Dear Valued Clients and Friends,
I have been writing the message of my new book, Profit from the Profit, in the pages of Dividend Cafe since the day I began this weekly commentary that has become such a major part of my life and our business at The Bahnsen Group.
Today I want to explain how and why dividend growth investing lies underneath everything I am ever talking about or writing about in the Dividend Cafe, even if it is not always immediately evident. I want to provide the rationale for why the message of this new book is so important to me, and really, why it drives all we do at The Bahnsen Group.
Let’s unpack it more in today’s Dividend Cafe.
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The History of it All
As I often recall for readers and listeners, the “weekly market commentary” I have penned every week since mid-September 2008 began as an ad hoc client communication the week Lehman Brothers went bankrupt. The drama of the financial crisis subsided at some point, but the weekly commentaries did not. I continued writing one every week and releasing it every single Friday until I left Morgan Stanley in early 2015. For that period, it was a mere email distribution that went to clients and maybe a couple hundred non-clients who organically “signed up” over the years (“sign up” being my term for someone emailing me saying, “can I get that thing I hear you do?”). When we left Morgan Stanley and set up The Bahnsen Group inside the ecosystem of Hightower Advisors, I began branding it as “Dividend Cafe” and actually incubated it at a website, running a real subscribe/unsubscribe function, and shortly thereafter added a podcast and a video. Here we are now just a few weeks away from the 18-year anniversary of the first week’s writing, and we haven’t missed one since.
I started off by bringing up my new book (release date this Tuesday, Aug. 25) because the message of that book and the message of Dividend Cafe are inseparable. Some weeks Dividend Cafe is looking at specific events like Liberation Day or a new Fed chair or the national debt or AI or bitcoin or an election or lessons from Japan, but it is, always and forever, market and economic commentary that comes from a real philosophy. And our practice at The Bahnsen Group of dividend growth investing is an application of this philosophy. The Dividend Cafe is my attempt to capture both the philosophy and its application for readers and listeners each and every week.
A Book for the Cafe
On Tuesday, Profit from the Profit: The Past, Present, and Future of Dividend Growth Investing will land on the shelves of great bookstores (and hopefully comes off of the shelves of these great stores into the shopping carts of great customers). It is a book I am proud of, to the extent that I know a lot of work went into it and I wrote every word of it (neither AI nor a ghostwriter has ever written one word of anything that has been published under my name, and never will). I believe it was a needed update of my prior dividend growth investing book and reflects current, modern, and practical arguments for dividend growth investing – not merely as an application or strategy, but as an outgrowth of a discernible and defensible investment philosophy.
I hope people who read the book but do not read Dividend Cafe will end up becoming Dividend Cafe readers, but what I really hope is that people who are Dividend Cafe readers will see the message of Dividend Cafe in the pages of the book (should they choose to read the book). This weekly writing is committed to capturing the embedded thinking (first principles), and current thinking (ad hoc application) of yours truly to the best of my ability, and Dividend Cafe readers should “know it when they see it” more than anyone else – especially in a book written to capture it all.
Did Someone Say Profits?
As professional investment managers and wealth advisors, we are trying to deliver a result to clients out of financial markets. That targeted “result” is essentially a goal or an outcome. The “financial instruments” we use inside markets are tools. And it is our belief that goals are met for real-life people (investors) out of the productive activities of mankind. And we believe that when it comes to financial instrumentation that captures this productivity, there is a vocabulary or nomenclature that captures it best called “profits.” A company creates value for others by selling a good or service that people want or need for more than it costs to produce. That productive activity results in something called a “profit.” A portion of that profit is then returned to the investor who took a risk by investing in the company that makes the goods or services, as a reward for said risk, and that is called a “dividend.” This process, done at scale, done at size, done sustainably, done competitively, done responsibly, becomes a repeatable and wildly investable process. It serves as the instrumentation for investors to obtain the outcomes they are after (savings, current or future income, charitable giving, inheritance for their loved ones, etc.).
It is all a process that can easily be summarized as “profiting from the profits.”
Personifying the Personal Personality of the Personhood of it All
Many investors believe that their financial goals are met because an “index” went up in value. A “market” did well, or didn’t do well. A “stock” saw its price go higher. A P/E ratio expanded. Interest rates moved or didn’t move. A commodity price went up and then got sold at a profit. Someone found one investment mismarked or mispriced relative to another investment.
On that last point, if you knew how many meetings I have had to suffer through, lectures I have attended, pitches I have heard, about how XYZ has some historical relationship to ABC and yet in the futures market the ratio is 0.001% off from the cash market relationship of ABC and XYZ so therefore easy money could be made in arbitraging the two things against each other (blah blah blah), you might have a little more empathy for some of what I endure in pursuit of investment excellence for our clients. But that last thing is not absurd because it can’t ever work, or because it bores mere mortals to an early death – it is absurd because no one on God’s green earth can possibly believe that “finding mispriced securities in relation to one another” is a sustainable source of investor return. For one thing, relationships between two assets change all the time. For another, where there is a real arbitrage opportunity, it. goes. away. Always. Because that is what arbitrage is.
