Getting Paid to Own Stocks

seem like they're starting to get back to normal. We don't want to jinx it, but they're starting to seem like the market's getting back to normal. So we're gonna get back to talking about fundamentals, and this episode is going to be all about one of the most important

elements of the stock market, which is dividends. Our guest is a portfolio manager who helps run a strategy that focuses on earning income from stocks with high dividends, and as always, will close out this episode with our tradition, the craziest thing I saw in markets this week, And remember, if you saw something crazy, give us a call on the What goes up hotline at six or six three two four three four nine zero, leave us a voicemail and maybe we'll play it on the show, and Katy

before we get started. One programming note, Um, for some strange reason, there's a lot of interest among our listeners as to what my nickname in high school was. I let it slip that I had a couple of nicknames in high school, and I said, we had about a hundred and forty seven ratings on Apple Podcasts at the time. I said, if we get ten more, if we get

to one fifty seven, I would reveal one of two nicknames. Obviously, the more flattering one would be revealed first, and if we got to two hundred, I'd reveal the really embarrassing nickname. Sure enough, the listeners have weighed in. We're now to about a hundred and sixty three ratings, a little more than I bargained for. So I do o listeners a nickname, however, uh with Sarah Off. Sarah insists that she'd be around when I for the big reveal for the for the

big reveal of the nickname. So I hate to disappoint the listeners. Um, So I think you know what this means is that you're on the hook to cough up a nickname this week. You know, you really got my hopes up. I thought this was the big moment and it's not. I know, I know there's they're they're there's gonna be outrage among the listeners. But can you come on give them something? I know you must have had some some horsey nickname. I'm guessing in high school. No

one called me horse girl. There's nothing like that. No, My nin name was really boring. I mean, my name is Katie Greifelt. They just called me KG because there's another Katie on the cross country team, so I had to differentiate somehow. Just KG. It's totally vanilla, like Kevin gart Like Kevin Garnett. That's pretty good. That's not a bad uh, not a bad namestake. All right, Well that's

the best we can do for nicknames this week. But two to next week, and if you get us the two, you'll get the embarrassing nickname as well as the the flattering nickname. But let's get to our guest here and full disclosure. This week's guest is a is a very good friend of mine, also one of my favorite musicians. Uh. One of the best golfers I know, pretty much, one of the nicest guys all around I know, UM, But none of that is is the reason why he's on

the show. He's on the show this week because he's also one of my favorite people to talk markets with. He is, as we mentioned at the intro there, he focuses on stocks with high dividends. UH runs an equity

income strategy. UH. He's a partner and portfolio manager at Hamlin Capital Management UM, which is a firm that has about four point eight billion dollars under management in two main strategies, once a high yield municipal bond strategy and the other is a dividend equity strategy, which is where our guests comes in. He helps manage that strategy. His name is Chris Dagnus. Chris, welcome to this show. Thanks

so much, Mike. UH. You've given me a lot to live up to there, so I'll do I'll do my best. Absolutely absolutely all true, by the way, all true, all absolutely true. But Chris, I didn't want to start off getting you a little bit out of your wheelhouse and talking about some stocks that actually do not pay dividends, because I find this fascinating and I want to sound like an old man here a little bit, which I guess,

you know, if if the shoe fits right. But you know, it used to be back in the day, if you were to become one of the biggest stocks in the country or in the world, you pretty much had to pay a dividend. I mean there were a few exceptions, especially in the dot com era, but you know, paying a dividend was was more or less expected of a mature,

big mega cap company. Now these days, you know, you look at the biggest stocks in the SMP five hundred and okay, Apple, Microsoft the two biggest, they pay dividends, probably not at any yield that that would get you excite. But then after that you go, oh for five um, you know, with Amazon and alphabet Tesla uh and Facebook, not a dividend to be found. Berkshire Hathaway is up

there too. I mean, that's sort of an outlier. Warren Buffett follows his own rules, and I guess one of them is he likes to cash dividend checks but not write them. But I'm just curious how as a dividend oriented investor you look at these big mega cap tech companies. Um, it seems to me like they almost are avoid They want to be sort of almost in sort of a sustained adolescents. You know, they don't want to give up that notion of being a growth company that's always reinvesting.

