Investing Unscripted Podcast 112: Let’s Talk About Dividend Stocks

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Jason Hall: Hey friends, welcome back to Investing Unscripted, where we ask the hard questions about investing. I am Jason Hall, joined by my good friend, the voice of the people, Jeff Santoro. Hey, Jeff. 

Jeff Santoro: Hello. We just saw each other. We did. Less than 24 hours ago, we were together in person. 

Jason Hall: We were, it was, it was fun. It [00:01:00] was fun.

And we talked about the topic for this show and um, it's an idea that we've had for a while and this is definitely going to be one of the kind of more stock oriented, stock specific oriented shows we do, but also some mindset and thinking about portfolios and allocation, that sort of thing. Jeff, let's talk about dividend stocks.

Let's talk about dividend stocks. 

Jeff Santoro: But wait, hold on before we do, we should give a little more context about where we were. So we got to meet up at FoolFest, which is a, an event that the Motley Fool hosts for its members, and we got to go, uh, as contractors, and I only mentioned it because we met a lot of great people some who are current listeners to the podcast especially our buddy Eric.

So shout out to Eric. But we met some new people who we told about the podcast. So if by, if, by some chance you are listening to this because you found out about our podcast this week, welcome. Welcome. Hope you enjoy it. 

Jason Hall: That's all. If you, uh, if you run a bar in Maryland we also met you too,

You were pretty [00:02:00] wonderful. 

Jeff Santoro: We're gonna drink at 

Jason Hall: your bar one day. 

Jeff Santoro: That was fun. One day. One day. All right, so dividends. Let's do it. I thought a good way to start Jason is to not assume that our audience knows the very basics about dividends. So let's start with the very basics. What are they? And I think more importantly, this is something that took me a little while to wrap my head around when I was new.

What's the difference between like the dollar amount that is paid in a dividend and the dividend yield because we hear about the yield a lot more than we hear about the dollar amount. So maybe let's just. level set some basic understandings here. 

Jason Hall: Yeah. So we'll start with what a dividend is. And, uh, in its purest version, uh, form, it's a payment by a customer, by a company, by a business.

Because they're not all companies. They might be a limited liability company. It might be a master limited partnership, a publicly traded partnership, a REIT, uh, which is a form of trust. It could be, um, uh, a royalty trust. There's lots of [00:03:00] these businesses out there. So we'll just say it's a business.

It's a, it's a payment by that business to an owner or part owner of that business. Uh, you may be a shareholder. Coca Cola, this is like the perfect example. It's a, it's a. Corporation that pays a dividend to its shareholders and it sends cash to them. You might also hear the word distribution. So like limited partnerships and LLCs often pay a distribution distribution is kind of, um, like.

MLP speak for dividends, but so in the mechanics of it, it's the same thing. You own a part of the company and they send you money. There's tax implications around these different names. So that's why you hear sometimes people will quibble about making sure you use the right name because there could be implications on how much that particular.

Payment is taxed. Now here's the other thing. It's not always a cash payment. It's almost always a cash payment, but some companies will pay, um, [00:04:00] scrip or dividend in kind, which is shares of the company. Now that is not the same thing as a drip dividend reinvestment plan, which is where your dividends are just reimbursed, vested in stock.

It's Because if you have a drip or a dividend reinvestment plan, the company pays you cash and then your broker, or if you own shares directly through the company, through their, their their trade agent, whatever it's called, they, they take that cash and then they, Buy more stock for you on your behalf with it.

So that's important to understand is that some companies pay dividends and more equity in the company. 

Jeff Santoro: Yeah. So, but hold on one. Let's pause for one second. I think for the purposes of this, I think, and you can tell me if you disagree, but I think we're going to be talking mostly about. What I would call just like normal dividends, which are just company X plate.

Well, maybe not company X. That's a real company. Company ABC ticker, single, simple ABC pays [00:05:00] 13 cents every quarter to all of its shareholders. So

Jason Hall: broadly, yeah. So the only time that we won't, the only time that I will kind of get into the minutia or into the weed, so to speak, is when it's important to differentiate.

But for the most part, we're just going to be talking about companies giving you money or businesses giving you money, and then you making the decision after the fact, what, what you want to do with that money. So that's important. Now, I think you might've had another question. 

Jeff Santoro: I was just going to say like, so for people listening who may already own stocks that pay dividends, you may already know this, you may already be doing this, but I want to just to, I wanted to return back to the dividend reinvestment plan, the DRIP, that's an acronym that you mentioned before.

Because essentially, yeah, you do have two options that those dividends will just accumulate as cash in your account, or they will automatically get, you know, that money will automatically be used to repurchase more shares of the, of that company. Um, 

Jason Hall: Yeah, and your broker and your broker gives you the ability.

A lot of times it's defaulted to reinvest. [00:06:00] You can go in and there, there'll be a setting somewhere you can find under the features of the account where you can change it like the default for the entire account. to not or to yes, reinvest, whichever you prefer. And then you should be able with most brokers.

I've never seen one that you couldn't. I'm sure some exist that you can change it for individual equities as well. Yeah. Um, maybe some you want to reinvest and some, maybe you just want the cash to accumulate. So that's important. 

Jeff Santoro: And you know, I'm just thinking through my portfolio of dividend paying stocks.

I would say the vast majority of them pay quarterly, but there are a handful that I own and a lot more out there that will pay monthly. Um. Yeah. I know, uh, one that you and I, I used to and no longer do, but you can still do all and I believe, Realty Income Trust, which is ticker symbol zero, uh, sorry, not zero.

Oh. Oh, right. 

Jason Hall: You think this is a Japanese stock market or something?

Jeff Santoro: Yeah, right. It's not, not the number zero. It is the letter O. Yeah. They pay a monthly. 

Jason Hall: EPR Properties [00:07:00] pays monthly as well. Um, in general, so you see a trend immediately right there. The vast majority of companies that are paying, um, monthly dividends usually are REITs, Real Estate Investment Trusts.

But broadly most of this is important. It's typically U. S. companies that pay a quarterly dividend. When you see semi annual dividends, often those are, are not American companies. So Disney has reinstated their dividend, but it had been paid semi annually. Honestly, I haven't checked to see if it's going to be semi annually or annually or quarterly, what their plan is. It looks like it's quarterly now. 

