We are going to look at the history of yields, market drawdowns, commodities, debt, China's economy, and Presidential conspiracy theories.
Dividend Cafe provides market perspective rooted in first principles, not the fads of the day. Authored by our Managing Partner, David Bahnsen, it covers a wide array of topics, it doesn’t try to do what it cannot do, and it strives to offer needed perspective not readily available in most financial commentary.
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We are going to look at the history of yields, market drawdowns, commodities, debt, China's economy, and Presidential conspiracy theories.
Question:
“Why do some mergers and acquisitions need approval from the FTC in the first place, and what criteria are they looking for? What makes M&A anti-competitive and bad for consumers?”
~ Josiah P.
Answer:
The FTC has broad and unfortunate jurisdiction over any matters involving trade and commerce, and so deals like grocery store mergers can fall under their purview if they deem it in their purview. The vast discretionary authority these regulatory bodies have is a source of much controversy, as many feel (yours truly being one of them) that it builds an unaccountable regulatory state over time, with minimal (if any) oversight from elected representation (i.e., Congress, who is supposed to make laws according to the Constitution). The current FTC ideology is that M&A can be bad even apart from the “harm to consumer” rule first codified by legal giants like Robert Bork, just on the basis of “size alone.” They have had a very poor track record prevailing in these adjudications. M&A in competitive industries can create more scaled players with more financial resources better able to serve their customers and avoid the bankruptcies that have happened so frequently in low-margin, highly competitive industries.
David L. Bahnsen – May 1, 2024
Question:
“In doing my taxes, I realized that some of my Alternative Investments that produce income are classified as Return of Capital versus actual dividends and earnings. Isn’t this just giving me my own money back? I am interested in return ON capital. Can you explain to me how this works, please?”
-R.V.
Answer:
Yes, there are many classifications for taxation from distributions that come from alternative investments. Capital gains, dividends, ordinary income, non-dividend distributions (or return of capital) and so on. If you own something like a private real estate fund or partnership, you’re getting either a 1099 or K1 statement that breaks everything down, but don’t forget that having income being generated by different sources like real estate versus equity versus debt etc., will all come delineated. Is one better than the other? Well, yes. To your questions specifically, a private real estate investment trust will typically generate its income as a non-dividend distribution. This income is nontaxable to you as a unit holder at the time of receipt, which is nice, but it lowers your cost basis of the investment as those distributions are received. This is due to the depreciation of real estate taken within the portfolio.
You may also receive section 199A distributions, which are tax-advantaged from real estate alternative investments as well. To your question specifically, in the case of non-dividend distributions or return of capital, it is a portion of shareholder equity being returned rather than dividends, which are paid from company earnings. If the equity value of a private real estate fund is appreciating, and there are consistent cash flows coming to unit holders as income where a portion is nontaxable, it is paid but reduces the cost basis of the units, is this a bad thing necessarily? No, as it’s just effectively moving the taxation to capital gain treatment when the units are sold later.
Brian T. Szytel – May 1, 2024
Question:
“If there is a cycle whereby decade by decade value outperforms growth, then vice versa, why wouldn’t the Bahnsen group move funds from value stocks into growth stocks as each decade unfolds? Why stay locked into dividend stocks?”
~Ted K.
Answer:
We don’t agree that dividend stocks are not growth stocks. And we don’t agree that dividends ever become less valuable. Withdrawers can’t eat growth. We don’t agree that the timing of each decade’s start and end is knowable. If one missed the end of the 90’s growth stint into the 2000’s value stint they were already down 40% or worse. We don’t agree that the classifications of “growth” and “value” are appropriate or even coherent. Ultimately, the mechanics and investment merits of dividend growth stocks make this strategy vastly superior to market timing of “growth” vs. “value” with the intent of capturing the best of all worlds. It is fundamentally a different objective all together.
David L. Bahnsen – April 30, 2024
Question:
“Do you ever see or have an idea when the TBG investing model would not work due to size? I’m thinking about Fidelity Magellan in 2000 or Berkshire Hathaway today. Warren Buffet admits it’s very difficult to invest these days due to the size of the fund.”
~Steve S.
Answer:
All asset classes have SOME level of diminishing returns capacity constraint but for highly liquid large cap equity it is well into the tens of billions – an impossible feat for an independent private wealth management firm like ours. We have about $3.1bn of our $5.5bn in dividend growth now, and I would say from an asset management standpoint it would not be problematic to see that number 10x what it is today. We are solely focused on making sure we constantly have the resources and capacity to properly serve RELATIONSHIPS. The asset management side is the easier part in terms of capacity just based on the size, depth, and liquidity of the markets we invest in.
David L. Bahnsen – April 30, 2024
In September of 2008 the world’s financial markets were brought to their knees by a debt bubble, the likes of which we had never previously seen. The turmoil in financial markets was severe and Wall Street banks were falling by the wayside daily. In this time period, David Bahnsen was working as a Managing Director at Morgan Stanley, responsible for the well-being of his clients. As their anxiety of clients intensified, David began writing a periodic bulletin to them. One bulletin became another, and then another, and all of a sudden, a weekly bulletin was organically born! Well after markets pulled out of the abyss of 2008, the weekly edition continued, evolving into something far more positive than its September of 2008 origins. This commentary distributed by simple email with an ever-growing following morphed into the Dividend Cafe when David and his team launched their own practice in early 2015.
Today, Dividend Cafe is still attempting to do what it was doing in the fall of 2008 – offering truthful perspective that may not be easily found elsewhere. The topics will vary from our dividend growth philosophy, to bedrock investing principles, to the challenges of interventionist monetary policy, to anything else that inspires David in a given week. The underlying objective is the same now as it was when we began – to build trust by telling the truth, not what people want to hear.
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