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Jake runs a YouTube channel on Dividend Growth Investing and shares why that’s his focus (1:20). Is yield worth looking at? (8:20) Unforgiving when it comes to dividend cutters (13:30). Be careful with REITs (17:10). Which dividend ETFs deserve the hype (19:15). Advice for retirees (28:25).
Transcript
Rena Sherbill: Jake from Dividend Growth Investing. Really happy to have you on the show. Welcome to Seeking Alpha.
Dividend Growth Investing: Thank you so much for having me.
RS: A lot of talk about what stocks may look good in this environment, where we should be focused our energy as investors. You’re coming at it from a perspective on the dividend side.
How are you approaching the markets in general? What’s your focus? And what, if anything, has you concerned or encouraged or excited at this point in time in the markets?
DGI: Well, my focus has been primarily on Dividend Growth Investing, where I’m focused more on the income that my portfolio produces and how that income is growing over time. Before I started focusing on dividend investing, it was a little bit more of a roller coaster for me. The idea of buying low and selling high just never resonated with me because I never could seem to get the timing right, right?
When you’re buying low, you have to time it on that side. And then when you sell it, you have to time it right on that end as well. With dividend investing, that really is not as important in terms of buying at the right time, especially if you’re dollar cost averaging because you’re always buying, right? I’m more focused on what is my asset, what is it producing in terms of the income?
And I’m really excited about the future. I’m excited because I’m investing into real businesses, businesses that are cashflow positive, that are really helping consumers, whether it be through a consumer staple, consumer discretionary, a healthcare company.
These companies are providing real value in the market and they’re rewarding me as a shareholder with a growing dividend, and I absolutely love it. And that’s what’s resonated with me and that’s why I love dividend investing.
And I’m always bullish on dividend investing because even if the market were to turn, the type of businesses that I’m investing in, they generally do well in a bear market or if the market were to go down. A lot of people are scared, okay, the market’s at all-time highs. There’s a looming recession. For me, I sleep well at night, regardless of what the market is doing, because I’m focused on the income that my portfolio produces.
What I love the most about dividend investing is you don’t have that boom or bust. The market is doing well. Okay, great. The market is not doing well. When you’re focused on the income that your portfolio produces, it makes it so much easier to ride out the volatility and the waves in the market.
RS: Talk to us about how you got started in general in dividend investing. Why is that the approach that you landed on or how is that the approach that you landed on? Aside from the reasons behind it, how did you get there?
DGI: Well, I started investing in my early 20s, and ironically, I started investing right around the Great Financial Crisis. And so any time that I would buy something the day after it would just go down. And so I just was like, okay, I’m buying this. I thought the market was supposed to go up. And so I got introduced into the market during the Great Financial Crisis where companies left and right were going under, even though they were great brands.
And so I realized that I was really bad at timing the market. I realized that investing is incredibly emotional and by controlling your emotions through an investing approach that works for you because there’s different strokes for different folks. You’ve heard that saying people, there’s different paths for different things for different people. And dividend investing was a way for me to control my emotions and to stay invested in the market because once again I’m focused on the income and not as much on the share price.
I’ll give you an example. When you invest into real estate and you have it as a rental property. And if your house is worth 20% less, you’re not going to sell your house if the income is still being generated for you. The rent is actually in some – in many cases, growing. So why would you sell the rental property if your income is continuing to grow?
And so I saw investing similarly to that where the share price – yeah, it’s important. It’s great. It feeds my ego if it’s at all-time highs. But my income that I’m using to pay for my expenses, that’s really where I focus.
And that has helped me so much to stomach all the volatility that we’re seeing in the market, and that’s really what attracted me to dividend investing because I felt that I had a bigger sense, I had a sense of control over the outcome because I’m focused on the income and not the share price.
RS: Was there something or has there been something that you’ve learned along the way that you’ve tweaked your approach to dividend investing even within that strategy?