Jeff Santoro: I mean, just, I did a quick search on Google finance and it says quarterly dividend 19 cents.

So, 

Jason Hall: yeah, but the point is, is you need to, you need to understand the companies. Their cadence of paying a dividend especially if you're thinking about investing in it for income. And if you, if you saw their last distribution was a dollar you can't just assume you're going to get that the next quarter, um, or the next month, right?

You need to confirm what their [00:08:00] dividend, um, policy 

Jeff Santoro: is. So let's use, just because I have it open now because I looked it up, let's use Disney as an example to talk about dividend yield. Okay, so if I just Google, I just Google Disney dividend and the Google finance page popped up. And at the very top, it says that the quarterly dividend amount is 19 cents, U.

S. dollars. And it says the annual dividend. Dividend yield is 0. 77%. Um, and I know that typically a lot of companies every quarter or every year will up the dividend amount a little bit. Now Disney might be an outlier because they just recently brought theirs back. So I don't know how quickly they're going to be raising it.

But the dividend yield can change. Day to day week to week based on the stock price. So why don't we talk about what dividend yield is how it's calculated? 

Jason Hall: Yeah, it's a real simple calculation. It's just the percentage of the stock price Annualized. So if a company pays it monthly or quarterly if it's a if it's a quarterly dividend the the [00:09:00] most recent dividend times, times four, um divided into the stock price, right so that 19 cents Uh, times four is 76, 76 cents over whatever the stock price is. 

Jeff Santoro: Which is right now around $97 ish.

Jason Hall: There you go. And that's where you get that roughly 0. 8 percent yield, right? Is roughly what it is. So here's, here's the thing that, that is, if you're, if the dividend is going to remain steady, right, at that fixed rate. And then, and you're going to buy the stock right now, right? So that's where yield is, is useful is thinking about what portion of your return on investment.

If you were to buy that stock right now the two things that have to be true are, the dividend is going to continue at the same rate, right? So when we think about things like yield traps, you're, you're buying a stock expecting to get some very high yield. And maybe the market's sent the stock [00:10:00] price down because there's a high expectation.

The dividend is going to get cut. Um, stocks got pushed the yield up. It pushes the yield up, right? Because that's, 

Jeff Santoro: that's the thing I think. That's the reason I wanted to talk about yield, because I know when I was a newer investor, it was very counterintuitive to my brain that a good thing for an investor, which is a higher yield for the dividend, is a bad thing for the stock.

Like, it means the stock has gone down. If it changes from a lower yield to a higher yield, 

Jason Hall: often that's, that's one of the first things you have to look at. Well, the yields this high. Well, let me just do a little bit of sleuthing and look at the past year. What's happened with the dividend payout, the actual number, the dollars that are paid, the dollars and cents and what's happened with the stock price.

If the dividend hasn't gone up, but the stock price has come down, the market is telegraphing that we don't believe this dividend is sustainable. Okay. So that's important. And until the company actually, until the board, now [00:11:00] the management doesn't control the dividend, the board of directors controls dividends until the board declares what's going to happen next with the dividend, that yield is going to be based on what has already been paid out.

Right? So, so that's where these yield traps can be dangerous. And I just want to say one mindset thing about that, that I think is really useful is if you have company a, That this is their business and this is their yield and company B is their nearest peer competitor and there's a massive difference in the yield.

that's usually the market telling you that the company with a much higher yield, um, unless there's some obvious reason why it pays a higher yield, maybe it's the largest and the oldest and it's well established and it's just returning lots of capital to shareholders. And the other company is an upstart and it's growing and it's yield may be lower because of that.

Generally, if there's a big divergence it's because there's trouble with the company that the yield is higher. 

Jeff Santoro: Let's continue to use Disney as the example because I [00:12:00] think this is another thing that I was slow to kind of internalize when I was newer. The dividend yield that you see like right now when you go look up a company you own may not actually be the yield that you're getting paid on your shares.

Jason Hall: Can we use, can we use MasterCard? 

Jeff Santoro: Sure, we can switch to MasterCard. 

Jason Hall: I just didn't want to Google another company. Let's do that. Is I want to go with a company that has had it for longer. Exactly. Without that's the, that's exactly right. So let me 

Jeff Santoro: give the numbers real quick. Currently MasterCard's dividend yield is, is 0.59%. And it is 66 cents a quarter, 

Jason Hall: Right. 66 cents a quarter. 

Jeff Santoro: So this is my question. So if I buy this stock right now, right, If I stop recording with you, log onto my broker and I buy MasterCard, those shares that I buy today, if I'm understanding this correctly, Are I'm going to get 0.59 percent yield on those shares forever, or that's just the yield [00:13:00] on my cost basis?

Jason Hall: That's the yield. That's the yield on the stock price today. And as soon as you buy the stock, that's the yield on your cost based on the current dividend. 

Jeff Santoro: Right? Yes. Yes. I should have said that. That's what I meant. But that, that's the piece I'm honing in on is that I've heard people say often Without explaining it, they say something like, Oh, the, my, you know, I'm getting X percent on my cost basis for that, you know, the X percent dividend yield on my cost basis.

And I don't think people understand what that means. That's what I was trying to get at. 

Jason Hall: Yeah. So, so I want to explain exactly that. And the reason I want to use, again, the reason I want to use MasterCard is because it started paying a dividend in, as old as MasterCard is, it hasn't been public all that long. Maybe 20 years at this point. But it started paying its dividend, I believe in around 2006 or 2007. 

But really what happened with MasterCard's dividend that's been the most incredible was 2012, I believe, 2012, They started raising the dividend. [00:14:00] MasterCard has increased its dividend 7,230%. 

Now, I want to give you another little, another little interesting tidbit. You can look at MasterCard since 2006. And it's dividend yield has never even touched 1 percent one single time.

And the reason that's the case is because the stock has consistently gone up because the company has grown its earnings massively. That's how it's been able to afford to pay and raise that dividend 7,000 percent because it's grown its earnings per share. It's consistently grown its earnings, and the market has continued to be willing to pay a higher and higher stock price.

