Dividend Fools, Vol. 2

Dividends are cash payments that companies make to shareholders as a reward for owning the stock. Dividend investing is not necessarily why you're tuning in here each week. Getting smarter, happier, richer, our goals for you, sure. But smarter, happier, richer about dividend stocks? But then again, on the other hand, some great rule breaker stock picks have over the years paid dividends. And not only that, some are just now starting. Did you see this?

Facebook, Meta Platforms, and Google, Alphabet, have both announced their first ever regular dividends in just the past couple months. Four years ago, this very month, as the world was shutting down for the pandemic and the stock market had shut down to the tune of a twenty five percent one month drop, We dedicated that whole week's episode to dividend investing. The timing was purely coincidental as it is this week. But every few years, I think it makes sense to touch base here again.

And so it's our next episode of Dividend Fools, rejoined by The Motley Fool's Buck Hartzell and also this time by one of our in house dividend investing experts. I think you know him. I love him. Matt Argesinger. You ready to talk about free money that comes your way just by owning stocks? Dividend Fools volume two only on this week's Rule Breaker Investing. It's the Rule Breaker Investing podcast with Motley Fool cofounder David Gardner. And welcome back to Rule Breaker Investing.

Matt Argesinger works on the dividend investor and real estate winner services here at The Motley Fool, aiming to identify and recommend compelling income oriented opportunities for our members. You can also catch Matt on the dividend show on Motley Fool Live and as a regular guest on The Motley Fool Money podcast and radio show. Matt, welcome back to Rule Breaker Investing. Hey, David. It is great to be back.

Buck Hartzell is an adviser on fintech fortunes and also works on the Fools' Canadian investing services and can be regularly seen or heard on the Canadian Power Hour on Fool Live. And it should be noted, Buck helped me kick off this series. As I mentioned earlier, four years ago this month, Dividend Fool's Buck, welcome back. Thank you very much. It's great to be back here. And, I did review that. People can go back and listen to the older podcast, and we recommended a few stocks back there.

I I actually like all the ones that I recommended Great. Back then, and I think they've all done, fairly well. Yeah. We'll talk about that a little bit later. In fact, we're gonna make some new fresh picks. I think you guys have some dividend stocks and investments in mind that we'll do a little bit later, this week. But thank you. It's great to have Buck and Matt here talking about, yeah, companies that make cash payments to you to own their stock.

I think, gentlemen, it makes sense to define our terms. Not every listener spends a lot of time thinking about dividends, and some of our listeners are probably completely new to the subject. I'm gonna turn to you, Matt. Could you briefly define dividends? Maybe throw in, like, what the yield is. I'm asking you to go not just high level, but one level down. Sure. So a company pays cash out of its earnings or from its balance sheet directly to shareholders.

That's called a dividend, and it can do that on a most companies do that on a regular basis, whether it's quarterly, semiannually, sometimes even monthly. There are some companies out there that pay monthly dividends. And, you can often look when you're looking at a stock, you'll see a dividend yield, which is simply the annual dividend the stock is the company is paying out divided by its stock price.

So that gives you a sense of what you can earn if you bought the stock today based on its dividend. So, for example, if a stock were at fifty dollars a share and it paid a one dollar annual dividend, and let's just call it twenty five cents a quarter, most of these are quarterly, then that would be a two percent dividend yield. Did I get my math right, Matt? I think you did. Okay. Good. So that's a good example of dividend yield using round numbers, which makes it easy to explain.

And so in a sense, Buck, that's the interest rate in one sense that you get paid for holding the stock. That assumes the stock doesn't move up or down. We generally like them to go up a little bit over time, of course, but you can kind of compare a dividend yield to t bills or any other interest rate that you might be looking to get in income investing in the rest of your life. Sure. Yeah. And and and you can compare it to bonds. I did a video long time ago.

I think, it's on the full site somewhere. Microsoft, at the time, interest rates were dropping, and, Microsoft did the first bond issuance that was below a percent. So you could essentially buy a five year bond in Microsoft and earn point nine seven percent, I think it was. And the video that I did was why in the world would anyone buy this bond, and they're basically locking in less than a percent return for five years.

When they could buy the stock, and I think at the time, it yielded almost two point three percent, and you also got all the growing earnings, which Microsoft had done for a long time. So, yeah, so that's a good comparison to to compare the interest rate not only to, what you can get from a CD or whatever else, but also a bond. It's a good comparison. Matt, you mentioned that companies typically pay their dividends out of cash flow if they have it, and many do.

You usually, the companies that are paying dividends can afford to do so. And maybe they didn't have a good year for cash flow, but they have a balance sheet where that company has cash in the bank. In some cases, they borrow to pay their dividends. Would you can we define one more term? Go a little bit deeper, the payout ratio. Sure. Would you just let listeners know exactly what that is and why that matters?

Sure. The the most traditional way to calculate the payout ratio is take a company's earnings per share and divide it by the annual dividend per share, and that'll give you the percentage of the earnings that the company is paying out as a dividend. Now sometimes now that number can jump around a lot, of course, as as David alluded to.

If the if the earnings were to fall but the dividend isn't cut, then you're gonna see that payout ratio rise, and you could start to get maybe a little worried about if the company could continue paying its dividend if the earnings are falling. But, yes, a company that has a balance sheet, and maybe a short term cash flow earnings problem can still pay dividend. Of course, this comes right out of cash on the, on the account. Guys, we've defined our terms.

I I'm about to play a game of word association with you both. I'll let you mentally prepare for that. Before I do, I just wanna convey ahead of time the five chapters that we're gonna cover in this podcast. So here they are for our listeners. This is where we're headed in our time this week. Chapter one is I'm gonna call it the shift in dividend investing, out of favor for decades in some ways. There's been a shift.

We're gonna speak to that, why it is, and maybe a little bit of why is Meta Platforms and why are Alphabet all of a sudden paying dividends. So that's chapter one. Chapter two, the practical value of dividends. Buck, you're gonna tell a story about your your family among other things. The like, why we why we're doing an episode on dividends, why dividends matter still matter. Chapter three, the challenges and misconceptions. A lot of people talk about double taxation.

Warren Buffett traditionally is not said to be a big fan of dividends, so we're gonna talk about the challenges of them and some misconceptions. Chapter four, stock buybacks versus dividends. Companies have a choice when they have cash flow or money in the balance sheet that rather than pay it out directly to shareholders as a reward for holding the stock, they could reinvest it in their business.

In some cases, they could just buy back their own shares and make holding an individual share dearer as a consequence of that. So we're gonna talk about stock buybacks versus dividends. Chapter five, our closer, a spotlight on some picks and some strategies. So those are the five chapters of this podcast. Now I did mention a game of word association. Matt, I'm gonna turn to you first. Have you played word association games before? I think I have, dude, with you several times.

Yeah. I tend to do this. I don't know why. It's not even really a game. If if it is a game, it doesn't really have clear rules, and it's kind of lame as a game. But let's do it anyway. Matt Argersinger, are you ready? I'm gonna flash a word out, and I want you to give me your gut level response with a word or a phrase back. Okay. You ready? Yes. Dividend. Real. Cash. Tangible. I like it. Buck, I know you're in a soundproof chamber. You did not hear what Matt just said.

You'd have no idea what I'm about to ask you. Let me ask you. Buck Hartzell, are you ready for word association? Yes. Dividend. Eureka. It's it's eureka to me because if, there weren't dividends, I probably wouldn't be doing the job that I'm doing today, and I wouldn't love investing as much as I do. Nice. That's what got me originally interested in investing. And that's why I'm delighted to have you back for Dividend Fool's volume two. It makes so much sense.

Let me complicate the game slightly more. Let's extend the game a little bit. Matt and then Buck, I'm gonna ask you this question looking for your answer here. Beyond that gut level response, what is a word or phrase, Matt Argersinger, that you can titillate our listeners with? A nuanced reaction to when I say this word, and you react slightly more intelligently and reflectively and provocatively. Are you ready? I'm ready. Here's the word. Dividend.

A high dividend yield does not always mean the end of growth. Okay. I hear you, and we'll get there. Thank you. Bach Hartzell, I know you didn't hear Matt's response. We're gonna bring you back from outside the studio, and I'm gonna just try a word out on you with a nuanced answer. Are you ready? Dividend. Discipline. I think when a when a company pays a dividend, it introduces a different level of consistent discipline in that company because it's an obligation.