DGI: Absolutely. There’s been a lot of learning by doing. I didn’t learn about this kind of stuff in school, right? When I first wanted to learn about this, I went on Seeking Alpha. I went on different blogs, watched different videos, read articles, and there was so much different information. And there was information that was good, and quite frankly, there was information that was bad for me, the reader, or someone who was in my particular situation.
And what I learned was that there’s a lot of commentator. There’s a lot of good advice, but not all advice is right for everyone, okay? And so when people kind of cast a wide net and say that everybody should do this or let me give you an example.
I used to love reading articles about the top 10 best stocks, the top 10 best ETFs, the best dividend ETFs, the best dividend stocks. And I would read those when I was a new investor. I was like, okay, well, these are the best ETFs. And I realized that they’re kind of all over the place. You got some that have a 5% dividend yield. You got some that have a 1.5% dividend yield. How do I make sense of all of this?
And then it wasn’t until I stumbled across or understood the concept of how to invest based off of your investment time horizon, because everyone’s in a different time horizon. And a lot of people generally think, okay, if you’re a dividend investor, you’re in your late 60s and you’re a grandpa, right. You invest in Coca-Cola (KO).
But that’s actually not really the case because if your goals are to live off the income of your portfolio, age is just a number, right? You have people you’re seeing now, people that are reaching financial independence in their 30s, 40s and 50s. And so you have to readjust how you view the traditional wisdom and the conventional wisdom around how to invest. And that’s why I always talk about understanding how to invest based off of your personal investment time horizon is absolutely key.
RS: In the words of the Grease soundtrack, conventionality belongs to yesterday. It feels like those truisms have gone by the wayside, I would say.
DGI: Yeah. And I mean, somebody’s truism can be great for them. But something that I love is when you dissect personal finance, because that’s what we’re talking about personal finance, it’s personal. It’s different for every person. And everyone is in a different situation.
And it’s incredibly important if you have a dream or a goal of one day living off of your portfolio, you have to look at it from that lens and not just paint it with a broad brush, because oftentimes, it gets painted over with a broad brush and you have to understand where you personally are at.
RS: So that’s good. Let’s break it down a little bit. I’d like to start from the perspective of yield, because that’s something that a lot of people say is great! A lot of people say, it’s not great! Who would you say it makes sense for them to pay attention to yield? And who would you say it doesn’t make sense for them to pay attention to a high yield?
DGI: That is such a great question because every new dividend investor, I would say, I would go off on a limb and say about 99% of new dividend investors, when they look at a screen, a stock screener, they immediately filter by the highest yield, because they fall trapped to the illusion that high yield by default means good, okay?
In reality, that’s not always the case. And in many cases, it’s not a good thing because when a company has a high yield or an investment has a high yield, it’s – there’s an inverse relationship between the stock price and the yield.
If the company is in trouble, well, you’re going to have what’s called potentially a yield trap where the company ends up cutting their dividend. Dividends are not magic. They come from real earnings from businesses.
And so this is what it ties back into the how to invest based off of your investment time horizon, if you have a long-term time horizon, meaning you don’t plan on living off of the income of your portfolio, meaning you’re going to still contribute dollar cost average from your day job, you’re reinvesting the dividends for the next 20 years, you ideally want a lower yield, especially if you have dividend stocks or dividend growth stocks in a taxable account with the goal of retiring before the age of 59.5. Traditional wisdom is you only have dividend stocks in a Roth IRA.
Well, if you’re in your early 30s and want to retire in your early 40s, you got to think differently, okay? And so yield is great once you’ve accumulated your wealth. If you’re in wealth accumulation phase of life, you want to focus on the growth aspect of your portfolio and the income that your portfolio will produce.
And then the reverse, if you’re nearing retirement, you’ve already made it in life, you’ve accumulated your wealth, you’re ready to retire, then you want to go shopping for yield. And so once again, tying back to understanding how to invest based off of your investment time horizon is fundamentally key to everything when it comes to dividend investing and understanding how to invest.