Because, you know, it hasn't, this isn't multiple expansion here, right? The business has improved and become more profitable. So it's become more valuable. The stock price has gone up, the dividend yield really hasn't gone up very much at all. 

Jeff Santoro: So, so in this case, what I'm hearing you say is that the fact that MasterCard's yield has stayed under 1 percent is actually a good [00:15:00] thing because it means that the price has continued to go up.

Jason Hall: That's, that's exactly right. Right, so like if we 

Jeff Santoro: saw, like if we saw all of a sudden MasterCard's dividend yield was 3%, that would be… We'd want to go look at why. 

Jason Hall: Yeah. Yeah. No, that's, that's exactly right. But I want to, I want to circle back to like the other part of the, the yield on cost conversation, because this is really important.

So on a split adjusted basis MasterCard stock back in mid 2006, call it 4 and 50 cents a share. Again, you bought it back then you would have gotten a yield of, in late 2006, this is when they first implemented their, their dividend. You would've been getting about a 0.11% yield. When you bought it, you would've paid, call it $8 a share. 

Jeff Santoro: Mm-Hmm. 

Jason Hall: For the stock. So a really good, really good year. The stock ran up a lot by the end of 2006, so eight bucks a share, right?

So let's say you were smart enough to have held MasterCard that entire time, and you continue to hold it. [00:16:00] Today they pay a 66 cent a quarter dividend. So 66 cents a quarter, that's what? 

Jeff Santoro: $2.64 a year. 

Jason Hall: So $2.64 a year in dividends on your 8 cost basis stock. So your yield on cost there is what, 28%? That's pretty good, right? 

Jeff Santoro: Yeah. So, and we'll talk more about this a little bit later, but like, that's exactly the point I was trying to get at. Because I think it's very easy when you're deciding, do I want to buy dividend stocks or do I not?

Or should I or shouldn't I? It's very easy to look and go, Oh, I'm only going to get 0. 11%. Why bother? And then fast forward, if you pick a winner, fast forward 20 years, and now you're getting, you know, 20 percent of your cost basis back to you in cash every year. Right. Um, exactly. Can get to a point where if you hold a winning stock long enough, you know, you hear stories about this, where you'll basically make a Your money back that you paid for that stock every [00:17:00] quarter.

Yeah. With takes a long time. You'd 

Jason Hall: have to be lucky to get that. But yeah, I mean, that's not common even, even like. You know, we've talked about this before and I just think it's such a useful example, even like, Coca Cola and talked about Coca Cola and Berkshire Hathaway. And it hasn't been a great stock.

It's underperformed the market, but Coke pays Berkshire. It's cost basis about once every year and a half. Right. Right. So 

Jeff Santoro: maybe every quarter was hyperbole, but basically if you, if you hold a winner, but that's still 

Jason Hall: pretty amazing to hold an investment that eventually gets to the point where it gives you your money back every year or two.

That's pretty incredible. Right? It really is. And when those investments really do well are the ones that you just set it and forget it and let them reinvest those dividends in that company for you. So you think about, again, I'm going to use MasterCard as the example here, and this is total return. So if you had taken those dividends and just dripped it right back into your portfolio over that period from late 2006, when they initiated the dividend through now, you would have gotten 6,700 percent total [00:18:00] returns.

And yes, I'm cherry picking here. But the, but the takeaway for me is that Thinking beyond yield, thinking about stable dividends, companies that are generating enough cashflow to pay a dividend while also reinvesting in their business in ways to generate great returns and grow their business, grow the dividend that they're paying out to their shareholders over time.

And you get the benefit of both owning more of the company over time without having to buy more of it. and you end up at a point where maybe 20, 30 years later where you reach a financial goal where you're no longer looking on employment to be your source of income and you want your portfolio to be that source of income, even looking at a master card that's yielding 0.

5 percent today, it's done so well for you that yield on your cost and your investments is much, much higher, right? And MasterCard becomes your income stock while everybody else just sees it as a low yield growth stock. 

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Jeff Santoro: Yeah, exactly. And, you know, this is a little bit more advanced. Maybe we'll get to this near the end.

But for people who are looking for dividend stocks to be a source of income in retirement, And the other added benefit of being able to, if you're able to do that, is it prevents you from necessarily having to sell your stock to live. Right. So, you know, if, if you have been a long time MasterCard [00:21:00] shareholder and you love the company and you love having the stock, it might suck when you're 63 or 68 or 72, whatever it is that you have to sell 5 percent of it every year for living expenses, you know, it would be much better just to live on their dividend.

Jason Hall: Well, one of the things I've talked about before is when it comes to owning stocks, the worst position to be in is, is having to sell a stock, right? And because that subjects you to the worst part about investing in stocks, which is the volatility and the market's whims, and just a little bit of bad timing.

You know, if you were selling stocks to raise income in February of 2020, you were fine. If you had to do that same thing again, in March of 2020, you had to sell more than twice as much stock. Um, because the market to come down so quickly and basically a month. So that's the other thing that's so powerful about having income stocks and dividend stocks in your portfolio.

Jeff Santoro: So one of the, you, you touched on one of the next questions I wanted to ask you and [00:22:00] talk about, which was how investors should think about dividends as it relates to like the total return they can expect. Now there's a couple places where this has manifested itself in my portfolio where it's been pretty stark.

But if you have. Either a spreadsheet that calculates this for yourself, or if you're able to, you know, have access to any sort of online website that will show you like the return of a stock over time, um, pick, pick like long term good companies that pay dividends and compare the The stocks return, just the stock.

Stock price. Stock price. Total return versus total return. Yep. And it is incredible. Mm-Hmm. in some instances, just how big of a difference it is. And I think maybe while, while you and I talk to each other, the opposite person can pull up some examples. 

Jason Hall: I'll, I'll use my, I'll use, um, MasterCard right now, now.

Yeah, the stock itself. And again, I'm using that late 2006 period. This isn't even since it went public. The stock itself has done incredibly well. It's a 9,680 [00:23:00] percent in total returns, which is anybody should sign up for that, you know, and twice on Sundays. It is every day of the week and twice on Sundays.