And I think you operate a little differently when you pay a dividend. Alright. Well, I think we're gonna return to some of the things you just said over the course of our five chapters here, so feel free to go back there. But, guys, thanks. Thanks for playing the game. Let's go from a silly game to a slightly more serious topic. Chapter one, the shift in dividend investing. Matt Argersinger, what has been the shift?

Well, if you look at the dividend yield of the S and P five hundred today, it's right around one point four percent. That is the lowest yield on record outside of early two thousand, which we all know is the kind of the height of the dot com boom. So the dividend yield in the S and P five hundred really has never been lower. And if you look at a kind of a long term chart of the S and P five hundred yield, it's gone nowhere but down for about forty years. And it's been, it's been remarkable.

And and the shift is, if you go back before that, if you go back to start in the nineteen seventies, go back even not just a hundred years, but go back five hundred years to when, you know, we were investing in the East Dutch East Indies company, on the Amsterdam Stock Exchange, investors invested to get a dividend. That was the whole point. It was it was a cash relationship with your investments, and that lasted that went for centuries.

I mean, if you think about the railroad investments, the industrial investments, the post war investments, it was all about, you know, investing to get a dividend. You know, Robert Brokamp joined us for episode one of this series, and he pointed out that Robert really said I remember this. He said, if you go back as far as the eighteen seventies anyway, maybe not the Dutch East Indies coming was it still in business?

Up through the nineteen fifties, I remember him saying stocks stocks always yielded more than bonds. Yes. And people felt like you needed to get that higher dividend yield to make stocks worthwhile because they were riskier. That's right. So over a hundred and roughly over a hundred and fifty years, even including this last decade, the average dividend yield of the market was north of four and a half percent. So it was significant. It was about triple what it where it is today.

And I there's a there's a re there's a new book out by Daniel Paris. It's called The Ownership Dividend. And he talks about three main reasons why there's been kind of this shift away from dividends over the last, say, thirty to forty years. The first reason is probably obvious. I mean, we've had a almost forty year decline in interest rates. If you look from the early eighties to roughly two thousand twenty one, twenty two, interest rates really went nowhere but down.

In fact and then in, you know, in the last fifteen years or so, they were close to zero, since the, global financial crisis. Amazing. When the cost of capital in the market goes down, when, you know, interest rates are super low, you can management teams can do a lot of things and look smart even when they're making bad decisions. You can always roll over debt, refinance debt at lower rates. You can invest in most projects because the discount rate is so low. It looks like it's gonna win.

You know, the value of assets in real estate are high, so you always have more access to capital. So there was just a lot of momentum behind the idea of, well, I'm gonna retain this capital, invest in these longer term, longer duration ideas and projects because the the rate the capital cost was so low, over that time. So that's the big first reason Yep. That, Paris goes into.

The second reason, and I think this is more interesting, a much less heralded reason, a little known SEC rule in nineteen eighty two, rule ten b dash eighteen, you can probably get what I'm getting at. In nineteen eighty two, it it allowed more liberal share buybacks. So before nineteen eighty two, it was actually difficult for companies to do buybacks. A lot of, regulators thought it was akin to market manipulation.

If companies were buying back their own stock, they often had to register and do shelf buys. They had to do tender offers. It it was a lot more cumbersome to buy back stock. After nineteen eighty two, a board can simply decide and authorize a share buyback. A company like like an investor can buy stocks in the open market anytime they want outside of a few blackout periods around, earnings or special events.

So that was a big shift in the in the way managers started to allocate capital, more towards buybacks, less towards dividends beginning in nineteen eighty two. The third reason Paris gives, and I think it's a great one, is look.

There was an undeniable rise, in the in the success and the value of Silicon Valley companies and the idea of the high-tech companies where there was a different culture about how to reward and retain employees, more towards stock based compensation, more towards ownership in these businesses, in these venture type style businesses, away from short term dividends.

And I think that became those companies, as they took off, became sort of the fulcrum of the stock market boom that we had in eighties, nineties, and beyond. That also took away a lot of the, shine on dividends. And I know you have a fourth reason you're gonna provide in a sec. I don't know what it is, but I wanted to react and see what Buck thinks about this.

Wanted to react to that third point, Matt, because part of what I think happened that Paris may be speaking to is that an amazing new technology was developed and deployed, and it was the Internet. And when you think about the growth rates associated with that, the opportunity, all of a sudden, to speak the entire world, which most companies didn't have anything like that platform or opportunity, Free information, social media, etcetera, ecommerce.

It was such a powerful development for our society that in a lot of ways, I don't think it made sense if you were if you were driving it, if you were AOL to start with, or more recently, Amazon dot com. It didn't make sense necessarily to pay your dear cash flow that you're looking to reinvest in your business at historically amazing rates. I don't think it made sense for those companies That's right. To pay out dividends. Do you agree? I I agree. I think that's a great point.

Yeah. I I I generally agree with that point, but I would say this. There's a lot of misconceptions about dividends, and I think one of those is that you, once you start paying a dividend, you're no longer a grower. And and we've known I know we all know a lot of really innovative high growth companies that in their early sometimes early on in their lifestyles, and I think that's actually their lifespan, they start paying a dividend. And that means a couple of things.

They're profitable, and they have a even though they can reinvest, they can also afford to pay some of it back. MercadoLibre is one of those companies that did it and, obviously, has been a high growth company for a very long time. There are others, but it I I think you're generally right, but there are some exceptions, obviously, all all the time. So Daniel Perez's book, the ownership Dividend. Dividend. And he covered his three main reasons.

You've summarized them very aptly. Matt, is there a fourth? So this is fourth reason. This is this is me, and I, you know, I there's no, I don't have the academic rigor study behind this that, Paris applies We don't need that on this show. We love you for who you are. What do you got for us? So and I we're gonna discuss him later in the show. I know this. But I think Warren Buffett has a little bit of influence on this.

And now Buffett didn't become, I think, a household name until the mid late nineties. But I think the fact that Buffett has never paid a dividend out of out of Berkshire Hathaway and has had such extraordinary success, widely considered the greatest investor of all time, I think a lot of CEOs and investment managers look to Buffett and say, well, he he doesn't pay a dividend, and he's done incredibly well. He's reinvested capital at high rates of returns forever.

Why should we why should we pay a dividend? So I think there's a little bit of a cult of Buffett, that has has some influence on this as well. And I would also say, you know, one of the mis misconceptions about Buffett will also get into this, I think, is he actually is a bit of a dividend investor himself. I mean, he if you look at the investments he makes, he absolutely loves getting dividends, and he loves companies that that grow dividends over time. Coca Cola, American Express, even Apple.

But, of course, he doesn't pay a dividend himself, and so I think that has had some influence on investor psychology. Thank you for that, Matt. And as we start to close chapter one, the shift in dividend investing, Buck, offline, you were sharing just a little bit of how dividends jump started your investment journey, your initial fascination with them. Can you speak to that? Yeah. So I was five, and I had my first job. I grew up in a family business, which was a restaurant.

It was a large restaurant in Pennsylvania, Dutch country, and, I earned a paycheck. I was the pot dryer. You were five? I was five years old. And I don't know Did you have a four zero one k? I did not have a four zero one k, but it was, you know, I it's funny. Ran into some folks that I haven't seen for decades, and I went to school with them when I was younger. And they said, oh, I just remember you, like, were the hardest working people.

And they they were feeling sorry for me, but I but and I didn't realize that, and I was friends with those folks. But the reality was it wasn't work for us. It was what we did. Yeah. And we were together as a family. But anyhow, I earned a paycheck. And at the end of every week, I would get a check and, missus Bricker, who was a lifelong Eagles fan, would come over and she'd do our book work and she'd do all the payroll for everyone. And I would get the first jack.

It was usually two dollars and thirty eight cents or five dollars and twenty eight cents. And I'd run to my dad who always had money in his pocket, and I'd say, hey. Cash this. I'd sign it. And I put all my money in my sock drawer. So that was the safest spot that I knew because it didn't just open like a regular drawer. You had to go up underneath and and and open it. Right? You had a couple brothers. Right? You had to protect that money. Right. You had to keep it safe.