RS: What would you say are the main metrics that you either get asked about or that you would encourage investors to think about either from a positive perspective, like use these metrics when approaching dividend stocks, or maybe this metric isn’t as important as it’s touted to be?
DGI: Well, it really comes down to a couple of fundamental things. If you’re a dividend investor across the board, whether you invest in the individual stocks or ETFs, you want to look at the starting yield. You want to look at the dividend growth.
The dividend growth rate, the compounded annual growth rate, the dividend CAGR, you generally want to look at the five- to 10-year historical average. And history – the past is never a guarantee of future returns, but I strongly believe that history doesn’t repeat itself, but it does rhyme, okay?
And so if a business has been able to grow its dividend and they put in – and management at the company puts an emphasis on the importance of growing their dividend, then you could reasonably assume that that trend is going to continue. And that trend will continue until it doesn’t, okay?
That’s why I really enjoy investing into ETFs because the companies that are held in an ETF like an (SCHD) or a (DGRO), a (VIG), these more popular dividend passive index funds, ETFs, they screen businesses based off of fundamentals around the dividend growth, their earnings per share growth, their payout ratio, right? The payout ratio is incredibly important because it’s what percentage that the business is paying out net of their earnings, right?
So if they’re not growing their earnings per share, how is a company going to grow its dividend? And I’m referring back to what I said earlier, dividends are not magic. They come from real earnings from real businesses. And so if a company is growing its earnings and are rewarding shareholders with a growing dividend, that’s what I’m looking for. And so that’s where I would start.
And when looking at ETFs, because ETFs are a little bit different. First thing that I look at is the fund methodology. How are they screening the stocks to be held in the index? And then secondly, what is the expense ratio?
How expensive is the fund? And then don’t forget as well, it’s not the sexiest topic, but how is my dividend being taxed? Is it taxed as qualified, non-qualified, return of capital? What’s going on behind the scenes? How am I going to be taxed on my income?
RS: How would you say you look at dividend cuts? Is it also a very nuanced brush depending on who’s doing the cutting and what the cut is about?
DGI: So I believe that if you invest into a stock under the premise that they are a great dividend company, a dividend grower, they’re in a well-established business, they have an economic moat, and you invest under that premise. And then the underlying business changes due to economic factors, outside factors, whatever it may be, and the facts change, well, I hold the right to change my mind.
And so I’m pretty unforgiving when it comes to dividend cutters. And there’s been many countless research done on dividend cutters that they ultimately over an extended period of time almost always underperform the market. And so I’m a bit more unforgiving when it comes to dividend cutters. I would much prefer to move on.
And the reason why is I’m not emotional with my stocks, right? If I have the company, if it cuts its dividend, okay, I move on. That’s fine. I’m not married to my stocks. And so that’s how I look at this. And if they cut their dividend, I wish them the best, but I’m going to move my capital somewhere else where I can rely on the income.
And that’s a big reason why I like dividend ETFs because it is a lot more of the survival of the fittest. And I have this saying that I say all the time with dividend stocks. Dividend stocks are great. And this goes for all companies, all stocks in general. Stocks are great until they’re not. And they – if they ultimately end up cutting their dividend, I wish them all the best, but then I move on.
RS: Are there exceptions to that pretty fastidious rule that you have broken or that you would anticipate ever breaking?
DGI: The only time I would ever consider breaking it is if something happened outside of a company’s control. Let me give you one example.
During the pandemic in 2020, I hold a hospital REIT and a nursing home REIT. The ticker is (OHI), Omega Healthcare. I’m not endorsing the company, I’m just using it as a simple example that they were thrown a curve ball. Nobody saw this coming.
They were completely caught off guard and they ended up having to stop increasing their dividend, which they’ve grown for the last 10 years and they’ve just kept the dividend the same. They didn’t end up cutting it, but they didn’t increase it, and I generally like to focus on companies that increase it.