It is incredible. The, Add in the dividend, that low yield dividend, and you're talking 10,600 percent in returns, and you might say, well, that's not very different. That's you know what it is. Let me tell you how very different it is. It's almost getting two more S& P 500 total returns over the same period.

Over that same period, the S& P total return 530%. So you're gaining another 900 plus percent in total returns just from that little tiny dividend reinvested in increasing your equity investment. And MasterCard. So again, yes, we cherry picked, this is one of the best examples of a dividend growth stock and what it can do.

But it's when you, when you walk past the lower yield stocks to chase yield [00:24:00] usually you walk towards risk instead 

Jeff Santoro: of away 

Jason Hall: from 

Jeff Santoro: it. Right. So let me, I'll give an example from my portfolio. Only because my portfolio is at its oldest point about four years old, right? So it's easy to pull up a stock and say like over the last 20 years, if you had, if you, you know, the dividend, the difference between total return and just the stock return is, is this.

So here's just two examples of my portfolio. They're both real estate investment trusts. They're both REITs. So they have decent dividend yields. They have to pay 90 percent of their taxable income as a dividend. That's why they're in my portfolio. So one is Ryman hospitality properties, which we've talked about on this podcast before the stock has is up 20.

8 percent for me. It's like my position, but if I include the dividends, it's 25. 7. So five extra percentage points of return just from the dividend. A more, a more interesting example, I think, because it turns the position from. a money loser to a money winner is EPR [00:25:00] properties. Again, we mentioned that one earlier in this episode.

My total return on that stock as of right now is just under 0%. It's negative 0. 1 percent as of right now. But with the dividend, it's, it's 7. 7 percent in the green. So 8 percent basically, almost 8 percent swing just because it also pays a dividend. Now, and that's after, that's less than four years.

Cause I know I haven't owned that one quite as long as my portfolio has been in existence. So, you know, I've provided that company doesn't completely fall apart. If I own it for the next 20 years, that's a pretty significant difference. 

Jason Hall: Yeah, absolutely. And, and I'm not going to give any other examples. I don't, I don't think it's necessary.

We've definitely, we've given some really good examples already, but the other part of it too, is as the, like, as the dividend goes up and your yield on cost goes, goes higher. And even when you buy like REITs, for example, because like you said, the thesis, the, the, you know, part of the reason you own them, the majority of the reason you own [00:26:00] them is for that That dividend, they're built to be tax efficient, that the exchange for them paying at least 90 percent of their real estate related earnings.

There's some other, I won't get into all the details there, but of, of, of being a REIT is that they, they pay no federal income tax, right? We'll talk about implications for you as the investor on that a little bit later, but so there needs to the yield will be higher, right? Because that's the majority of what you're going to get.

So as an exchange for that higher yield though, it lowers the bar for what you need to see in stock appreciation, which is over the longterm is generated by increasing earnings per share. Right. So, so kind of in a way, like it's a higher floor, maybe the ceiling's not as high, um, because if you're paying out the majority of your earnings, how are you going to pay for growth?

And generally it's, you're going to issue more stock and you're going to. Issue debt, right? If you're a REIT. [00:27:00] So the dividend needs to be a bigger part of, of the return. 

Jeff Santoro: So it would be very easy if you're listening to this and you were a newer investor or newer to thinking about dividend investing to say to yourself, I'm going to Google what are the best dividend stocks or what are the highest dividend yields right now and just buy those companies.

So I did that while you were talking. I just Googled, um, highest dividend yields and I found a nerd wallet article. And actually the first five stocks on it are not getting, they don't give the names cause I guess they want you to log in or something. But I'm actually glad they didn't cause I don't want to mention these companies cause I don't know anything about them.

I don't want to give anyone any ideas about anything. But here are the yields on the top five that they don't give the names for from 13.77%, 13.5, 13.49, 12.51, 11.53. So why shouldn't someone just do what I did, right? And by those five stocks, because they say to themselves, 14 percent [00:28:00] yield, that's that pays for my, you know, that that's higher than my mortgage.

I it's free money, you know, like the it makes up for the fact that I have this high interest car loan. Like what's the downside of just just looking at yield and making investing decisions? 

Jason Hall: I'll use 3M as an example. 3M has been around for over a century. Um, every single person listening to this podcast has something in their home that was either made by 3M or there's an adhesive that holds it together that was made by 3M or some other industrial product. Part of it that was, uh, that came out of a three in factory. It is an exceptionally important company. And it had paid a dividend for roughly six decades.

I don't and grown like it paid it for more than that, but it had grown it every year for somewhere between five and six decades. So it was on, you know, the dividend aristocrats, the dividend Kings, like it was on all of those lists. And the yield for the better part of a [00:29:00] year was super duper high and a ton of investors were ignoring what the institutional investors were doing and what the large money was doing, which was moving away from it and bought it looking backwards and saying, Oh, it's paid this dividend so long.

It's going to every year. They're never gonna, they're never gonna not do that, right? It's so important. To their investor base they just got their dividend by like 80 percent because the company had kind of turned itself into a mess. They had done a number of acquisitions and they had maybe under invested in R and D. Ended up with some massive litigation risk. Hearing loss for military veterans because of some ear protection forever chemicals, PFAS, right? Tens of billions of dollars in liability because of that. So, the company, the returns were getting worse. And the dividend had become such a large percentage of its cash flows that it [00:30:00] was easy just to justify what it had done for the past five decades, six decades and disregard how much the business had deteriorated and its ability to continue supporting that dividend had, had gotten worse.

So, and I think its yield had gotten up to six or seven percent much less double digit yield. So if, if a great company with a legacy of a 3m can't maintain its dividend, we could do the same thing with Walgreens. Right. And theirs was less about major missteps in a series of more of minor missteps. Plus the headwinds of being in a retail business. Um, same thing. Dividend five decades plus of growth every year gutted the dividend gone through multiple CEOs trying to refine the strategy. Chances are the companies that are paying the highest yield in any given sector. Are not paying a higher yield for a good reason. Sometimes they're misunderstood 95 out of a hundred.

They're not paying it because it's, it's high because of a bad reason. 