But walk us through how you would look at companies like that. Isn't inevitable that the facebooks of the world, that the alphabets of the world will someday have to pay a dividend, do you think? Yeah? I think I think that's right, Mike, and and you brought up a couple of important points. They're one is that Apple inevitably and created its dividend in two thousand and ten, and

Microsoft initiated its dividend in two thousand and three. And once a company gets to a point where it has a lot of free cash flow and maybe not as much to reinvest back into the business, maybe the opportunity set is is not as good. You eventually see that these these companies will will likely come around and started a dividend payment to shareholders. I would not be surprised to see that from Facebook or or Google or or

some of the big ones. As long as they have that free cash flow and the wherewithal in capacity to to do it. What's interesting is that there's not much we're missing out on today. If you can believe it, four hundred and twenty of the five companies in the SMP actually pay a dividend. Now. Back in that number was as high as four hundred and sixty nine companies, and in two thousand and one it fell all the

way to around three hundred and fifty companies. So the number of companies has actually been growing over to the last ten or twenty years of companies paying paying dividends. So I think we're getting back to it a little bit. And I think one thing you're gonna see is that the demographics of this country, we're aging as a country, and we need income. Seniors need income, retirees need income.

It has gotten very difficult to find income anywhere. So why not have those big companies or demand from those big companies that they share some of the cash with their shareholders. I think you're gonna I think you're gonna see that, uh going forward. I think I think the demographics are going to really really require it and ask for it. Uh. And and just lastly, one one last point.

You know, the way we think about it actually is that the dividend really imposes a lot of discipline on the company and the management team, and without it, you really can invest in just about about anything you want. But if you're committed to a dividend, if you've committed to your shareholders you're going to pay that dividend, well,

you better deliver on it. And you know what, your shareholders are gonna want you to grow that dividend over time, and so you've got to really operate the business efficiently, make good decisions, make discipline decisions. You just can invest in everything. And I think that's a very important concept of why this strategy has worked over time. It's the

governor on the capital allocation process. And eventually, maybe Amazon or Google or Tesla, especially maybe Tesla do something shareholders are not pleased with, and if they forced the management team to implement that dividend, it's gonna be harder for them to do that. So that would be that would be my my comment on all that. I would say,

we don't feel we've missed out. There's been plenty of really exciting dividend stories out there and companies we've been able to own and tech has been a big part of that over the last five or ten years because a lot of the tech sector has initiated dividends. So to your point that you know, you there's actually a fair number of companies in the SMP five hundred that are paying dividends, it brings some mind. There's this really interesting note from Bank of America last week that looked

at dividend yields in the SMP five hundred. They found that over sixt of stocks in the SMP hun five hundred have a higher dividend yield than current ten year treasury yields. And it might have shifted around a bit since then, but their point was that, you know, in this rising rate environment, this big reflation trade we're seeing, if the ten year reaches their year end target of one point seven five by the end of the year, then that would kind of diminish the appeal of stocks

to some extent. And I wanted to hear your thoughts on that. You know, if if we truly are in a rising rate environment, what does that mean for your strategy? Is that a headwind? A lot of a lot of good questions in their Katie on the number of companies that yield more than than the tenure Mike made a funny joke about UM being a senior or an elder when we began this call. When when someone talks about a one point seven ten year treasury being too high, I really feel old. Uh that that that is that

is not a big number in in my mind. UM, And it's it's hard to to recall, but the tenure treasury UH in the late nineties during the tech bubble was somewhere north of five percent, and the SNP yield at the time was one point five percent. In other words, it was fine with a much higher treasury yield. Uh. It's really all about future earnings growth and and dividend growth earning. You that that lower yield and what does

that look like? Uh? Now you bring up a interesting uh point on you know, how does this strategy handle higher higher yields. Um. It it's really been a misnomer over time that dividend pang stocks don't like higher yields. Uh. There are certain groups within our universe, maybe more bond proxy like groups. Utilities and reats would be the obvious ones that over time have not performed as well. Maybe during a brief period of rates moving up, but actually

