The Jay Kim Show #153: Ben Reynolds (transcript)
Jay: How you doing? Very happy to have you. I read a lot of your work online and your blog, and I like the way that you invest and what you write about investing with regards to dividends. So we’re very happy to have you on.
Ben: Excellent. Thank you, Jay. I’m doing well, and I’m glad to be here.
Jay: Why don’t you give the audience watching a quick introduction of yourself. Who is Ben Reynolds, and what do you do for a living?
Ben: I’m Ben Reynolds. I run Sure Dividend. Sure Dividend is a dividend growth site focused on high quality dividend growth stocks. Specifically, we try to help individual investors build high quality dividend growth portfolios.
Jay: Okay. And have you been doing this for a while now or were you working somewhere else beforehand and just kind of branched off on your own?
Ben: Absolutely. I’ve been running Sure Dividend for a little over three years now. Before that, I had some different jobs in non-financial fields. My finance background really started in college where I got a degree in finance, and that’s where my interest in investing really started.
Jay: So you’ve just been a private investor for a while, and you kind of learned the craft yourself, and you decided that you wanted to start writing about it because you believed very strongly in your methodology.
Ben: Exactly. My methodology has really evolved over time. I’ve been really interested in investing just on a personal level, I guess. I did a tremendous amount of reading. I’ve read a lot of different investing books, and that’s really where it started for me. It started with value investing. I was really interested in value investing and then just different market anomalies that are out there. That’s really where my interest came from. The more I learned about it, I decided I wanted to put my thoughts out there and share them with other people.
Jay: That’s excellent. Do you manage any sort of fund yourself, or is it mostly just your private money that you’re managing now?
Ben: No, I don’t manage a fund or anything.
Jay: So let’s get into it. What you just said, I’ve been an investor for a while myself. I enjoy the craft. And the one thing that I always say, like you mentioned, is there are many ways to make money in the market, but if you’re a first-timer starting off, I do always recommend starting from the value camp because I think that that’s a very good base foundation for investors to just learn the fundamentals and some of the almost pitfalls that a lot of the investors out there in the market fall for.
Maybe you could just talk about your journey as an investor and how that led you down to really focusing on dividend stocks.
Ben: Sure. Like you were talking about, I started out with value investing. I read The Intelligent Investor and books like that. I was like “Wow, this value investing makes sense. You find something that’s worth a dollar, and you buy it for 50 cents. I see how that makes sense.” So that was really the start of my investing journey.
And I read a lot of the academic literature on how effective value investing is. It’s one of the most persistent factors that have outperformed over long periods of time, likely to do so in the future.
I started with value investing, and when I was first starting, I made some really silly mistakes like most people do. If a stock has a price ranks ratio of three, it probably does for a reason. It might not be a good investment.
So I quickly learned a lot more about value investing and the importance of quality in combination with value. My journey as an investor, also I looked at different quantitative strategies, and I was interested in momentum investing for a while, and I was just looking at all the different ways to invest that are out there that have outperformed the market in some way demonstrably. I didn’t set out to become a dividend growth investor, but I felt that dividend growth investing — and I still feel that dividend growth investing — combines value investing because you’re looking for the higher yield, the better. That’s a value characteristic. It combines looking for quality businesses because if you want a company that’s going to pay you rising dividends year after year, that’s got to be a quality business. It combines long-term thinking into your investing because, again, you’re investing for rising dividends over time. It’s not going to happen in three months.
It also facilitates a focus on the underlying business and not “I’m trading shares really quickly, and I’m going to hope to make a quick buck here.” So I think dividend growth investing really focuses the investor on what’s important in investing.
Jay: You bring up a good point, and I think that the psychology of investing is something that most people, when they first start out, you might read about it, but until you experience it for yourself, you never really fully grasp the power that psychology has to an individual when they invest. Like you said, I’ve made in my… I still make mistakes, and I still actively recognize the cognitive biases and flaws. But human emotion is very powerful as well.
One of the things that you just said about taking a long-term approach, I think that is key for any successful investor. There are investors and there are speculators or traders. You hear about people want to start investing right away. They have stumbled upon some cash, or maybe, even worse, they’ve saved it, painstakingly saved up their money, and they’re looking for a quick win in the market. And that almost always leads to disaster, in my opinion.
Like you said, value investing is a very safe way to learn how to invest bottom up, looking at fundamentals, looking at good companies, taking the view that you’re investing in a business, not just trading the shares for a quick buck. There are these investment scenarios where you imagine that if you couldn’t have liquidity… Think of it like a PE investment. If you couldn’t sell your shares, that kind of puts the whole thing into a different perspective. If you had to hold onto their shares for years, then there is no quick buck, so you’re going to be a lot more careful about how you screen your investments.
Let’s talk about high growth dividend investing then. As you went down your path of education, you started value investing. What led you to focusing on high growth dividend stocks particularly?
Ben: It was sitting down and looking at the different market anomalies I could find. We’ve talked about value investing. Another one is looking for low volatility stocks. Again, most low volatility stocks happen to be dividend growth stocks. And then looking for shareholder-friendly companies because stocks that repurchase a lot of their shares also have historically outperformed — and that pay rising dividends. So the companies that have paid rising dividends and repurchase lots of their shares are dividend growth stocks.