Jeff Santoro: [00:31:00] Right? So my like quick filter, if I see a really high yield to say to myself, like, I want to know why it's high before I do anything. But I know that there is a, not a be all end all, but for like a newer listener, who's not going to do an in depth analysis of, You know, three M's business struggles.

And by the way, once they cut the dividend, it's too late, right? You need an indicator earlier than that. So one thing that I've heard people talk about as relates to dividend investing is the payout ratio or the dividend payout ratio, which is simply the percentage of a company's earnings that they pay out in dividends.

So if you saw 

Jason Hall: for share over dividends for share, 

Jeff Santoro: right. So if you saw that over a hundred, That means that they're paying more than their earnings in dividends. And that's a big red flag because that's not sustainable. So talk a little bit more about the payout ratio. Like, is there, I don't know if you ever look at that specifically, or if you just would rather dig in, but like, is there a number you like a percentage you like arrange, you like to see that in?

Cause, cause the one that's too [00:32:00] low might indicate that. They could afford to pay a bigger dividend, right? Like, so how do you think about that? 

Jason Hall: So a couple of different ways. So first of all for most companies, most corporations, the payout ratio is the most useful thing. Again, the earnings based payout ratio.

And I never use it just based on what was it last year. Uh, companies go through different capital cycles. Maybe they take a goodwill write down on something they bought five or 10 years before that undercuts their earnings. Uh, but it's a non cash thing. And maybe it was already clear to the market that that, that was clear.

Going to happen. And anyway, the things there, there are non cash financial things that can affect the payout ratio from one year to the next. So it's, I think it's more important to look at the trends, the broader trends, look at, you know, three to five years. Also it's not the, the earnings payout ratio doesn't work for every industry.

We talked about REITs, for example, uh, REITs, um, one of their biggest expenses is the cost to acquire. Real estate. And when you acquire real estate, when you acquire [00:33:00] any asset, then you depreciate it over time. Depreciation is an expense because you've spent the capital. The capex is not an expense.

It's, it's an expenditure, but it's not an expense. The depreciation of that asset over time is the expense. With the idea that you want to expense it because eventually you're going to have to replace it, right? You buy a copy machine or you build a factory or you put equipment in that factory.

Eventually that equipment has to be replaced. You have to spend more capital and you create more, you know, assets that you'd appreciate over time. 

Jeff Santoro: And to be clear, this is all just how gap accounting works. It's gap accounting. It's just 

Jason Hall: basic accounting. It's to, it's to account for money going in and out and, and future expenses and present expenses.

Uh, your present expenses, uh, often. For depreciation of assets, uh, points towards future expenditures to replace or to improve those assets. 

Jeff Santoro: Yeah, a quick way I like to think about depreciation is just like, and I think it's the easiest example for everyone, is like your car. 

Jason Hall: Yeah. 

Jeff Santoro: Right? Yeah. If you pay $30,000 for a car today, and then you try to sell it next [00:34:00] week, you're not going to get $30,000 for it.

Right. Because it has already depreciated. Or five 

Jason Hall: years or ten years, the value goes down, it depreciates. That's exactly it. Now, and again, for the, the reason it's important for most businesses is because eventually once you've depreciated that asset, in very rare instances, you, you depreciate something that continues to have economic value and maybe you don't have to replace it and you've just got a little bit of maintenance expense.

It's an operating expense that that shows up on your book. And this is where real estate, why real estate is different. Real estate generally is an appreciating asset. You know, it increases, it gains in value over time. So because of that. There's a better metric for REITs, real estate investment trusts and other business, some, some, uh, there are some publicly traded partnerships that also use FFO because the assets they own, um, are real estate or also very, very long live assets as well that can appreciate in value.

That's where we use FFO. So FFO takes earnings per share, and then you add those real estate related depreciation expenses [00:35:00] back into it. So it's a more accurate. measure of the true earnings, uh, for those real estate based businesses. So you can do a payout ratio based on FFO for those businesses. Something else that you can do is you use a cash based, uh, cash payout ratio, which is typically dividends divided into, um, operating cashflow. And that tells you the cash payout ratio. So, now your question is kind of what's a rule of thumb about what makes a dividend safe or sustainable or room for it to grow? Um, the answer is it depends, which I know is incredibly satisfying for everybody to hear.

I think we can move on. That's great. Yeah. Yeah. That's it. That's it. Thanks for listening. Everybody. No, um, it's. And the reason it depends is you have different industries with different capital needs, um, different growth uh, trajectories, um, and different levels of capital efficiency. You'd like, for example, a utility, the payout ratio is going to be higher, you know, maybe in the [00:36:00] 80 percent range because they do pay out most of, you Most of their earnings and but they're not growing at really high rates necessarily, right?

They've a lot of their growth is going to be just increases in in rates, you know They're not expanding their base a ton. Maybe they're expanding it based on population growth So they don't need to retain a ton of that cash Because there's, they're, they're just going to screw it up anyway, because that's what management teams do with excess cash, uh, with capital intensive businesses like this.

The best thing for them to do is return the majority of it back to, uh, back to their investors. But you might have a company like Microsoft or MasterCard that we've talked about that are. Incredibly capital efficiency. They don't efficient. They don't. They're not building distribution centers and buying delivery trucks and hiring hundreds of thousands of people to staff them.

So they don't need to keep anywhere near as much they don't reinvest a lot of that cash back into hard assets. So, [00:37:00] but, but that very big growth. Opportunities. So the smarter thing for those businesses to do is to retain more of the cash to fund their growth initiatives, 

Jeff Santoro: right?

So there's a lot of the power ratio is one thing to look at. I like what you said about maybe if you're able to. Access this information, go back and see what it's been, what the yields been over time. Right. That could give you an indication. Like we used MasterCard as an example, the, you know, it's been a great, successful company growing its dividend, but the yields never got over 1%.

If you all of a sudden saw it jump to three or four, you should probably go see why. Cause there's something fundamentally has shifted with the business. So I know that when I was. My beginning time buying stocks coincided with the end of the 0 percent interest rate era. And dividend stocks were kind of compelling because you couldn't get guaranteed.