we really want rates to go higher. We think it has been a huge headwind for our strategy. Um it has been a big tail wind for growth stocks with such a low rate environment. Higher higher rates generally mean better growth, more inflation, and dividend paying stocks. Companies that are paying out a dividend and want to grow that dividend,

they want more inflation. They want to be able to raise prices on their products and service because then they can pass that through in the form of faster earnings growth, faster dividend growth. That's good. If they can't raise price on their product and service, then and they're trying to grow their dividend, you might see a payout ratio start to go up and the dividend gets called into question

and the stock is under pressure. I think we've seen more of that over the last UH ten or fifteen years now because we've been in this low growth, low inflation environment, and that's just been really good for growth stocks because because valuations are getting pushed higher and higher.

Low uh it seems like a strange concept, right. Low growth is great for growth, but when there is no growth out there, you really are going to pay anything for those growth companies that are showing any growth, and I think that's what's happening. I think you're seeing very high valuations on the great, big large growth companies, the Russell one thousand growth you know, those twenty five companies in the top twenty five of that index, they're nearly

forty times earnings. I think they're around thirty nine times earnings on average right now. That's that seems to be fairly elevated. And I think I think rates going up might might pull that valuation back down, so we we would love it. We think it would probably level the playing field between growth and value a little bit if you saw a little more inflation and higher interest rates.

You know, Chris, it's it's interesting every now. Then I'll just do a screen of stocks and I don't know either the Russell, say the Russell three thousand or the SMP five hundred, and just sort them by dividend yield, and it kind of reminds me. You know, my dad was in the insurance business and and he was uh

claims guy early on it. He'd always tell stories about having to go out to the whatever the flood or a big fire or something blew up somewhere, And whenever you do the dividends screen like that, it reminds me of that because often that the highest yielders or some company something's going wrong, something, something's blowing up. UM. And especially last March last spring, in the middle of the

covid UH craziness and the and the bear market. You know, I looked at sort of the highest dividends stocks in March of last year, and it's just eye popping some of the yields that were on offer at that time. But I'm curious how your approach fits in with that sort of mentality. Um. You know, picking out a really high dividends stock, say temper Center More is obviously risky

but can be very rewarding. So so what's Hamlin's kind of approach for sorting out the disasters from stocks that have just been dumped, you know, baby with the water type of situation, Especially how you navigated UH last spring.

I always can only imagine you were working around the clock trying to figure out, you know, some of these stocks with these humongous double digit yields, you know, what were the opportunities and what we're Can you talk to us a little bit about your process for sorting through uh, you know, high high paying stocks, especially at at a chaotic time like that like we saw about a year ago. Yeah,

my last last March. I don't think I slept for three weeks straight and we probably talked during that period at some point. I'm sure. I'm sure I sounded like it. Um. Yeah, So you what you've brought up is a is a concept, uh that we call a yield trap. You don't want to be stuck in a yield trap. Some call it a value trap. Yield trap is is worse. It's the same as a value trap, except you're getting paid while you're getting killed, so you feel better about it. But

it's a problem. So there's that, and then of course there's the accidental high yielder, and the accidental high yielder you want to own because that yield will compress back over time and it's just being thrown out. So how do you find that accidental high yielder. There are very few episodes in one's career, like last March, where the SMP drops in three weeks or four weeks. In fact, it's it's never happened. That was the fastest beare market ever. So usually you have a lot of time to sift

through UH and last year was was just different. March was just different than anything we've we've ever faced. But the process for selecting stocks that doesn't that doesn't change. You just have to go through it a little more quickly and be a little more active in terms of your conversations with companies and management teams and your colleagues and figuring it all loud. We we have a process to help us avoid the so called yield trap. So when we select a stop for this portfolio, we we

do like a high yield. We we would call a high yield two times that of the SNP five, So that number moves around today, that's around three. You know, we'll look at anything one point five to jute times the yield of the SMP or higher. Um. We also want a company who is very much committed to dividend growth, so that's sort of our starting point. But then the key to this entire strategy is that the dividend is sustainable. This won't work if that dividend has to be cut.