Yes. And, so that's what I had. So after about two or three years, one day my mother came to me and she said, Buck, come on. We're going to the bank. And that and that was fun for me. Back in those days, you got a lollipop every time you went to the bank. And besides, there was this mystery machine that you put stuff in it, like, zoom things out of space, and this little tube came back to you. I don't kids don't know about that today, but I remember one that had little NFL, helmets Okay.

That that was at the Safeway. Yes. You put your twenty five cents in. You'd, like, will I get the New Orleans Saints? I hope not. Nice. Yes. Yep. Yep. So we had that vacuum tube. Sure. And a lollipop came back at the end, and that was always great. But this time, we had to go into the bank and we set up a checking account. I said, why are we doing this? She's like, I don't have any room to put socks in your drawer anymore.

It's filled with money, and that's not safe if the house burns down or whatever else. So anyhow, long story short is I got a checking account. And in a couple months, she started giving me checks. At two dollars, five dollars, seven dollars. And after about the fourth or fifth check, I'm like, what is this? And she's like, well, those are stocks your father and I bought for you when you were born, and this one's from Hershey chocolate.

That was one of them, and I liked Hershey chocolate, and they also pay out a portion of their dividends. And now as somebody who started working at five, when I got a free check for two dollars and thirty eight cents that I did not have to work for, that was eureka to me. Because I'm like, oh my gosh. I don't have to work at all for this? I'm gonna get more of that.

And so that was I was probably seven or eight at that time, and that's what really, for me, kindled my lifelong, kind of interest in investing. Beautiful. Love that story. Thank you, Buck. You're reminding me of one of our former employees who told a great story when I first met him at his kind of initial coffee joining the Fool, wonderful guy for several years here. Mark Reagan said, yeah, my mom said this to me growing up when I was at an impressionable age.

Son, there are three ways to make money in this world. First is with your strength. Second is with your mind. The third is with your money. And Mark said, could you tell me more about that third one? And you just shared a story very similarly. Our money makes more money, and especially when you're a kid, mind dot blown Yeah. Dot. Yep. Let's move on to chapter two, the practical value of dividends. Buck, maybe some more storytelling. Yeah. You brought some stories for this, Alex. Did.

I did. I brought I brought some stories. So I think in some senses, you just spoke to the practical value of dividends, maybe more the excitement that they would even exist. Speak now. Did you bring a story about the practical value of dividends? Yep. So I'll I'll I'll give one. And Your parents? Yeah. My parents. My father, as he got older, I helped manage his portfolio, and we had a couple guidelines.

And and one of those and I think this is something for that's attainable if people work for it. One is to have three years living expenses in cash. Right? Because if you you get beyond retirement and all that stuff, and one of the great things about that is you don't have to sell anything when the market goes down.

And for somebody who was in his eighties and he wasn't in great health and and and things, he had zero percent of his portfolio in bonds, which most people would find crazy, but he he did have a decent amount of cash. And when two thousand eight and two thousand nine came out, the stock market went down about thirty percent, and our stocks went down like everyone else's. Mine went down more.

Right. Okay. Yeah. And and and what you saw then though in the portfolio was, one, didn't need to sell anything. Secondly, dividend stocks hold up better than regular stocks because companies don't like cutting the dividend because their investors don't like it when they cut them.

So the dividends hold up better than the stock prices, and that kept a constant flow of income coming in throughout his portfolio so that not only do we do not have to sell stocks when they were down, we had the dividend income to live off, he did, and he could also reinvest some and buy some more stocks, when they were very cheap.

So that regular ongoing income that comes in, and I think at that point in time, and it was a decision I made, was I'd rather own dividend stocks than I would have, thirty or forty percent of his portfolio in bonds. And I think that worked out very well for him over the long term. Wonderful story, and I love that he did it with stocks. Now if Robert Brokamp were here with us, and he always is here. He's he's in our he's on our shoulder.

There's, like, there's the angel on one side of your one shoulder, and then on the other side is Robert Brokamp. And he's probably he might talk about laddering t bills at this point or other strategies you can use without using stocks in order to get that guaranteed regular recurring income. And we love bro, and I like that about him. A lot of people use strategies like that, and they're they're they're brilliant. Yep. And you could do with stocks.

Right. And you can't you can't do it with stocks. And and the the reason I paraphrase that and said, three years living expenses in cash Yeah. Means you have the flexibility. And if you don't wanna do that, you don't have to, but it all comes down to your tolerance. And my father had my mother was more of the investor in our house, and that's who I talk stocks with my entire life. Love it. But he he had seen that, and she managed our money that way.

And so he had a tolerance that he didn't care about the up and down. It was long term money that was gonna stay invested unless he needed it for something. If I could just add some historical data to something that Buck said earlier about the fact that when the market declines, dividends companies tend not to cut.

If you look at the even the Great Depression, the worst period for the market, nineteen thirty nineteen thirty two, where the market declined eighty three percent, the dividends in the market only declined thirty two percent. In the great financial crisis, October two thousand seven, March two thousand nine, stock market down fifty seven percent. The amount of dividends, zero percent decline. Yep. Yep. Incredible. Before we move on, Buck, where was that family restaurant?

Lancaster, Pennsylvania. That is amazing. Last week, Robert Scuia wrote into the mailbag from Lancaster, Pennsylvania. And indeed with me at the microphone, the Motley Fool's chief investment officer. We know him. We love him. Andy Cross. And Andy Cross is from? Lancaster, Pennsylvania. And he's really from Lancaster. When when I say Lancaster, I'm, like, actually in a town, called Lititz. It's seven miles north of Lancaster. But Andy's, like, legitimately from Lancaster.

That would be, like, the city. We would say he's city boy. Right? Yeah. Like, he's big big big town. And my father and his brother his brother went on to start Gardner Investments, and they grew up in Lancaster, Pennsylvania. I mean, what is going on with this? Okay. Enough with the Lancaster, Pennsylvania Chamber of Commerce announcement in the middle of our dividend fools conversation, but thank you. Yeah. Lancaster.

Yep. So these are, Matt, these are some of the most resilient companies in the world today that are paying substantial dividends, especially ones that have done so over a long period of time. We haven't used this phrase yet, but is there a phrase that's used to label the companies that dependably pay rising dividends over long periods of time? That's right. The dividend aristocrats, which is a S and P five hundred global property, so give them the trademark there.

Okay. These companies have not only paid a dividend for twenty five consecutive years, they've grown their dividend every year for at least twenty five consecutive years. It's, a remarkable set of companies. If you think about what it takes to do that, the type of business that you have to have to have it sustain sustainably grow earnings and exist, for that period of time and beyond is extraordinary. So it is it's absolutely extraordinary set of companies.

And, Matt, you're working on the Dividend Investor, one of the Motley Fool services. Please give a really brief plug for Dividend Investor. Sure. So it's dividend investor. It's it's actually about a year old as of this month. We launched it, yeah, early two thousand twenty three and with with a focus on dividend growth. Because if you look at companies that are and we just talked about the dividend aristocrats.

But if you look at companies that can grow their dividend over time, those tend to be, over the very long term, the best performing part of the market. So companies that initiate and grow dividends compared to really any other sector of companies, non non payers, worst of all, dividend, you know, companies that cut their dividend, Those are the companies that do well. So we wanted to really isolate that part of the market focusing on high quality companies within that space.

And before we move to chapter three, we're we're closing at chapter two here, the practical value. Would you speak to the benefits of reinvesting through, let's say, a DRIP plan, dividend reinvestments that investors can make over the course of time, benefits thereof. That's right. So one of the things that Buck said, was, you know, talking about owning dividend stocks and downturns, which I loved, and dividend stocks tend to hold up better.

But what they also do for you, if you're reinvesting those dividends and you have options you have a couple options to do that. You can get the cash and simply choose what to invest in, choose what to buy more of, or you can do what you said, these drip plans, dividend reinvestment plans, where most brokerages will allow you they get the dividend, and it's it's it's cost free, tax free. They will just reinvest that dividend into that same stock.

So you can buy fractions of the stock over time and and kind of build your position naturally. I love doing that, especially during downturns, because if you think about if stock if the stock market's down thirty percent but the dividends aren't, your dividends are getting getting reinvested at better prices.

And so you're building these positions over time in these companies, these high quality companies, oftentimes at low at low valuations, and you're kinda really compounding your wealth, as years go by. Yeah. And interestingly, I'll just add that, when you when you calculate the actual returns on a stock that pays a dividend, you have to make some assumptions about what people do with those dividends.