I know nothing's guaranteed, but you couldn't get that kind of yield anywhere else, [00:38:00] right? The money in my savings account was getting what 0%. So a stock that had a dividend yield of 3 percent was attractive to me because I figured, well, I'm at least going to get 3 percent in unless they cut it. And if there's any capital appreciation on the stock act.

Oh, you know, on top of that, great. now with treasuries and, and, uh, high yield savings accounts up near 5%, four or 5%. Do you think that that makes investing in dividend stocks any less attractive? 

Jason Hall: No, I, no, I really don't. Because again, you have to think about, you know, the reason for owning stocks versus the reason for owning cash versus the reason for owning bonds.

So, and they are, they are, they serve three different purposes. So I do, with that said, I do think because of the fact that you can own a money market account and get close to 5%, you can have cash in a SoFi high yield account or capital one account and get over 4 percent pretty [00:39:00] easily. Um, it means that you can be more choosy about what you, what you invest in.

You don't have to necessarily maybe be in as big of a rush, uh, to deploy your capital and you can increase, like this is something that I've done and I've talked about it. Certainly the timing hasn't worked out from when I decided to do it to Now, if you look at the stock market's returns, but I made the decision to increase the percentage of cash that I hold in my investing portfolios from around 5% to around 10%.

Just increasing the margin of safety in my optionality. So I think that's something you can do, but again, the reason you own stocks is because they can generate better total returns than an alternative asset. And if you're, if you're buying a stock just because you want to get a four and five percent return, you're, you're doing it wrong, right?

There's, I can't think of a scenario where buying a stock and expecting four to five percent of return and like that's, that's your threshold and you're happy with it is really the [00:40:00] right thing to do. The right move because every stock at some point is gonna fall 20 plus percent, you know It's it's inevitable that it's going to happen and Earning 4 percent a year is just not good enough to offset to me the level of risk of that happening, 

Jeff Santoro: right?

Like you you need the the potential of higher than that to offset the risk of it dropping 20%. 

Jason Hall: Yeah 

Jeff Santoro: Hey everybody, we'll be right back, but first, a word from our sponsors. Earlier in the show, you heard us talk about investing platform Public.com. That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave Public five out of five stars for options trading.

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So another, I think, misconception out [00:41:00] there is that only old, boring, stodgy companies in the last third of their life as a business pay dividends. And that's an interesting conception or misconception that's out there, especially considering some really big dynamic growth companies do pay dividends.

And some big, growthy, huge companies have just started paying dividends. So like, for example both Nvidia and Apple have been paying a very modest, but growing dividend for a while now. And just recently Meta and Google instituted their first dividends. So then I've also heard people say that dividends can actually be really great.

I think it was Jason Moser who we just had on recently. I heard him say once that dividends can be something, it can like help management teams get religion on being more, better stewards of, of the, of the businesses cash. So let's go there a little bit. Like what signal does it send [00:42:00] about the, about the business, whether they do pay a dividend, whether they always increase it or whether they initiate one for the first time, like we saw recently with Google and meta.

Jason Hall: So the first thing is it's a, it's a clear signal of financial strength. When a company, Institutes of dividend policy begins paying it out because the business is saying that we are, we are, we have reached a point where we're generating excess cashflow that we can continue to invest in our business and our growth initiatives, acquisitions, all of the things that we've been doing.

And we've got so much money coming in. We can just start sending some of it back to, to our shareholders. Now, I think it also does indicate a little bit of, um, maybe a certain amount of maturity for the business, um, when it gets to that point. But it also doesn't mean the growth is over, right? I think that's really important to remember, especially if you think about a company like like Meta and Microsoft, if you think about Apple, how much has it continued to grow since it first instituted a dividend?

Um, I guess it's over a decade now at this point, it's been a [00:43:00] while. It's been a 

Jeff Santoro: while. Yeah. 

Jason Hall: So that's important. It's like, to me, it's definitely a positive signal about financial strength. And again, I'm speaking broadly. It's not always the case. They're always outliers that, you know, they're signaling something that's maybe it's counterintuitive to it.

But that's the biggest thing is it tells me that they have a dominant position, enough markets Dominance strength and their cashflow strength and their balance sheet to be able to do it. Um, it also says that, that we're, we're trying to be disciplined about capital as well, because owners of those companies have been perfectly happy for many, many years to not get dividends.

 I think it also says that Mark Zuckerberg wanted a bigger paycheck without having to sell any of his equity. Yeah, that is 

Jeff Santoro: a, that is an undercover aspect of these big tech companies initiating dividends, which is that they're. They're founders and or executives that own big chunks of the company are now getting a lot more money.

Jason Hall: Yeah, Zuckerberg from Individually gets [00:44:00] the better part of a billion dollars a year in dividends now. 

Jeff Santoro: Yeah, well, is it $700 million or something like that? 

Jason Hall: Yeah, $700 million a year. So, you know not not not bad work if you can get it. 

Jeff Santoro: I would be happy with like only 600 million in yearly dividend payments.

Like I would do. You're hired. Yeah. I would just take six. 

Jason Hall: You're hired. 

Jeff Santoro: All right. So I, I do want to pivot to how we think about dividends in our individual portfolios. Cause I know my thinking of it has changed once and might be changing again. Um, and I want to hear what you have to say, but I have one more question I think is worth discussing, which is how are dividends taxed?

So obviously if you have them in a tax sheltered account, like an IRA, that's a different situation, but. I have some in my retirement account and I have some in my brokerage. So what do people need to know about how dividends are treated when it comes to taxes? 

Jason Hall: This is where it can get complicated. Um, well, keep it simple.

Well, no, I'm, I'm going to simplify it as much as I can. With the nuance that people at different situations might need to do some additional [00:45:00] research. So by and large, um, you can own most Stocks that pay dividends in your retirement accounts with no, no tax implications. Real estate investment trusts, for example, it's certainly the most tax efficient way to own them is in your retirement accounts.

You can, Shield all of the taxes owed on all of your C corps in your, in your brokerage, in your retirement accounts we'll talk about what happens when you sell in a second because that's where things start to get a little complex now, not all publicly traded partnerships and master limited partnerships, which you often see in the energy industry.