Now, had they cut the dividend or suspended the dividend, I probably would have moved on. But this is one simple example where things can happen outside of a company’s control. And you just want to take it one by one. But generally speaking, I will move on.
RS: And on the flip side of that, have you seen a company that you feel like is growing their dividends too fast?
DGI: Too fast? A simple example, well, I guess the only example that I would look at is over the last couple of years, Altria Group (MO), tobacco company, was historically known for growing its dividend 8%, 9%. Now, these last couple of years, they’ve reduced that to around 4%, a little bit more of a sustainable growth rate. And that doesn’t really alarm me.
I guess one thing that you want to focus on is how are they growing their earnings and what is their payout ratio, right? Is their payout ratio going up or down? But that’s what I would say on that part.
In addition to that, I would say where you really got to be careful is with REITs because REITs are very interest rate sensitive and there’s a lot of uncertainty and volatility with rates and the market, the future is unknown, we just don’t know what’s going to happen.
A lot of REITs, they get ahead of themselves and this is in part due to how they’re structured and how they’re required to pay a percentage out in terms of a distribution. But I would say pay attention to REITs because they can oftentimes get ahead of themselves.
With REITs, I would focus on quality. I would not go bottom fishing. I would not go look at companies that are yielding 20%. I would look at companies and be very critical of their history. Look at the Great Financial Crisis. How did they do during the great financial crisis? How did they do during the pandemic, right? Looking at companies that have at least not cut their dividend.
I use the example of Omega Healthcare. I’m pretty impressed with how they’ve sustained, how they’ve maintained the status quo and even managed to grow a little bit these last couple of years, despite everything that’s going on.
I look at more defensive real estate. I don’t like the boom or bust. I like real estate where there’s a fundamental need to human society where we absolutely need it, right? Where there’s more foot traffic, I’m very selective when it comes to residential real estate, data center real estate, those kind of things. My favorite sector, what I really like is industrial REITs.
Prologis (PLD) is my favorite REIT. I think there’s a bright future there. There’s an e-commerce component there where the world is trending more towards e-commerce. Prologis is solving that need that we have for that with the facilities. And I would just be very, very selective in terms of which REITs you go after and you bottom fish.
RS: And speaking to the ETFs that you mentioned, are there ones under that rubric that you prefer over others?
DGI: Oh, absolutely. I think not all ETFs are created equal, you’re going to want to make sure that you understand how the ETF filters and screens for stocks because they’re not all the same, right?
A lot of people, a lot of people who are newer dividend investors, they go online and they see, okay, there’s a lot of hype around this ETF or that ETF, but they have no clue what the ETF is actually designed to do, right? They have no idea how it’s structured.
And so I would encourage anyone listening who’s truly serious about dividend investing and looking into ETFs is truly understand how these ETFs are structured, understand the fund methodology, how they’re screening companies for dividend growth, the different metrics that they’re looking at, because they’re not all created equal.
Some of my favorite ETFs that I like, I really like (SCHD). There’s a lot of hype around SCHD and it’s well deserved because SCHD is the Schwab Equity ETF. It tracks the Dow Jones 100 Index, here in the U.S.
And it’s a unicorn because it has a high, relative to the market, a high starting forward yield of about 3.5%. And it’s a unicorn because it’s grown that dividend by around 10% annually since its inception, okay, the last about 10 years. And so it truly is a unicorn.
However, one drawback to SCHD is you’re only getting very limited exposure to the overall market. So there’s about 7% overlap with the total U.S. stock market. So there’s a very much an active approach to SCHD in the sense of you’re only getting a fraction of exposure to the overall market.
So I like combining SCHD with another ETF, for example, (DGRO). This is from the iShares Dividend Growth ETF. The thing that I like about DGRO is it screens companies that have increased their dividend for at least five years, and look at other qualifying metrics around the quality of the businesses and how they’re growing their dividend.