And usually, the convention is that you assume that they were reinvested at the time, but ironically, almost no one does it. So the returns that you see for most of the stocks that they paid a long term dividend is assuming that they reinvested and bought more of that stock when they got the dividend, and most people do not do that. So Now I know some of our listeners do. I bet we over do. Some do. The Motley Fool. I bet we over index toward people who do that.

And yet and yet a lot of people listening right now are probably going, wait. Check that. Wait. What what did Matt say again? I how do I sign up for a dividend? How do I get that automatically reinvested? And And is this something, guys, that I would typically do if let's say I have an account at Schwab. Do I just let Schwab know, or do I go to the company? Are there benefits? Let me know. I'll speak to Schwab just because I I have an account there.

If you go to you can simply go to your portfolio page, and there's literally a checkbox next to every position. And you can say, reinvest dividends? Check that box. Yes. And then going forward, every dividend that receives for that stock will be reinvested in that stock. Yep. And so a lot a lot of brokerages do that now, so it's as easy as Matt said. There used to be a company when when the no. Nobody not a lot didn't offer it. It was called ShareBuilder Yeah.

Which I originally had for my kids, and they got bought out by somebody. I think E Trade bought out ShareBuilder, but they were kind of the unique one in this fear. And and, They did it really well. Yes. That was their, like, big focus. Around the challenges and misconceptions. Buck, let me let me turn to you. This is, this is an important topic because there are some challenges to being a dividend focused investor. Double taxation might be something you'd like to speak to.

But in addition, we're also gonna address some misconceptions. Let me kick it Hartzell's way. Yeah. So, I'll say that the double taxation is real. So the company pays taxes on the profits they earn. That's what companies do. If they have profits in the United States of America, most of them, I think. Right. If they haven't offshorted or figured out some way around the tax man, they're paying taxes on their profits.

Yes. And and then when you get a dividend from them, you also have to pay taxes on taxes. Have already been reduced, and they're paying you some of what's left over to you, the poor shareholder. But you, poor shareholder, pour only in relative terms. You, unfortunate shareholder, now also have to pay tax on the dividend that you received, the dividend dividends and income that you're receiving. Yes. That's right. Hence, the double taxation.

Yes. And and I think Matt mentioned earlier about Warren Buffett. And one of the reasons he's gone publicly and said, you know, several times that Berkshire Hathaway will never pay a dividend as long as he's CEO, And and that's been true to date. And by by the way, I'll I'm I'm going up to the Berkshire meeting, here in, a day or so. So I'll be there. I I think we've talked about Meta, and we've talked about, Alphabet. Alphabet, introducing dividends.

I'll I'll predict the future and say that Berkshire will actually pay a dividend. I don't think it'll come on Warren Buffett's watch, but I think whoever is his predecessor, which is gonna be, Greg Abel, it's gonna relieve some pressure from him and the people that invest Berkshire Hathaway's money. And Warren Buffett has also said it's hard to hold a hundred and fifty billion dollars in cash on the balance sheet and and do that. So I think they will pay a dividend Mhmm.

Sometime in the in the not too distant future. Over his dead body? I'm not meaning to be morbid. No. I I I I don't know. I don't think that's what you're getting in. I'm saying it's Don't hold don't put it all back. Perhaps they'll make a giant acquisition of a hundred billion dollar company, which I know he'd love to do, but I I think a dividend is coming to Berkshire Hathaway. Thank you. You heard it here first or maybe not because Well, you heard it here. Completely original to you, Buck?

Are you the first person to take a risk and say that? No. I don't I don't think so. But Well, you might be. But I don't know. We don't know. We can't know. I yeah. I don't know. That was brave. So yes. And and so the other one I'd say, is there's a lot of great businesses and even the best businesses, you probably don't want to pay a dividend.

And what I mean by that is if management has demonstrated an ability to take their profits and reinvest them at a high rate of return and earn twenty percent or twenty five percent or thirty percent, you want that management team to keep all that money as long as they can and keep earning more money on it. Right?

So, not many companies can do that, but if you are one of those companies in your growth business and you reinvest a high rate of return, you probably don't want a dividend from Matt Argersinger. Agree, disagree, neutral. I will disagree mostly in the sense that when when you when Buck when you say not many companies, I would say very, very few companies can invest at high rates of return for very long periods of time. And what do you mean when you say long periods of time?

Because that seems like an important I would say I'd say ten plus years feels like a long time. I I don't think many companies can even invest at high rates over a decade. I'll give you an example. I mean, we talked we talked about Alphabet earlier. Alphabet is Google is an extraordinary business. I think we'd all agree. And since it's since it's IPO, it's trounced the stock market. And I think and I think, rightfully so, they should not have paid a dividend.

But I would argue that if Alphabet had started paying a dividend, say, ten years ago instead of just recently, I think their return to shareholders would have been better. I I say that because they've made a lot of allocations capital allocation in the last ten years.

So I would argue probably wasn't in the best interest of shareholders and had that some of that gone to dividends and not to allow their other bets or other parts parts of the business, I don't think paying, say, a three percent dividend yield over the last ten years would have absolutely would have restricted them at all from allocating capital effectively. Yet I think shareholders would have been better off.

So it's not always about, well, a company just invested high rates return, let them keep all the capital. I think that can go hand in hand with paying a dividend as well. Let me ask you guys, you know, one of the things I've said about dividends over the years is that they provide a cushion for a company's stock price drops. Because if the company can keep paying out let's go back to our example we used to kick off the podcast. It's stocks of fifty dollars a share.

Company's paying a dollar a share in dividends, a two percent dividend yield. Let's just pretend the whole market drops twenty five percent like it did in a single month when we last did this episode four years ago. All of a sudden, that fifty dollar shot stock is now down to thirty seven fifty or something like that. And now the dividend yield, one dollar on thirty seven fifty, is starting to get closer to three to four percent.

And it's almost like if they can keep paying it, the stock can't drop much below twenty because at that point, it's a five percent dividend yield. You pointed out, Matt, we're at historically low dividend yield for the S and P five hundred of one point four percent. Five percent is a phenomenal return. Again, assuming this is a rock solid enterprise that can keep paying that dividend. So there's that cushion.

There's that unsinkable Molly Brown factor for the companies that can keep paying these dividends. That's right. There's an absolute balance that comes with with a company that pays a dividend. And I would also argue that agency risk or the the the discipline that the dividend exerts on a company is I think it's it's really an understated point. If a company knows it has to pay a dividend, and we talk about companies that are paying it, you know, I have to pay this dividend.

I have to pay thirty percent of my earnings out or whatever the payout ratio because that's what I promise, and companies hate to cut their dividend, and they wanna maintain that. I think it inserts amount a certain amount of of pressure on management to say, well, we can't do this other project or this other thing because you know what? Thirty percent of our earnings are going to dividend. Thirty percent are going to pay back debt.

And so that leaves us forty percent to, you know, allocate to the business, reinvest, whatever have you. And I think that is a is an underrated strength of a lot of companies that have paid dividends over time. Yeah. And and I like one thing that Matt said when and and and a few companies do this where they say we're gonna pay out a certain percentage of earnings or above a certain level of earnings, we're gonna pay out this much in dividends, and it varies. Yeah. Year from year.

We also haven't talked much about special dividends at all here at at all. I love companies that pay one time special dividends, and some do it very regularly where they're saying, hey. If we have the optionality to invest in this growth or we're gonna make a big acquisition or we're gonna do whatever else, we're not gonna pay a special dividend this year.

But if we find ourselves where we can't find good ways to invest, we're gonna pay you out a special dividend, and return that capital to you because that that is disciplined in another way that's saying, hey. It's nothing's meeting our hurdle rates, so we're giving it back to our I don't know if it's I don't think irony is the right word, word, but it's interesting if you look at a lot of international companies, especially European companies. They do exactly that model Yeah.

Which is we we're gonna make a certain amount of earnings, or we think we are, and if we make it, we're gonna pay a certain percentage of that out to to investors, and it varies year to year based on the earnings. Yes. I kinda wish a lot of companies would do that more in the states. We tend to for some reason in the United States, we have adopted the whole, we declare this quarterly dividend, and that's what we're gonna pay until we raise it, and it's gonna stay that way.