Are, are, they can get really complicated to own in your retirement accounts because of something called UBTI, which stands for unrelated business taxable income, where if they actually earn generate a certain amount of income that then they distribute to the [00:46:00] unit holders. Unit holder is a shareholder of an MLP. If you, in the aggregate, in the total, you generate, I think it's more than $1,000 of UBTI. Um, you actually might have to pay taxes on on that earnings in your retirement accounts. So if you've got a Roth and a rollover IRA, um, and, uh, another, Like since you've got these three separate retirement accounts and generates a couple thousand dollars of UBTI from your, uh, midstream high yield stocks or MLPs that you own, you might actually have to pay taxes.

So with MLPs, you have to be careful. It's actually one of the things I like about the Brookfield entities is there's It's not a zero probability, but it's very damn close to a zero probability risk of UBTI resulting in a tax bill inside your retirement account. So that's [00:47:00] like, by and large, that's how you think about that.

Now, if you own them in your brokerage account, like your Coca Cola dividend or your big dividend aristocrat, that's been paying that quarterly dividend and growing it all the time, MasterCard's dividend, those are generally what's called a qualified dividend. Which means that it's going to qualify for to be taxed at a very low rate of like 15%, uh, which is the capital gains rate, long term capital gains rate for most people, which is what qualified dividends are generally qualified for a lot of people may not pay any.

Income tax on their dividends. If their total dividends income is below certain thresholds even in your taxable account. So they can be very, very, um, tax efficient. Now, REIT dividends do not, are not qualified dividends. Again, there's no taxable income.

They're untaxed as businesses, no income tax that they pay. So because they're that pass through entity, you don't get [00:48:00] to take the dividend and get the benefits, the tax benefits that you do with the other corporations, right? That's why 

Jeff Santoro: those particularly are better to be held in a tax deferred account.

Jason Hall: Ideally, yeah. Now, here's the other thing. I think broadly, unless you're reinvesting the dividends, If you have the optionality to, to own those corporations in a taxable brokerage versus your retirement account, you're probably better off doing that, particularly if you're taking distributions. And the reason why is again, if they're qualified dividends and you own them in a taxable account, you may not have to pay income tax on a very large portion of those, of those dividends at all.

And if you do. It's probably 15%. If you're taking distributions out of your retirement account, and again, Roths are always 0%, right? So they're the absolutely most tax efficient way to own everything. With the exception of UBTI, I'm [00:49:00] not going to get any more about that, but your, but distributions out of your, your rollover IRA or your 401k are, are at your marginal tax rate.

That's your regular income tax rate, right? 

Jeff Santoro: Yeah. So I think like when it comes, what I would say, like when it comes to like those specialty situations, like, If you're taking distributions to things like that, like obviously talk to someone who's not us just to make sure that you're understanding all that.

But like, I think the general idea is like, I, I'm glad you mentioned REITs cause that's one piece that I did know. Like they're, they're just generally, again, speaking in generalities, better to be kept in tax advantage account. 

Jason Hall: well, and I guess the way I think about it is that there's the benefit, the tax with your 401k and you know, the rollover IRAs and that kind of stuff.

Yeah. There's, there's always a trade off, right? And, and you're, you're trading off not paying any income tax on your contributions or your growth. And then you pay the taxes when you're taking the distributions and the, you may lose some of the, the benefits of the [00:50:00] lower or zero taxes to grow it may result actually in higher taxes when you're at the point of taking distributions and the efficiency may have been better off Um, in a taxable brokerage.

So, but I think if you, it's too, it's too easy to work too hard to try to make it perfect. So, so don't get too caught up in it and yeah, talk to your tax pro and they can help you kind of be mindful about 

Jeff Santoro: it. All right. So let's pivot to what we each do currently in the way we think about dividend investing.

I'll start. I don't think about it much. I. I think it's because like, I, I am still far enough away from retirement and individual stocks are still such a small percentage of my overall invested wealth that I don't feel like I need to spend an incredible amount of time thinking about how many dividend paying stocks I do or don't have.

That said, I do lately, I have been thinking more about it because the idea of, you know, generating a substantial amount of income from dividends when I do [00:51:00] retire in 20 years or whatever is it is appealing to me? Um, but again, like so much of my, you know, retirement income is going to come from retirement accounts that aren't in individual stocks.

I don't know if I really need to spend that much time. Now I will say this back in again, when I was new and trying out all different ways of investing and. Interest rates were near zero. You and I both had a similar, well, we were doing something similar based on the conversation we had with each other, which was specifically buying dividend stocks.

We thought could generate a total return that was higher than our mortgage interest rates as a way of, as an alternative to paying down the mortgage more quickly. Cause we were both lucky in when we, Had moved and or bought our houses and or refinanced that we have low rates, which is particularly helpful.

Now that rates are a lot higher. And getting over that hurdle didn't seem too difficult when you look at, you know, high quality companies that pay a good dividend. [00:52:00] I got away from that strategy personally, because I https: otter. ai Because I was buying weekly at the time and I found myself making investments into the stocks that paid dividends in that sort of portion of my portfolio when I had a better idea of In the other part of my portfolio, if that makes sense.

No, so I got away from that. I still own a lot of those companies I bought for that purpose and they're still paying dividends. And two of them I mentioned earlier when we were talking about the difference between stock stock appreciation and total return. So that's, I don't, to summarize, I don't give too much thought of it.

To thought to it right now. Although I have been thinking about maybe I do wanna focus on that a little bit more then in the coming years, let's just say, uh, for the future. But I'm curious if you have like a, any strategy or or way of thinking 

Jason Hall: about it for yours. I do, and I've talked about this multiple times over the past few years, but it's actually been a long time since we really have one of these more portfolio.

Level [00:53:00] strategy sort of conversations. Um, and I, my portfolio I take a barbell approach. So one end of the barbell is, and it's not balanced where it's exactly 50 50, but it's just thinking about two very different ends to the, to the barbell. At one end is focused on more growth, you know, businesses, disruptors, trying to find Companies that are going to be like a CrowdStrike, I think is a good example.

Uh, we could also even include like Trex in that where they're like a category creator those sorts of businesses where right now the best thing that they can do with every dollar they bring in is reinvested back in the business to grow, right? Take more market share, grow revenues, improve their operations.