They exclude REITs on both of these ETFs. So what does that mean? It means that the income is 100% qualified. You’re getting the very best tax rate on the income from these ETFs. So if you’re working a day job, you’re getting a W-2, you’re paying regular income tax on that income that you’re generating from active income.
When you invest in these ETFs, you’re getting the lowest tax rates that we have here in the United States. Every country is going to be a little bit different, but here in the U.S. you’re getting much favorable rates on your taxes.
And so understanding what you’re truly getting, understanding the expense ratio and all of that is so, so important.
RS: Anything else that you would point to in terms of investors needing to stay away from in terms of metrics or types of dividend paying stocks or specific dividend paying stocks that you would stay away from?
DGI: I would categorize it this way. If you’re new to investing, right, and you’re a little bit more inexperienced, you’re trying to figure things out. Don’t take – don’t try to go for that Hail Mary, right? Don’t think that you’re going to pick the stock right before it turns around, okay?
Don’t buy the Walgreens (WBA) before they cut their dividend thinking that it’s going to have a quick turnaround, okay? Don’t take on extreme risks that you don’t have to when you’re first learning about what you’re trying to do here, understanding why you’re investing and what your goals are, okay? You could always do that later.
I’m saying that because I made that mistake. I went and I tried to – a lot of people quote Warren Buffett, be greedy when others are fearful and be fearful when others are greedy. I took that to heart and I got burned really, really bad because I would go and I would actually invest in the companies where there was fundamental underlying issues at the business.
And so be very careful quoting Warren Buffett when it comes to that, because you can get burned very easily, especially if you don’t know what you’re doing.
So when you’re looking at ETFs, first look at the expense ratio. That’s the very first thing. If you’re looking at a dividend ETF and it has a 1% expense ratio, there’s something – it’s not a traditional ETF if that’s the case. There’s something more going on. They might have a derivative strategy where they’re doing covered calls on it. They might be doing something that’s a little bit unconventional compared to other ETFs.
I would be very critical of an ETF that has a high expense ratio. I would be very critical of following the herd. A lot of – I’ve been on YouTube making content around dividend investing for over five years. And like a kid growing up, there was always the next fad, right? There was a fad at school. This came, this came and went – and went. It’s the same thing on in the financial online, right, with financial commentary on what’s the best dividend stock, dividend ETF.
Do your research before you dive head first into buying some of these ETFs. I would be critical of funds that have a high expense ratio. I’d be critical of dividend stocks that are a little bit more controversial, right? Online people have been debating for years and years on AT&T (T).
AT&T is a screaming buy at a 7% dividend yield. And then they have the spin-off with Warner Bros (WBD), like Warner Media and all that stuff. And I would recommend, if you’re a new dividend investor, avoid for now the controversial investments and stick with the tried and true. That’s the best advice that I can give.
RS: So what would you say are some dividend stocks to encourage investors to be looking at, either on the novice side or on the veteran side?
DGI: Depending on your experience and what you’re trying to do, I think the great place to start is with the dividend aristocrats. Starting with the dividend aristocrats, you cannot go wrong there in many cases.
The dividend kings are great, but you have to understand dividend kings, they’re likely not going to grow as fast as maybe a company that’s an up and coming company, right? Maybe a dividend contender, maybe a company that’s paid a dividend for 10 years.
I guess the best advice that I could give anyone when it comes to researching dividend stocks, I’m going to tell you what I did. What I did was go on Seeking Alpha, go take a look at (SCHD), some of the best dividend ETFs out there. Take a look at (DGRO), (VIG), (VYM). Go take a look on Seeking Alpha and go under the Holdings section and look at the top 10 holdings and research and start there.
Take a look and see which companies are held in this index and understand why are these companies in this index. And then what you can do, go on the company’s website, on the Schwab website, the iShares website and look at the top list of holdings and do some research and start there and build a list and a watch list off of that.
That’s what I did and it makes it a heck of a lot easier than trying to reinvent the wheel, is how I like to say it. So that’s what I would recommend.