It's got to be sustainable and it has to be able to grow over time. So there were three really important factors we consider number sort of. Our third criteria is the bound sheet. You need to have a uh quality bound sheet. Low debt. Uh. We don't want too much leverage. The deadholders need to be paid before the equity holders, so you want to keep the debt at a manageable level. Are sort of fourth important criteria is cash flow coverage of the dividend. There should be enough

free cash to pay that dividend and then some. And then the fifth thing we look for is a quality business and we look at returns on capital. There should be uh, you know, mid teams are higher returns on equity over over time. We think that defines a good business. So as long as that's all in place and that's there, you've got a really good starting point and really good

framework we think to avoiding the the yield trap. It was a chaotic period, but having that framework, that repeatable process that has worked for us over twenty years, that that really helped get us through. I feel like I have to ask you at least one question about Game Stop in the Material East and over. You know, you mentioned that you did actually own game Stop in so it's kind of amazing about how the world has changed.

But you know, I gotta ask, are you worried at all about you know, you mentioned you have a pretty concentrated portfolio. Are you worried about getting, you know, reddited and having one of the names you own sort of caught up in a similar frenzy? Uh, Kitty's so funny. Um, it's so so funny. You brought that up in Uh typical value Manager. Right we were we were eight years early on Game Stop, always too early. But because this was my favorite part of the notes Chris sent over.

You know, we often get notes from the guests on some stuff that's on their mind. This was buried at the end number ten of the bullet points. Not necessary to discuss unless it somehow fits the conversation. But we actually did own Game Stop, Like, not necessarily to discuss. Come on, Chris, you yeah, you know where we're gonna hit you with that one, but yeah, to talk us through it. It was two thirteen. Yeah, I guess I should have guessed that that would come out. What what fits?

What fits a better current event than that? Um, And it's funny. I It's something I have literally not thought about in in eight years until a couple of weeks ago. I didn't think anyone even knew with this company was um. But once upon a time, game Stop yielded four percent, had no debt on its bound sheet, had a ton of free cash flow, and it covered that dividend. Vine. Now we owned game Stop in for a short period

in two thousand and thirteen. At the time, it was literally treading at seven or eight times earnings, and it was at a big discount because everyone was worried that the business would eventually be disrupted. Uh So here we are eight years later, still talking about the same thing. Um. But it's a great example of what you were asking a little bit about earlier. Mike. You know, how do you how do you know? How do you know? You're dealing with a value trap or or a yield trap.

And every so often we get these opportunities where we have to think that we have to think that through and through our discussions with the company at the time, we thought, for one that this disruption was was going to be years out. Um, It's it's pretty much happening now. So it took it took a number of years, But we also thought there would be a slight reprieve because eight years ago they were going through the uh previous video game console cycle that they're now going through the

next one. But that one was PlayStation four and Xbox one, and they were just gonna have an enormous amount of equipment to sell over the next twelve to eighteen months. And we thought that would be good for them. So, um that that was a shortholding for us. We uh an unusual short period for a Hamlin stock and um we we did okay by it, but there are plenty we don't uh so uh, you know you have to you have to keep that in mind, now, Katie. There's just nothing we can do if those Reddit boards come

after our names. I guess we have decisions to to make, um, but I'm not sure any um. You know, teen sitting on a couch playing video games is going to be that excited. And what's in our portfolio today? They're not coming after corpor Uh, we're target Well there's I guess there's a couple they could Well, well we'll see what happens. Well, it's it's an all cap strategy. So there, you know, it's uh, it's all over the map. I I don't think there's a better seguay into the crazy thing segue,

uh than game stop talk. But before we do, Chris, let me just see if if you can remember, and if not, as close as you can get, what's the highest yielding stock you've ever entered a position into. Um, we own a company today called Enterprise Products. Enterprise Products has had a high single digit yield over the over the time period of of of ownership, so that would probably that would probably be the highest yielding stock at