And then over time, maybe turn into like, a MasterCard or an Apple or, um, You know, one of those companies that down the road, like once they get to a certain level of scale and cash flow, then they start giving some of that back to shareholders. The other end is a dividend focused part of the portfolio.

And this is a couple of things. Number [00:54:00] one, um, just from an intellectual perspective, the longterm returns of, of companies that pay and grow dividend over the longterm is market beating. Right. So, uh, it's, it's a, it's a great way to generate returns also kind of offset some of the risk of, because I do operate a little bit more like kind of almost like venture capital with, uh, the growth side of my portfolio.

I, I've taken a lot more risk. I invest in companies that are, can be more binary that, that may or may not turn into anything at all. Right. And, uh, you know, I can lose 97, 98%, uh, with some of these, but then if you have, you know, one that generates 500 percent returns or, you know, 10X or something like that, you know, it more than makes up for a ton of losers and still generates strong wealth.

Um, I want a little bit higher floor with the dividend paying companies, right? So it's stability. It's ballast in my portfolio. Right. Which I think is really useful. Um, and I tend to take larger, larger positions in those companies because they are [00:55:00] stable and I'm not looking at, you know, small bets.

And then the company's demonstrating that they're earning more of my capital by doing well, and then I buy more of them right over time as I do with kind of the growth stocks out of my portfolio. Um, just kind of a number to put out there to kind of contextualize it. I'm in a little more than 90 stocks total.

And in that, uh, mix about 25. Um, a little more than 25 or dividend stocks in terms of percentage of my portfolio, so that's, you know, call it a little more than a quarter of my portfolio. But in terms of the value of my portfolio it's about 37, 38 percent of my portfolio's value. Um, so again, I'm taking bigger bets because there's are safer businesses, um, that can provide ballast.

And if I have a lot of those kind of VC higher risk growth stocks that don't. Pan out and drag down the returns of my portfolio. Then, then I'm going to get some uplift from, from the dividend stocks at home. 

Jeff Santoro: Yeah. It's interesting. I don't [00:56:00] know. I don't have the time right now to figure out like the percentage of my portfolio that in terms of like, the total value of it that are dividend stocks, but just numbers wise, about 30 36 percent of the stocks I own are dividend payers.

And that's, most of that is from that now abandoned strategy of trying to get over the hurdle rate of my mortgage. Right. And, um, But not all. I mean, you know, I, I do have, like I mentioned earlier, I have some of the, you know, the tech companies that pay very, very tiny dividends like Nvidia and Apple in my portfolio.

All right, so just to wrap up, I have one, one, one of the things you and I have talked to each other about As it pertains to dividends is, and I forget, I think you said it to me, but I think we've both heard other people say it, which is sometimes your biggest dividend payer 20 years from now will be a company you own right now that doesn't pay a dividend.

Um, you know, case in point, if you had owned Apple since the eighties and then it started paying a dividend, what, 10 years ago, [00:57:00] 15 years ago, You know, obviously you bought it when it wasn't paying a dividend. So what's the stock in your portfolio currently that you absolutely expect will pay a dividend at some point?

Jason Hall: So the first, the first two that come to mind, are Axos Financial, the online bank and financial services company, and Trex which I, which I mentioned earlier. Again, right, right now they're, they're, it makes the most sense for them to continue to reinvest the money back into the business and continue to expand and grow.

But at some point, you know, hopefully 10 years from now, not five years from now. They've grown to a point where this is the best thing they can do with their capital. One, one recently that's done that for me is Meritage Homes. They, they implemented a dividend policy, not too recently. Actually a little sooner than I expected, but that's what you want to see.

You want to see because when, when a great company that has done really well for you for a long time gets to that point, it means everything's worked. Like everything's works like, like love it. When a plan comes [00:58:00] together. What about you, Jeff? So the one that 

Jeff Santoro: I think is probably most likely to, and I maybe not, I maybe wouldn't have said this before Meta and Google started to pay theirs, but, or Alphabet, I should say.

But Amazon does not pay a dividend. And that's interesting to me. I feel like I feel like they're going to be around for a while chance. Yeah. There's a chance. So like, I, I would say, you know, if I'm looking at like retired me and I still own the Amazon stock, I'm going to expect that they're paying a dividend.

The one I think is fascinating and we both own it is, will Berkshire Hathaway ever pay a dividend? It seems pretty clear that for as long as Warren Buffett is in charge of the company, the answer is no. Yeah. Yeah. But a lot of smart people. Who I admire are of the opinion that, you know, at some point he will obviously no longer run the company.

And they, a lot of people feel like that will be the time when they do pay a dividend, but who knows, maybe the culture is so ingrained in the, in the future leadership [00:59:00] that they won't. But just, I mean, that, well, 

Jason Hall: and everything we've heard about Ted and Todd they're, they're so far their execution is they've actually been better capital allocators, better stock pickers than Warren has.

And they're in their time with, and we're, so we're over a decade with both of them at this point. So not so fast, my friend, 

Jeff Santoro: I guess we'll find out. 

Jason Hall: We'll see. We'll see.

Jeff Santoro: All right. I think we're near the end here, but one more thing we didn't talk about that I want to see if you have any thoughts on in that is what about bonds?

Jason Hall: Yeah. That is a great question and it is important question for dividend stock investors to consider. And it's so big. That it's going to be on a future episode, Jeff. 

Jeff Santoro: Yeah. Well, good. Then I'm glad I forgot to ask it till the end, because that can be our, that can be our teaser as we wrap things up here.

Jason Hall: Yeah, no, we'll definitely do a future show, um, where we talk more about bonds because it, uh, it definitely deserves its own category and, um, our investors, they deserve that Jeff. All right. We did it [01:00:00] though, right? We did it. 

Jeff Santoro: We did it.

Jason Hall: Words about dividend stocks. They are things. Okay, friends. As always, just a reminder. Jeff and I love to give our opinions and answer, give our answers about these hard investing questions. Where do dividend stocks fit in our universe? It is up to you to figure that out for yourself. You can do it. I believe in you. 

Okay, Jeff. We'll see you next time.

Jeff Santoro: See you next time.