can languish, or worse disappear. Taxes could be an issue if not handle properly. Todd’s book has a whole chapter on avoiding dividend cuts. Usually the main reason is the lack of sustainable free cash flow.  If a company can’t covert a dividend with free cash flow, they need to fund the payouts with cash on hand, debt, or asset sales. Expect trouble if that happens.

The holy-grail of dividend investing success is the compounding effect. The combination of the increased in value of your stock (capital gain), dividends, and growing dividends reinvested that creates bigger dividends, that gets reinvested can turn your investment into a snowball what creates wealth.

In case it wasn’t clear by now Todd makes the case for smart dividend investing. In case you need to read it again, if you want success in the stock market you need a long-term patient approach. Dividends helps you focus on the business. It helps you focus on the fundamentals of the business. It helps you forget about the daily gyrations of the stock market. I have no clue what the stock market is going to do, so it would be more profitable to forget it and concentrate on trying to find the right stock to buy. Dividends also help you take hit. If you have an investment that is down 15% (because it happens) and the business is sound, you have your dividends coming in and an opportunity to buy the business 15% cheaper.

Long-term thinking, patience, and persistence are qualities which should pertain to investors. Dividends delivers on these fronts. Keeping Your Dividend Edge deserved a place on your investing book shelf.

Enjoy!

Brian

The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First

I enjoyed reading The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First by financial journalist and sportswriter Jonah Keri (@jonahkeri). Keri has a podcast and is also the author of a book on the Expos. He’s active on Twitter and a great guy to follow.

The Extra 2%  is a mix of many interests of mine like sports, finance, and business. With the NHL and the NBA finished for the year, it’s time for summer sports and summer reading. Baseball holds a special place. Maybe it’s because I played it when I was a kid. Maybe it’s because of the 1994 Expos and their possible come back. Or maybe I played too much Ken Griffey jr. the video game. Or maybe it’s because baseball is such a different sport from all the other major sports. There’s no clock; you go home after 27 outs. Or the real reason is probably because it’s so goddamn much fun to hit a ball with a bat.

The book documents the turnaround of the Tampa Bay Rays by three financial wiz kids from possibly one of the worst run franchises to a team that’s making the mighty Red Sox and Yankees sweat. And that’s with a tiny fraction of their budget. If the Rays considers spending $8 million on a closer, it’s a huge decision with many implications. If the Red Sox or Yankees spend $8m on a closer and it doesn’t work out, it’s a rounding error.

It’s the classic David vs Goliath story. The only difference in this story is that the large majority of fans are cheering for the two Goliaths. Since the Rays can’t compete on financial ground, they need to find another way to win games. They have to find an edge else where. They have to do things differently. They have to be creative. This is a good follow up book on Michael Lewis’ Moneyball. It’s a similar play. Both the A’s and the Rays are a small payroll team that was willing to discard old baseball wisdom. If you dare going against 100 years of conventional wisdom, you better make sure you are right.

The book is a great case study. Stuart Sternberg, Matt Silverman and Andrew Friedman accomplished so much in so little time. They turned a perennial loser into a contender. They are lessons to learned. The title, the extra 2%, reminds of something Anthony Robbins said (I think it was him). He said something like if you only try to improve 1%, it can make a huge difference in the long run. You might not noticed it at first, but that 1% will add up. Just think of what happened to a golf ball when it you hit it a couple degrees off. It matters.

In a way, the book could have been published now. Stuart Sternberg is still the owner. The Rays are still fighting the mighty Red Sox and Yankees. The Rays are still hustling for a division title. They are still a low budget team. They still don’t have anybody watching them. And they still don’t have stadium deal. Also I should mention that Mark Cuban, owner of the Dallas Mavericks, wrote the forewords.

I don’t really care about the Rays but I pay attention to them from a distance, that is their stadium saga. Rumors in Montreal is that if the Rays can’t get a stadium, Montreal is waiting in the wings to welcome them. Montreal first need to built a stadium and there’s a team of investors working on that. Despite the success of the Rays, Tropicana Field is empty. Tropicana Field is awful and the Rays have a lease until 2027. Is Montreal going to wait another 9 years for a team?

I don’t blame the fans in Tampa or surround areas. I think it’s a Florida problem in general. Most major sports franchise in Florida are not major hits. It’s a college state (and Nascar). Floridians love their college sports. People in Tampa are baseball fans, but they are Cubs fan, Red Sox fans, and Yankees fans. Most Floridians are from there and cheers for their former home club.

To conclude, it would be interest to hear an update from Jonah on the Tampa Bay situation.

Regular season results. Source Baseball-Reference.

Jeff Bezos Explains Why Amazon Makes No Profit

In this 9 minutes video, Jeff Bezos is brilliant in his response to the question “Why Amazon Makes No Profit ?” In the video JBezos explains his business(es), shares great insights, and throws in a couple in Buffett and Graham quotes.

• Subjects: Free cash flow (FCF), profits, Return on invested capital (ROIC), what drives the stock price, customer obsession, operational excellence, long-term thinking etc…

If you have read it, read the Amazon 1997 Shareholder letters.  Back then Bezos laid out the vision and his multi-year thinking process.