The advantages of ETFs is that you don’t have to pick the winner. What you’re doing when you’re investing into an ETF is you’re saying, you know, what? I’m not really good at picking individual stocks, and that’s okay. And so what I am good at is understanding and realizing that.
And then what you can do is you could say, all right, well, I’m going to pick the best index that meets my goals and what I’m trying to do, what I’m investing for. And then that’s how I would look at that if you’re going to – if you’re uncertain about which stocks to invest.
Another great feature that I use on a regular basis is the Seeking Alpha ETF and Stock Screener. It’s very thorough. You can go and you can drill down into all the different metrics, the dividend growth rate, the starting dividend yield, all of those metrics that are important to you and tying this back to base off of your investment time horizon.
If you’re in your early 20s, you’re going to want to look at this entirely different than somebody that’s in their late 50s. If you’re in your early 20s, 30s, and you know I’m not going to quit my job and stop reinvesting my dividends for 20 years.
What you want to do is you want to focus on a lower starting yield and a higher dividend growth rate and the absolute reverse if you are in your late 50s and you’re planning on retiring in the near future.
But here’s the cool thing and I’m living proof of this. Even if you’re in your mid or late 30s, you can still do that if your goal is to live off of your dividend portfolio sooner in life. And that is the cool thing is age is just a number. It truly just depends on what your time horizon is.
RS: How do you encourage retirees, again, either very soon to be retirees or those that have a big runway ahead of them, what do you think is the best advice for retirees or what do you give as the best advice for retirees?
DGI: Well, let me take two examples. I’ll take the example of myself who retired early. I spent 10 years in my corporate software sales job, saving up enough money, investing enough money so that I could be in the position that I’m in today.
So I’ll take my example and then I’ll take the example of my dad who’s in his early 70s, who’s retired, right? So the example with me is you want to find a balance of building a portfolio that’s based off of your anticipated expenses.
Now, inflation is a thing. So you want to factor in how inflation is going to impact your portfolio and your expenses going forward. But what you want to do is you want to understand, well, what are your expenses? Now I have a little bit of a longer runway because I’m in my mid-30s and I would assume that I got a good amount of time ahead of me, knock on some wood. And so I want to focus on a good balance between a starting yield and a dividend growth rate, okay? And so I want to make sure that I have a healthy balance of that.
Now, on the reverse side, someone like my dad or somebody who’s maybe in their 60s, right, who’s going to retire in the next year or two, they can maybe sacrifice a little bit on the growth side for a little bit more income on – in – on the front end, okay? And that’s what I would recommend they do.
And based off of their risk tolerance, you don’t want to take on a lot of risk when you’re planning on retiring. Volatility is your best friend when you have a long runway. But when your runway is shortened, you don’t want the volatility. You’re willing and happily willing to forego the potential upside in the future for more stability and peace of mind and a lot of people online forget that. They say mathematically and historically the best approach has been X, Y, and Z, but they’re not factoring in that you don’t have another go at this.
When you’re retired, you don’t want to go back to work. They’re not factoring in the reality that this individual who’s retiring, they don’t want to live with all that stress and the volatility. So understanding that from that perspective, so from somebody who’s maybe a little bit younger when they’re planning to retire early and someone who is in the later stage in their life where they’re entering retirement very, very soon at a traditional age, there’s different priorities and different things to consider.
RS: Well, Jake, first of all, I really appreciate this conversation. Really happy to talk to you and got so much insight on the dividend stock space and the dividend investing space.
A lot to tap back into if you’ll come back. And any questions, send them Jake’s way, leave a comment. Jake, where else can they find you on the Internet discussing Dividend Growth Investing?
DGI: Yeah, you can find me on my YouTube channel, just Dividend Growth Investing. I create content on YouTube about once a week where I talk about financial independence, retiring off of dividend investing and everything related to that. So yeah, thank you so much for having me. It was absolutely my pleasure to be here.
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