But taking out the insanity of those who believe they will deliver investor results by a constant search for some mispriced opportunity, even the other examples used all suffer from the same problem: A depersonalization of what is actually happening to create value. Investors whose portfolios go up over time and enable them to enjoy a dignified retirement or pay for their kids’ college education did not enjoy that result because a “market went up.” It may feel that way, but what drove the result was “value creation” that got captured inside a financial instrument that enabled you to not think about it. “Profits” still had to get created. And by aggregating the profits of a “bunch of companies” into one basket we call an “index,” we do not change reality one iota. Cosmetically, you may think “the index went up.” But metaphysically, “profits went up” for enough companies that the basket increased in price. Now, the sentiment around that “basket of profitable companies” may enhance the value, and it also may depress the value – public sentiment is a huge driver of short-term price action for these things called “indexes.” In fact, the vast majority of volatility around any diversified portfolio of companies is a by-product of this public sentiment – not in the underlying activity of the companies themselves. Exploiting that sentiment and volatility may enhance or depress return, and it very likely does one way or the other without any talent or predictive ability from the investment manager or underlying investor. But it is a separate factor for the return that comes from profits – that comes from repeatable value creation.
Endogenous vs. Exogenous
Dividend growth investing is our way of seeking endogenous returns (those created by the companies we invest in), and minimizing our reliance on exogenous factors (the sentiments of the masses). We believe exogenous factors are unpredictable and outside the scope of a cogent investment philosophy, whereas endogenous factors can be far better managed, understood, analyzed, and capitalized.
I know those two words are wonky and complex and do not easily roll off the tongue. But it is a very useful way to capture the essence of dividend growth investing vs. what is often so popular. Many investors, without any self-awareness of this fact, rely almost entirely on factors outside of their control or purview. We want the outcomes we deliver to be borne from the profit-making activities of the companies themselves.
Outcomes that Hurt
My own discovery of dividend growth investing was born out of a very simple and empirical fact: That millions of investors were doing something in the late 1990s and early 2000s that failed them in terms of their own stated goals. I do not mean, and this is very important, that it failed them “because the investments went down.” All good investments have periods of prices going down. Volatility is not failure, in and of itself. Even prolonged and dramatic drawdowns are not to be confused with failure. I mean failure in the way we are supposed to use the word – “when something fails.” If an investor believed that a certain allocation to a certain portfolio composition would support a certain financial goal for a certain period of time, and it fails to do so, it seems appropriate to call that a “failure.”
The wealth advisory profession is a goals-based and outcomes-oriented profession. And the late 1990’s and early 2000’s were a wonderful time for someone like me to enter this profession, because I got to learn early two very important things:
- Excesses of euphoria, greed, concentration, and leverage could end disastrously (that was the easy one)
- Even people avoiding the above four things might have a portfolio that failed to deliver a stated goal or outcome
I discovered dividend growth in pursuit of a withdrawal strategy that would sustain cash flow for a withdrawer in perpetuity. I came for the withdrawal wisdom, and stayed for the accumulation wisdom. I discovered a strategy that, on one hand, required me to be intimately involved in the portfolio management of my client’s money, but on the other hand, tapped into the real sources of sustainable returns that would deliver the outcomes we promised. That intimate involvement in the portfolio management of client capital was a business and personal cost. Outsourcing to a passive model that could be set and forgotten would enhance time on the golf course, afford me more time to sleep in the mornings, and leave me agnostic about various things happening with companies we were invested in. I saw 90% (or more) of my profession go this route. The necessary activity (non-passivity) of dividend growth would require a different lifestyle and work commitment, but it would also enable us to deliver an accumulation and withdrawal strategy that was consistent with my underlying philosophy.
I didn’t spend five seconds trying to make up my mind. And I haven’t spent five seconds wondering if I did the right thing ever since.
Next Week
Dividend growth investing is not without its critics. The book takes on these critics and criticisms one by one by one, and I feel humbly confident in saying that it does so cogently and persuasively. Next week, we will look at the counter-cultural reality of dividend growth investing, and what it has to say no to in order to get what it gets. We will evaluate the danger of waiting to begin the compounding and dividend accumulation of a future withdrawal stream. We will look at how dividend growth does not merely defend against inevitable market volatility, but capitalizes on it (and begs for it!). We will demonstrate that it is not a tax-deficient strategy but, on the contrary, a tax-opportunistic one. And we will summarize what the only real question is when it comes to dividend growth versus other potential public equity investments: What to do with the profits of a company.
As for the clients of TBG and me, our answer is to profit from them. To that end, we work.
Chart of the Week
An all-time low for the S&P 500 dividend yield. Higher and higher valuations in the stock prices being bought, fewer and fewer companies paying a dividend, and fewer and fewer companies focused on growing it. Most significant, of all the factors, is the math of cap-weighted indices … the ten companies that drive the index are in the no-dividend (or paltry-dividend) arena. Half of the return of index investing used to come from price appreciation. Now, if the returns are to stay at historical levels, it will need about 92% of the return. Because of math.
Quote of the Week
“Luck is the residue of design.”
~ Branch Rickey
More to Chew on
- 200 years for the first $1 trillion of debt, 95 days for the last trillion.
- AI impeding, not enhancing, the education of kids
- The President chimes in on whether or not tariffs raise prices
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I really was touched by the extraordinary response to last week’s unorthodox Dividend Cafe. The week was a memorable and special one for us, and I appreciate so many of you who shared your encouragement, love, and experience.
I have a lot of writing in front of me this weekend, the book release next Tuesday, and TBG will have a very special announcement about a new office in the coming days or weeks as well. I will enjoy a few days in the Newport Beach office next week before returning to New York City next weekend, but not before a USC home opener as we get ready to embark upon the greatest time of year known to man. No, I do not mean “book release week” – but of course, college football season beginning.
Fight on, and may you Profit from your weekend.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