Whereas a lot of international companies, a lot of commodity based companies, Rio Tinto comes to mind, where it pays big special dividends based on how their earnings do. And that's a cyclical business, so it makes sense. But that, to me, always seems like a smarter model. I don't know. Why won't companies It's a much better it's a much better model. It's funny. I'm torn on that, guys.

I will mention, looking back over the stocks that I picked for The Motley Fool over twenty eight years, one of them was a great dividend pair and has been a fantastic investment. And it's TDG, TransDigm. Right. Yep. Mhmm. Ticker symbol, TDG TransDigm Group. This company is famous for special dividends. But we're here in chapter three, challenges and misconceptions.

I find it challenging to remember what my actual rate of return is because when I look at a stock graph and I look at at TDG, it's this amazing looking it's been a it's up nine hundred percent if you go back July twenty two thousand twelve when I picked it for Stock Advisor. Nine hundred percent on a stock graph today, S and P five hundred three hundred percent over that same twelve year period. So, you know, tripling the market, awesome stock. That wasn't its return.

The actual return of TDG, and we have this on our Stock Advisor site because we properly fully account for things. The actual actual return is nineteen hundred percent. It's a twenty bagger. The more the dividends factor into a stock's return, the harder it is, the more opaque it is, not just to me, the shareholder, but to the world at large, to us on a podcast trying to talk about what your actual returns are. So I find that a challenge, and I'm about to pass the ball to Matt here.

But and at least if you do it regularly quarterly, I kind of can keep up with that and get that. If you start going, yeah. Three dollars seventy nine cent dividend this, I don't know, January, it becomes very hard to understand what our return was. So I find that a challenge. So I know you guys are championing the European model, and I love me, my TDG. Shout out to Stock Advisor members who might still be holding that for twelve years ago because it's been phenomenal.

Amazing. But it's very hard to really know what's going on. No. I agree. I agree with you, and I and right. And kind of kind of hurting my original point about the regular dividend is is is more disciplinary on management in a way. So I I kinda I like that aspect of it. But, you know, your your example of TransSign brings me to the example of Costco, which is kind of a hybrid model, pays a regular dividend and the occasional special dividend.

But we do we we do a big disservice with most stock charts when we just show price or even because companies that do pay special dividend or even companies that just pay a high regular dividend. There's a company called EPR Properties. It's a real estate investment trust. No one's ever heard of it. If you look at the return since its IPO, it's been phenomenal. It's, like, eighteen hundred percent. If you look at just the price return, it's up, like, fifty percent.

But because That's what I'm talking about. Right. It's paid such a huge, percentage of its earnings out of dividends, being a REIT it has to, that you it really undercounts the the actual total return that shareholders get. Do you know what EPR stands for, by the way? Experiment? No. I don't. Experientials, properties? Sort of That is entertainment properties, and the r for the EPR may be just from properties. So Maybe. It's kind of, it's kind of an acronym. I wish they'd rebrand themselves.

They have an opportunity to They do. Create more love and consumer awareness by not claims of EPR properties, which I agree. Even Matt, you're lionizing this company. You don't even know what it stands for. I know it's terrible. What am I doing here? Yep. Alright. Well, thus concludes chapter three, the challenges and misconceptions. Sure. There are probably more misconceptions out there and more challenges, but we're not trying to cover everything this episode.

We're just trying to cover the things we think are important. Chapter four, stock buybacks versus dividends. Now I have made some hay over the years on Rule Breaker Investing by occasionally dedicating an entire week's podcast to my pet peeves. And it's almost embarrassing. I think I'm on volume eight or nine, and I've been doing, like, eight eight an episode. Like, I have put out there into the public seventy sixty to seventy things that irk me over the course of time.

A lot of them are pedantic language. It's like it's almost sad and self indulgent that I've done as much as I have with Pet Peeves, because I'm a happy person. I don't think I walk around judging the world in the way you'd think for my pet peeves and Buck Hartzell. I'm not the only one No. You're not the only one. With pet peeves. I have many pet peeves, but I haven't done any episodes. So I've probably got a long list of ones that we need to get.

Well, you're on this episode, and you got a pet peeve in this area. Pet peeve in dividends. And, and and I've got a bone to pick with a lot of executives. And and and Pick it. The big one that I have is when companies, at the end of the year ago, we bought back a hundred million dollars in stock and paid thirty millions in dividends, and we we returned a hundred and thirty million dollars to shareholders. You did not return a hundred and thirty million dollars.

That when you buy back stock, that is not a return of capital to shareholders. Dividends actually are. So stop telling us that you return capital to us because oftentimes, stock buybacks don't even benefit the shareholders, at all. So you don't see I mean, because, technically, if we're not getting down to technicalities here, but it says you take money. Right? And you, when you take money and you buy back stock, that money was on your balance sheet.

If it was a hundred million dollars, it's now gone. Yeah. Right? You didn't give it to me. And this if if the stock didn't go up, by the total stock by a value of a hundred million dollars, there's nothing that comes back. And, typically, it's just not a return of capital to shareholders. So don't tell us that one of them is, and that's dividends. That's a return of capital to shareholders. Matt, are buybacks effective? Are dividends effective?

Do you wanna is there a debate to be had here about what we as shareholders should be cheering on? I think as shareholders, we should be cheering on dividends much more than buybacks. So I'm I'm with Buck. I would say there you know, and and this is an obvious point. I think we we all know this, that there are companies that do buybacks more effectively, and I think buybacks have a role to play. I wish there wasn't I wish, you know, it wasn't dividends really small here and these buybacks here.

Let's see. I mean, if you look at even Alphabet's announcement, they, you know, they announced this this point five percent dividend yield. Stock had a nice day that day. Although, there was also a buyback and a dividend and some earnings, so I couldn't really tell why the stock jumped. But they announced a dividend in in conjunction to this massive, I wanna say, seventy billion dollar buyback. I think that's what it was, a new buyback.

Anyway, it's I think the dividend will cost them ten billion dollars. Well, the I think that the I read that the the interest they're getting on the cash and the balance sheet is gonna almost cover the dividend if you look at it. But They got a lot of cash. But regardless, no. I think dividend should should be more in favor. I think more companies would should do that. I think invest and shareholders would be better off. But there are certainly good examples of companies that are doing it right.

I think eBay is a is an interesting example of a company that although has not been a, you know, a market beater by any stretch, if you look at and I know Buck's a little bit fan of of eBay. They initiated dividend for the first time five years ago. They've doubled that dividend, over that, five year period.

But what's interesting is the cash they're paying out to cover the dividend today is only ten percent higher than the cash they were paying out five years ago when they first initiated the dividend, and that's because they bought back so much stock that the the obligation the cash obligation to pay out the dividend is is, you know, it's much lower, based on the number of shares outstanding.

So if you can find a company that's growing its earnings, a high quality business, paying a growing dividend, but that's also doing effective buybacks, and we have there's a bunch of companies that do, Wow. You can really compound your wealth in a in a business like that. And you don't have to get a ton of growth in revenue or earnings to really do that. Yep. And and, unfortunately, I I agree with Matt. The statistics tell us that most companies are not good at buybacks.

Terrible. I always hear that. Right? And and and and they don't create a lot of value, for folks. But here's here's why I believe CFOs and CEOs like buybacks because they're not locked into them. When they it's that discipline. They declare a dividend, something happens, they're they're still Right. X dollars toward buybacks. Yeah. And so if you see what happens, and I did I did re that's absolutely right. I did research many years ago where we looked at S and P five hundred buybacks.

And when do you think they peak? If you look at the performance of the stocks and the the price It's gonna be a cynical point, isn't it? It'll be a Since the market peaks. Yeah. When the market peaks, that's exactly when when buybacks peak. And then what happens when stocks drop in two thousand eight, thirty percent? Ain't nobody buying back. Nobody buying back. Right? For, like, ten years in two two thousand seven was, like, the record year. Yeah.

It helped the record. It always hits the record right before. So their timing is impeccably terrible. But if you think of it, from the mind of a CFO, the first thing that they're going through is, okay, we gotta pay our payroll, We gotta invest in our growth, and we gotta do all these things. And then at the end of time, they go, okay, what do we have left over? And on their best years when they're earning the biggest profits and they're really good, they're like, we have a lot left over.