least in in my recollection. Yeah, it's something tells me a double digit yielding stock is is uh, almost always going to be a trapp or at least you don't have to worry about it being one. I imagine you do, and you usually don't get many opportunities that because if it's not a trap, it won't be double digit loong. You've got to move very quickly. Yeah, alright, well we'll move very quickly into the Craziest Thing segment of the podcast. Stand clear of the craziest things we saw in markets

this week. Christ I know you came prepared. You sounded it sounded excited with with your crazy thing. So we'll save yours for last and we'll get Katie's first. I'm curious what Katie came up with. All Right, well, I'm going to talk about doge coin. Um, I'm just gonna pronounce it doggy coin. I think it's a lot cuter. Um. I mean, this is kind of an obvious one. It's sword like dred percent year to date from like half

a penny to seven entire scents, so pretty crazy. And um, what I think is even crazier is Bloomberg got an interview with the man who created it. His name is Billy Marcus, and he's actually cashed in all of his doge coin doggy cooin, so he's not in it at all because he said that he left in twenty fifteen because the community started to shift in a direction that he didn't go into. So it's kind of an interesting

Frankenstein story. But doggy Cooin off to the moon. Yeah, and now you put that jingle from TikTok back in my head. It hasn't left. It's been three weeks. I just I'm gonna need like a hypno sister or something to get that song out of my head. Oh man, I don't know if you've heard that, Chris. It's good, good piano jam. You might want to learn that one. It's uh, we're taking dog coin were dogg ecoin as as I don't know if you're gonna get dogg e cooin to stick Katie that we'll try that. I'll start

calling it that too. Yeah, I tweeted about it, so that's all right. Let me give you a couple. Um, I'm actually gonna rely entirely on listeners for my crazy things, uh this week. One of them is a guy I know, Chris knows. Another touching resident here among us, John Mindler, who pointed out to me a tweet thread from a guy named Joe Pomplano who's a sports business journalist. He writes a newsletter called Huddle Up. He points out that at the super Bowl, and Chris, as a musician, I'm

curious to hear your thoughts about this. The super Bowl entertainment doesn't get paid. You know, whether you're Janet Jackson or your Shakira, you don't get paid. And in fact, the Weekend who performed in this this last super Bowl, this guy estimates Stay gave him a budget of about thirteen minutes thirteen million for the show. He said, that's not enough. I'm adding my own seven million on top of that. To really do the show I want to do.

And the reason this works its way into the craziest thing is this guy, Joe Pompliano says, it's probably a good investment that the number of downloads and the streaming you get, UH and the tour revenue you'll have actually get UH makes seven million a decent investment for the weekend. So I thought that was pretty good. One other one before we get to Chris is and this is UH.

Someone tweeted this to Sarah at from the handle Softball Insider, and it's a story from market Watch and one of the craziest Chris, I'd like to specialize in the alternative asset classes when it comes to the crazy things, And one of the craziest alternative asset classes are basketball Sneakers, for some reason, are hot sellers on the secondary market.

Anyone whoever came anywhere near my basketball shoes when I was playing Katie would not would not pay a dime for them unless it was for some kind of scientific experiment on the you know, uh deodorizing process. But Southby's actually has a new platform where you can they just sell something out of set price. UH. And this is a curtsy of market Watch a story a pair of Nike hyper Dunk basketball sneakers that were actually made for

Barack Obama while he was still in office. So they feature the presidential seal and the number forty four is is embroidered on the side. There are only two pairs made, uh, one one to Obama and the other Nike made is just kind of a test runt, see, you know, to proof concept with the shoes. Sother bees is have the

has them up for sale. And Katie, this is the time of the show where we play prices, right, what do you think the the asking price is for a pair of Barack Obama Nike hyper Dunk basketball sneakers size twelve and a half and they come with free shipping if that helps you decide. Okay, Um, you know, I actually saw that tweet and I'm kicking myself for not clicking the article, But I am going to make a completely uneducated guess to say, like three D thousand dollars.