What do we do? We're gonna we're gonna we're gonna buy back stock even though we're paying a very high price for it, and then we'll tell shareholders that it's a return of capital, and they'll all be happy. I don't really follow buybacks per se. It's not something I target, hope for in the stocks that I would buy or recommend, or follow in the companies that are doing it. So you guys probably follow us more than I do, and I'm not even saying you follow it.

But are there companies that routinely, regularly buy back through all market conditions in the same way that there are dividend aristocrats that regularly pay dividends quarter after quarter through all market conditions because if there are, and I suspect there are, I I at least sometimes I'll look over, you know, five years of financial results in a annual report, which used to be paper that we used to call the investor relations department for and have mailed to us.

And these days, it's all online. But when I look over the companies that you know, there are definitely ones that persistently reduce their share count, and those are often good performers. But it would seem to me, guys, that if you as a CFO, chief financial officer, simply routinely bought back stock, you would not be one of those companies that always makes the bad calls. The stock market tends to rise over time.

If you wanna be a hero CFO, just systematically quarterly allocate something to buy back stock if you wanna allocate your capital that way. Don't time anything. Yep. Be regular. So I'm just curious. Is that something that you observe? That's a it's a it's a an amazing point. I haven't seen work on that, and I have not observed that necessarily. I will say that a company like Chevron, which I may maybe has never come up on the RBA podcast. I don't know. You know what? I can I will search?

I have a database that's August. I will now search to see the number of times Chevron may have been uttered in nine years of this podcast. Keep going. Okay. But Chevron is an example, at least one that comes to mind, of a company that, eight or nine years ago, had a new CEO came in, kinda did a big cap capital allocation shift, and they have dedicate every year, they've said, we're gonna buy back four or five billion dollars worth of stock, and they actually have done it.

Now it's not it's not all it's not in equal amounts, but if you they've really lived up to their what they've said they're gonna buy back. And so one company I can think of right now but I'd love to do that study, David. I think that's it. Walmart is another company that years ago decided they were gonna take about a third of their earnings and buy back stock, and they're gonna take another third of their earnings and pay out a dividend.

So they kinda balance it. Mhmm. And I think those are better than the ones that guess and just do it when they have extra left over for sure. Yes. The ones that I do spend a lot of time on and and think think a lot about, are the ones that are very strategic about it. And they're saying, basically, there's two rules. We have to have extra capital and it has to be below intrinsic value. And those are companies that when it does go on sale, they buy a lot of it back.

So those are the ones that are very strategic, not just the regular. So for thirty years, we at The Fool have said to anybody who would listen on our website, our podcast, etcetera, you know, dollar cost averaging is a great way to approach investing. Save a portion of your salary check every two weeks. Market's high, market's low, doesn't matter. Put it into a company or a fund that you love and respect and think will be around ten plus years. Take timing out of it.

It's time in the market, not time in the market. Dollar cost average. It's got its own acronym, DCA. I think a lot of people hearing us right now are already doing this. Why wouldn't you do this with your capital allocation if you're gonna buy back? DCA, baby. Sounds like a CFO, what they should be doing. Appreciate that, Matt. And, yes, you are the first person to ever bring the word Chevron to this podcast. The word Chevron. This podcast launched in July of two thousand fifteen.

We've had a new fresh episode every single week since. No one until right now, Matt, had ever said Chevron. It's happened to me. Ticker CVX, by the way. Alright. I love it. Alright. Chapter five. Maybe the spotlight chapter of this entire podcast. We'll see based on the clicks and the data user data that I never actually look at. I hope people are still listening. It's spotlight on dividend stocks and strategies. It's picks time. Buck, by the way, thank you for your picks four years ago.

It's been fun to watch them. You you mentioned CNA Financial at the time, an insurance company, is paying out special dividends, something that I now know that you really like. It had, like, a ten percent yield Yep. Back then. Yep. And it still does. Still has a high yield. Not I mean, the stock's gone up, but they still pay a special dividend, which they did again this year, and they've raised their regularly quarterly dividend.

So people that did buy then are probably getting over a ten percent yield. Pretty happy? Do you know who's the CEO today? Is it still the same gentleman? Yes. It's a person, Dino Robusto, who An amazing name. Yes. Which is an awesome name. Could you say that name again? Dino Robusto, and he came over from Chubb, which is a great insurer. And, he's he's done a remarkable job. Possibly the best CEO name of our time. A great name. Dino Robusto. A Hall of Fame.

Baby. Alright. Good. Well, let's get into the picks here, guys. Let me go to Matt first. I think you've each brought three. And so we're gonna bounce it back and forth. Ping pong. A minute or so each. Give us a pitch. Matt Agersinger pick number one. Let's go. RPM International, ticker RPM. This is a a great family run business, founded by the current CEO's grandfather in nineteen forty seven. RPM stands for Republic Powdered Metals.

If that gives you an indication how exciting this company is, then, well, there you go. But this is a company that just has a ton of products in sort of the repair, maintenance, DIY, home renovation markets. Think think Rustoleum, Kwik Seal, Dynaflex. If you've done any home renovations, and I've done way too many, you've definitely used RPM's brands. I promise.

So in nineteen forty seven, when the company was founded, they had this one product, and it it sold only in United States, and their sales reached ninety thousand. In the most recent fiscal year, they have a portfolio of dozens of products, a market, that encompasses a hundred and sixty four countries and territories, and their sales hit seven point three billion. It's really impressive.

What's really what I love about this business, we recently recommended it for our dividend investor service, is they have paid now paid a dividend that's grown for fifty consecutive years. And there are very few companies that have done that, and the business and CEO, who's also the grandson and the founder, loves to call this out.

But if you invested in the business in after it went public, in nineteen seventy three and held for all those fifty years, your one thousand dollars has turned into one point one million dollars. So extraordinary business and a company that has really dedicated to growing the dividend and continue to grow within, within its markets. And I love all these picks. They're all our children. I do know something more about this particular one, Matt, because I did pick it for Motley Fool Stock Advisor.

I'm just checking in. The date was January sixteenth two thousand fifteen. So we're coming up now on nine years. And I was just checking the stock over that period of time. It's been roughly a market tracker. It's right around a hundred fifty percent or so over the last nine years, but I'm pretty sure that doesn't include dividends. It's not showing up on the stock chart, a point we made earlier.

I think it's been a very good performer, And Frank Sullivan is actually somebody that I know through the University of North Carolina connections that I have. So I didn't know you're bringing that. If there needs to be a disclaimer for me, there you go. Home team pick. Great company. Buck. I will break the home team pick, and I have a contrarian streak in my picks, but also, some important points. We're Got it. We're gonna dispel some myths. So my pick is Enghouse Systems.

That's e g h s dot f at trades over the counter. I'll make one quick point about that. For those, United States investors, when you get, a dividend from a foreign company, in this case, Canada, usually, there'll be a fifteen percent withholding tax. So we talked about you have to pay tax on dividends. Triple tax? This is about this is above that. It's fifteen percent. So This better be good, Bob. Warning. Yes. It's just a warning for you. But here's here's why Enghouse Systems is important.

It's a small cap company, which typically I think people associate dividends with larger companies. True. It's about one point two billion dollars. It's Canadian as we mentioned. It's also a technology company. It's a founder led business that is a serial acquirer of smaller technology companies, and, so it's very profitable.

And one of the things that they've done, recently is when interest rates went to zero and the prices for the companies they acquire were very high, they said we're not gonna buy anything. We can't find anything, and they build up a war chest of two hundred and fifty million dollars in cash, no debt. And now those prices are starting to turn over because they often buy companies that aren't particularly well run, and then they run them better.

So we're starting to see a a big pickup now in their acquisition activity, and it trades for twenty times earnings for a wonderful business. If you look over the last ten years, the average is about thirty four times earnings. We mentioned they have zero debt, two hundred and fifty million dollars in cash on their balance sheet. They recently raised their quarterly dividend, by nearly nineteen percent. That's twenty two cents a share. That's Canadian.

It's the fifteenth consecutive year that they've hiked their dividend by over ten percent. So fifteen years in a row, not just raising it by over ten percent. That beats inflation, fellas, over that time by a long shot. And triple taxation. And triple taxation. Right? So you do have some taxes. And, current yield's about three and a half percent, which Matt mentioned, the s and p five hundred. If you're buying the index fund, you're getting about one point four percent.

So you can afford to pay that little extra fifteen percent tax, and you're still gonna be getting a much higher yield than you will be from the S and P five hundred. And I think you're getting a better quality company as well. Company liquid enough if all of our listeners try to buy this stock on on Yes. Next week? I have checked that, and I sure hope so. We've wrecked that in, in in in many services Yeah. And including in the US, and it trades on the OTC, and the trading volume is pretty good.

Okay. If you I if all of our millions of listeners go in and buy at the same time, I would say what I generally recommend for all smaller companies is use a limit order and be patient. If everybody's buying today on the first day of the podcast, then wait till tomorrow or Monday and put in a limit order, and it'll fill. That's always been good advice for all of our Motley Fool services, especially our biggest ones where stocks will pop when we say we're buying this one.

Yes. We've always designed it so that you don't have to get it that minute or that day. Just do it two days later. Yeah. Especially if this prices pop just because of demand, that will subside, and you'll find yourself with the stock two days later less stressed. Matt Argersinger, stock number two. I promise this was a complete coincidence. But the company I my number two company is Enghouse. That would be a real coincidence. You're not working at the the Canadian No.

No. No. It's not Enghouse, but it is a company we talked about earlier, founded in eighteen ninety four by a gentleman named Milton Hershey in Oh, Hershey, Pennsylvania. Not Lancaster. But Yeah. No. Actually, no. No. No. Sweetest place on Earth. It was founded in Lancaster, Pennsylvania. That's right. Because it was Carmel's originally. Yes. Yeah. It was Carmel. I didn't know that. There you go. So Lancaster's come up how that's, like, the fifth time it's come up.

Unbelievable. That and Chevron. And, you know, we're done. We're done. We're done. Alright. Yeah. No. We don't we we all know Hershey. Hershey's, Reese's, Kisses, Jolly Ranchers, Icebreakers. Love Hershey. But these days, Pirates Booty, Skinny Pop Popcorn, Dots Homestyle Pretzels as well. They got into the, salty snack business. Wonderful business. If you just bought Hershey and nothing else for the last thirty years, you've more than doubled the stock market.

It pays of course, it's paid a dividend. It's raised its dividend for fourteen consecutive years. Stock has been hit lately, though, because cocoa prices, guys. Co I don't know if you follow the news, but cocoa prices have just been it's unbelievable. They've risen they've tripled in the last five months. Trade they recently traded over ten thousand dollars a ton, more than the price of copper. That's what's happened to cocoa prices. So that is put a little bit of a cloud on Hershey stock.

It hurts their margins. I promise you, cocoa prices are gonna come down. Hershey's margin's gonna soar within the next year, and you get the stock today at a at a very nice valuation, almost three percent dividend yield. Great opportunity to buy a great long term business. And and I believe the most unique ownership structure probably of just about any public Yes. Publicly traded company. There is.

It is controlled by a family trust that, doesn't own majority of the shares but controls the voting power. So And that and that's controlled by the her Milton Hershey School That's right. For Orphans. Orphans. Yep. That's right. Phenomenal story. Milton and his wife did not have kids, I don't think. And so yeah. And I did not know the Lancaster Caramel Company. You say caramel because you're from you're actually from Lancaster. I'm not, but I love that.

And I didn't know that that that's how Hershey started. Yep. That's right. Yep. That was his first success. And by the way, Milton Hershey, I think, went Well, he He went bankrupt successfully. That was his first success. Predecessor company to Hershey's company. Got it. You got it. And just so many things. I mean, what a wonderful person, first of all, but a great story and a success story of capitalism doing well.

And doing good. Yeah. He built he built, Hershey Park, which a lot of people know as an amusement thing. It's entertainment for the people that worked in his factories, right, to give that in. And if you go to Hershey, it's a beautiful, quaint town, with wonderful long streets with, just a beautiful place. And he's an example of not only now that school and by the way, a couple years ago, I I think the the the school tried to sell the stock.

So they wanted to spin it off and diversify, and the governor put an injunction. It was a whole battle over that. And by the way, you think about this, and this happens a lot, where very wealthy people give their stock to certain causes and then the first thing they do is sell it off and diversify it. You're typically much better off keeping the stock that was given to you, from the place that was originally Yeah.

And that's served that that little high school can do very well with the amount of money that they have in Hershey's loan. Right. And so there was no reason to diversify, but I think there were, yeah, probably other things going on. The Hershey family, Pennsylvania Mennonites. And Milton grew up speaking Pennsylvania Dutch. That was like what he was rocking Right. Yep. School at age six. Alright. Let's let's pull ourselves back to pick number four, Buck. Your pick number two.

Yep. Okay. I'm going to Canada again. This is Brookfield tickers, and I wanna make something clear about this. BIP is one, and the other one is BIPC. Important thing for US investors, if you wanna avoid that foreign tax withholding and filing a k one, you buy BIPC. That is a corporation. Okay? And it's not a limited partnership. So, the So what you're sharing with us right now could take one of two flavors. If people are buying, definitely buy BIPC. We're not gonna even say the one don't to buy.

If you're in the US, we're just gonna say the ticker that you wanna remember, that's BIPC. That's correct. Yep. And so what do you get? This is a company that's much larger than the last one we mentioned, about twelve billion dollars. And, what they what they do is they own a remarkable stable of infrastructure assets. We're talking about ports. We're talking about railroads in Australia. We're talking about data centers. We're talking about cell phone towers in India.

This is worldwide, and one of the things that makes Brookfield so unique is that, their parent company, Brookfield Corporation, invests money alongside their investors in every project they do. And and it's resulted in wonderful performance. And if you buy, Brookfield right now, you're getting about a five point one eight percent dividend. They recently raised that distribution, which they have a long history of doing, another six percent. Right.

And and the reason the stock is down a little bit is just because interest rates went up. Right? So interest rates went up, and so high dividend payers went a little bit out of favor. But this is a wonderful company, and most of their, revenues that they earn are inflation protected or contracted, so you don't have to worry about this company in an inflationary time frame doing bad or or cutting the dividend. So wonderful company, over a five percent yield, BIPC, Brookfield Infrastructure.

We gotta keep moving, Buck. But earlier you did when I asked you playing word association for that more nuanced non gut level term. You spoke to high dividend yields and maybe alluding a little bit to dividend traps. You've just shared with us a five percent yielder. That's definitely a high yield in today's market. Without spending too much time because we're running out of time, can you briefly speak to high dividend yields and traps?

Yes. So the big trap for me is when you have a business that's not performing very well, and you can see that either revenues or and or profits are declining Dropping. Year over year, and the stock price has declined significantly such that there's a very high dividend yield. Maybe it's ten percent in today's world or nine percent or whatever else it is.

And you say, well, that's that's a high yield, but there's a good chance that that dividend could be cut fifty percent or sixty percent or go away altogether. So I'm very careful of of looking at the company and how they're doing, not just picking a stock based on whether it has a high or low dividend yield. Correct. So we're looking at the whole stock here. We're not just, I don't know, aiming our browsers at a certain level of dividend yield saying those are the ones for me.

Correct. Absolutely correct. And I and I know, you know, we're talking about Matt, and they focus on dividend growers. Those are ones that are growing over time, and all the ones I'm recommending have as well. These are companies that are growing in strength and paying more, and they might not have a real high dividend yield to start with. But if you get in now They keep growing. Over ten years from now, you're at a stock that's has that high yield based on your original cost basis.

Alright. Chapter five near its end. One more pick from each of my guests, Matt Argersinger. Right. Starbucks. So two of us here are drink at this table are drinking Starbucks coffee. Good on you. Love the coffee. Unfortunately, the market just doesn't like Starbucks stock right now. It's trading at about five year low. A lot of reasons we won't get into, but I would just say Starbucks looks really compelling at today's price.

I think there's still tons tons of international growth ahead for this business. The new the relatively new CEO thinks they can still grow store count by ten percent a year for the foreseeable future. They're growing in they have less than four hundred stores in India. They think India could be as big as China for them, in the future. But the dividend, they initiated dividend, I believe, in two thousand ten. They've grown that dividend at almost twenty percent annual rate.

Wow. That since then, they've also been buying back a ton of stock lately. They bought back more stock in the last quarter than they did in the previous fiscal year, and I think that's management being really smart with the stock where it is today. So I just think Starbucks looks really good right now. And Buck Hartzell, number three. Yeah. I'm gonna go with MTY Food Group, and that's when most of you are probably going, what is MTY? Know I'm about to ask you what MTY stands for.