Three D thousand dollars. Okay, I'm keeping my poker face. Chris, you're taking the are under on three grand for a pair of Nike hyper Dunks. Yeah, that's a that's a big number. The prices, right rules, right prices, right rules are in effect. Yeah, so you could go one dollar, I'll go three one dollar, We'll go one dollar. Okay. That is a value manager right there. If I've ever seen one, Katie, that that is a big bit ask spread right there. One dollar grand is the asking price.

I had the Obama factor. I got caught up. Now I'm dying to know what Katie pays for her shoes. I I all right, Chris, what's the craziest thing you saw this week? Well, first on the on the musician at the super Bowl thing. I have heard that in the past, Mike, and I mean, don't you think the

band the Commuter would do that for free? I think I think they would absolutely absolutely, Kay, Chris and I have a little dad band called the Commuters that would if anyone in uh, not to be confused, there's some other band and name the Commuters that will price so us. But we'll cross that bridge when we come to it. But if any super Bowl representatives are listening, we absolutely would would would play that one for free. Yeah, we're not gonna chuck in another seven million, though I don't

think so. Um. This is uh and Katie, thank you I had no idea how to pronounce. I did think it was doggy coined, by the way, because I thought that was cool, and I had no idea how to pronounce that. Um, so mine is is obvious. Uh, and Katie was almost hinting at it. But I think the crazy thing this week, and I'm glad you didn't ask me to bring a normal thing because it's getting harder to find everything is crazy. It's harder to find normal thing.

It's the craziest thing this week is the Reddit boards went after the pot stocks, and I, um, I find this so so crazy and so funny in so many ways. But um, but the funny thing is to me why I can't believe they went after this after everything else. I would have thought this would be the first thing that they would have all gone, all gone after, right, games, game stop and pot stocks? I mean, how how did that not happen? And then um, there a lot of synergy.

And then separately, I just think that it's a gift to you guys because the headlines right themselves, right, I mean, you know, hi, high flying uh, potstocks, um pot stocks growing like a growing like a weed, or maybe maybe for the kids, the weed stocks are lit and then and then it also works on the way down right the pot stocks are coming off their highs or the weed stocks got stoned. I mean, there's so many like this is such a gift to you guys, Um as

as as writers and media. Phone Absolutely absolutely, Chris, you're pretty good at that. I gotta say, if if the whole Um portfolio manager thing doesn't work out, we we could bring it as a headline writer. Maybe those are pretty good. I might be steering, we might be stealing some of them, Katie. Write those down, get stoned. I'm ready, they're getting smoke. Oh that's good. Yeah they do. They write themselves. But with that, congratulations Chris, that's a pretty

good crazy thing you came. I'm gonna have to give it to Chris. I think, yeah, it will allow it usually, Chris, I I anoint myself the winner of the Craziest Thing competition, uh, which is a tough, a tough crust to bear, but I do it anyway. But I think with that said, put that on your resume. Put that on your resume. With that said, I think that's all the time we have for the this week. Katie, thank you so much

for phoning in for Sarah very admirably. Thank you, Thank you for having me and Chris always a great opportunity to chat markets with you. Really appreciate you coming on the show and uh maybe we'll get you back some day if if we can really appreciate you guys having me and letting me talk about what I what I love to do and about my firm handling capital. So thank you And just a quick statement from Chris's employer,

Hamlin Capital Management. This discussion is intended for educational purposes. Please note that past performance does not reflect future results and that it should not be presumed that any Hamlin trade or strategy was or will be successful. Please contact Compliance at Hamelin CM dot com for a copy of Hamlin's disclosure statement were for a complete discussion of Hamlin's tradings and holdings. What Goes Up will be back next week. Until then, you can find us on the Bloomberg Terminal

website and app or wherever you get your podcast. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us, and you can find us on Twitter, follow me at Reaganonymous, Sarah is at Sarah Ponzac. Our guest host, Katie is at k Greifeld. You can also follow Bloomberg Podcasts at podcasts and thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City Subway system. What Goes Up is produced by Tofur Foreheads.

The head of Bloomberg Podcasts is Francesco Levy. Thanks for listening, See you next time.