Are you prepared to answer that? No. Oh, boy. Nor would I be, but I have the Internet at my fingertips. So you're gonna yep. So So we're gonna know shortly. Go ahead, Bob. But I I would say we are, we're heading into May here. It's it's going on summertime. This is an operator of multiple franchise units. A lot of them you think were in the malls in the nineteen eighties or nineties and kind of been brands that you've kinda lost. Is this Orange Julius? Yeah. Right. That's exactly Is it really?

I don't know. Oh, okay. But TCBY frozen yogurt. That was one of my first great stock picks. Cinnabon. Yeah. There you go. We have, no. We have Famous Dave's Barbecue, which is a recent acquisition, Wetzel's Pretzels, and as we mentioned going into summertime, Cold Stone Creamery. Oh, yeah. If you like mix ins with your ice cream, pink berry froyo, if you like that, or planet smoothie or Sweet Frog frozen yogurt, Tasty Delight.

So they're they have a bunch of different brands spread across Canada and the United States. And as you know, franchise operations, they use other people's capital to grow, and they take a percentage of revenues, and they generate a lot of cash. Well, the two recent acquisitions that were rather large, were Wetzel's Pretzels and Famous Dave's Barbecue left them with about seven hundred million dollars in debt.

And what they're doing is they're paying that down very quickly, and they have a history. They're a serial acquirer, and they pay down their debt. So what I'm thinking is gonna happen and what is is trading at a very low multiple relative to what it typically does, and, we're seeing them deleverage now. And what that's gonna mean in the future is certainly more acquisitions, but also it's gonna mean higher dividends. And they've also are one that'll pay a special dividend every now and then.

So MTBY food group, and then when you go out to Sweet Frog or you go to Pinkberry or you go to TCBY or you go to Planet Smoothie I'll think of you. You know that a little bit of what you spend there is coming back to you in the form of a dividend, and, that's MTY Food Group. Well, that's a company that I've I've not heard of before, Buck. MTY food group makes me wonder, what does the MTY stand for? We've talked about acronyms here. MTY food group. I once met famous Dave. I know.

And this is not by the way, the see, he sold it before they bought it. I understand. Yes. He's ended up not being that famous in my opinion. Buck, I will note you brought three Canadian investors because that's where you're specializing within our business. Sometimes. I just I just did it for, like, we it's a big world out there. Yeah. And I think we have some friends to the north of us about one tenth the size of our country. They are friends too. I love Canada. They are friend.

Everybody's friendly in Canada, and and there's some wonderful businesses up there that people generally here in the United States don't tend to look abroad. Well, we do look at Shopify, and we appreciate that. A lot of Motley Fool members every day, even though it's been a volatile stock last few years, that's a Canadian. And and Dynamo. Constellation Software is probably the the best business that no one's Gilley's podcast. Ever heard of. Yes.

Loves that. Yeah. By the way, MTY Food Group, it is unclear what MTY stands for. They they haven't really put an official explanation out. They changed their name a few times. It does remind me of one of my earliest worst stock picks. One of my earliest best was TCBY. That's why I have warm fuzzy feeling as you talk about TCBY here and Famous Dave. I have a different feeling about him. But, specifically, NBI, which was an early stage back in the day, microcomputers were a thing.

It was the eighties, and they were making them. Maybe it was the chips, but I think it was the computers. I remember that they were based in Colorado. I think the CEO's name was TS Kavanaugh. This is back when you would just read that on the annual report. There was no YouTube where you could watch the CEO doc. It's just a name on paper to me. I may have it wrong. But one thing I have right, NBI stood for nothing but initials. Oh, really? For real. For real.

And and I loved it. That's why I bought the stock. It ended up being a not great investment. But any company that had that kind of sense of humor Yeah. Very, very foolish. Oh, yeah. So yeah. Yep. And by the way, foolishness doesn't always win. Sometimes we live Right. Yeah. Well, I wanna thank Matt Argesinger and Buck Hartsell for their expertise and their time shared with us this week on Rule Breaker Investing.

We don't talk about dividends as a thing very often on this podcast, but I'm glad we do sometimes. And I think everybody should be aware of it. So I think we laid some track and some scaffolding, especially for newer investors this week that might not think too much. I certainly don't think too much about, dividends, but you guys brought a lot of terms, nuances, and additional thoughts. In the end, dividend is one aspect of what a CFO can allocate.

In the end, dividend is one aspect of what an investor might target in his or her investments, and I think we really fleshed that one out this week. In fact, I'm gonna ask you guys to provide some quick summary points to close the podcast. Before I do that, one quick plug for the next two podcasts here on Rule Breaker Investing. Next week, It's gonna be blast from the past volume nine. That's right.

I will be bringing back five points that are favorites that I just don't want people to forget because this podcast has been around nine years. So I'll say something in two thousand sixteen that I thought was really good, but no one remembers it in twenty twenty four. So we bring it back, blast from the past next week, and then my annual birthday gift to me, you as our listeners, r b I at fool dot com is the email address. It's what have you learned from me?

What have you learned from David Gardner, which we do somewhere around May sixteenth every year? We're gonna do it again this year. So would love emails, r b I at fool dot com. You can tweet us out at r b I podcast. What have you learned from me? Either over the course of time or in the last year. It's always a fun way to share back a summary of a lot of rule breaker rethinking that we put out here from one week to the next. So r b I at pool dot com for what have you learned from

David Gardner two weeks from today. Okay, guys. Let's summarize. I'm gonna ask you each to bring three summary points, and we're gonna bounce it back in reverse order this time. Buck, are you ready? Yeah. Point number one. Summary point number one. We'll keep these quick. Point number one, dividend companies don't have to be stodgy, and they don't have to be big. Often, the best companies early on in their life stage are very profitable, and so they can pay an early dividend.

And I think we have some small companies that are on there that are, growth companies and also pay a dividend. Summary point number two. Well, we, I gave some reasons why dividends have kinda become out of favor last thirty to forty years. A shift may be coming. I think dividends could be in favor for the next several decades or so. Meta platforms, alphabets, some people are saying, hey. Amazon's next. The trend is the dividend trend. Netflix maybe? That would make me happy. Alright.

Summary point number three, Buck Hartzell. Technology companies generally don't pay dividends. We've already talked about the large ones that are Meta and Google. I put Hang House Systems on our list. That's a small technology company that pays a dividend. It's a very good business. So your point with this one is that's a misconception. It's a misconception, and I think even I'll I'll mention a company that was recommended in in fintech. Nuve is a company that recently got taken private.

They announced in the previous, call that they were initiating a dividend. They're a very profitable company. The stock went down because they said, oh, you're not a growth company anymore. People didn't wanna own it because you can't you can't be a growth company and pay a dividend. That made the yield a little bit sweeter. Yeah. It but it's ridiculous. And then now they're going private. Then he Alright. Matt Argersinger. Summary point number four.

I would say favorite companies that emphasize dividends over buybacks. Buybacks are great. I would just say if a company is is putting dividends on equal footing or even greater footing, that's when you want to pay attention to. Buck, number five. My last point, I would say, is pay attention to capital allocation. Not only what people are, doing that are managing company, where they're allocating the capital, but also, this is a little tip, what they're doing with their own money.

So I'll say, if you have a company that has a good history of not only paying dividends, but making good cap allocation decisions and insiders are buying the stock, that's probably a good price to look. Close this out, Matt. Summary point number six. I think above all for me, focus on dividend growth. I think dividend growth will show you, will be a good clue as to earnings growth because they go hand in hand.

So if you find a company that's growing its dividend, it's probably growing its earnings. It's probably a great business, and it's probably gonna be an outperforming stock. And it was a delight to be with both of you gentlemen. You know, part of the pleasure of hosting this podcast from one week to the next is I get to share my friends. And look at these amazing friends that I have and have made over the years, and there are a lot more than just these.

But Buck Hartzell and Matt Argersinger, you guys did a great job. Thank you again. Buck, four years again from now or so. Let's let's do it again. I mean, I hope we're both still at the Motley Fool, but, you know, or maybe more than once every four years. We'll see how people like this episode, volume two of Dividend Fools. Buck, thank you. Thank you for having me. Matt, thank you. Thank you, David. It was a pleasure.

As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Learn more about rule breaker investing at r b I dot fool dot com.