What led me to dividend growth investing was looking at a lot of different things that have done well and seeing where does that lead. What type of stocks fit that universe? And they were mostly dividend growth stocks, and that’s really when I got very interested in them.
Jay: It’s quite interesting because when you break down how company management can use their capital or allocate their capital, there is a number of ways. They can pay a dividend. They can buy back shares, like you mentioned, or pay down debt or reinvest in businesses or acquire other businesses, this sort of thing.
A lot of it actually comes down to the confidence you have in the management that they have the shareholders’ best interest in the long run. This is sort of an anomaly in Asia because stocks here don’t necessarily always trade on fundamentals, and we definitely don’t have the transparency that you guys have in the US equity markets, and we certainly don’t have the shareholder friendliness of management. A lot of times a lot of the companies are either state-owned, government-owned or large family-backed companies. And it’s quite strange because they’ll come to market, and they’ll still have this mentality that “Oh, the family still owns the company even though it’s listed on public exchange,” and they don’t really care about the shareholders.
So I do like the model you’re after. Maybe you can just break it down for us. I know that you wrote a pretty good and concise, articulate piece on 8 Rules of Dividend Investing. Is that the framework that you would present to a first-time, high-growth dividend investor?
Ben: That’s definitely the framework that we use at Sure Dividend. The 8 Rules of Dividend Investing are the ways that we make, buy, and sell decisions and also how to allocate a portfolio.
The first five rules are all things we look for in a buy, and there are different categories. We rank our universe of stocks on those categories, and most of the things I’ve mentioned — share repurchases, long history of dividend growth, volatility. But we look at these different factors, and we basically come up with a score for every stock in our universe. And then the highest-ranked stocks are the ones we recommend as buys.
And then we have two sell rules as well. At Sure Dividend, we try to sell as rarely as possible because we’re really trying to hold for the long run. One of our sell rules is to only sell when a stock becomes extremely overvalued. And right now, that’s a price rank ratio of 40. It’s kind of an arbitrary number, but you have to use something arbitrary there. And that really prevents selling in most cases.
And the second reason we sell is if a company cuts or eliminates its dividend, and that’s because if a company is cutting its dividend, it’s probably deteriorating. It can’t pay a dividend anymore, and that’s something that it was probably known for with the companies we’re investing in. So it’s a good time to get out before it’s completely, completely gone.
And then finally, we look at just overall portfolio allocation. You don’t want to have all your eggs in one basket. Don’t put 100% in Apple and then be done. So we make portfolios of around 20 stocks, I think is the sweet spot that I look for — 20-30. And that way you’re still benefiting from each position, but you have a pretty good amount of diversification there.
Jay: Got it. Do you actually run a model portfolio or is it just… I know you have a newsletter and this sort of thing, but do you actually run model portfolios for your subscribers?
Ben: We used to have a model portfolio, and I actually stopped doing it because it was confusing because there was a portfolio building guide in the newsletter. It lays out a very detailed way to build a portfolio. And the reason we do that as opposed to an actual model is because it’s sort of an issue with a model in that since we’re holding for the long run here, say I recommended a stock as a buy two years ago. Right now that stock might not be a buy, and it would be in the model portfolio, but I wouldn’t want someone coming in today to buy that stock. So I prefer to have a guide on how to build a portfolio. And everyone will have a little bit different portfolio depending on when they start. But that way, they’re only buying at what we hope is the right time and not buying into something that’s trading at a reasonable value, and it’s a good hold, but it’s not a screaming buy right now.
Jay: Yeah, I think that’s the other challenge of taking the value approach. The entry prices aren’t always… They’re almost rarely going to be available right at the time when… If you done your work — you’ve screened your stocks and you have looked for underpriced situations — you basically have to hold cash until there is some sort of market dislocation that you can take advantage of to jump in. And I’ve found that, again, it’s difficult. Psychologically it’s difficult, especially in this last bull run that we’ve had. Stocks have been up for eight years in a row. It’s kind of like, the investor psychology is “I’m missing the boat. I can’t just hold cash. I can’t just hold cash. I’ve gotta get involved.” So that’s a very difficult thing for an individual investor to come to grips with.
Back to building a high-growth dividend portfolio.
What’s the easiest way for someone to get started? Let’s say an audience member is like “Okay, I want to put some of these rules into practice.” Give us the 101. How would you walk them through that process?
Ben: First I’d say the ultimate goal we’re trying to do here is build a portfolio that’s going to provide rising passive income over time. That’s what we’re going for. That’s the purpose behind why we’re doing this. So hopefully you’re going to get rising dividend income every year.
How do you do that? You invest in stocks that have historically raised their dividend every year and are very likely to continue to do so.
My favorite quick go-to for that, there is a list of stocks called the Dividend Aristocrats, and they’re all stocks that have increased their dividend payments for at least 25 years in a row. So they’ve proven that over the Great Recession, over all the crazy stuff that has happened in the last 25 years, they’ve increased their dividend every year. So they’re typically really well known blue-chip companies like Coca-Cola, McDonald’s, Walmart, Exxon, Johnson & Johnson, companies like that.
I would recommend starting there and from there, looking for, if you want to do it really quickly, just look for the lowest price-to-earnings ratio Dividend Aristocrat or the highest yield would be a good place to start.x`x`
Jay: You usually back-test 25 years to come up with this universe?
Ben: Well, that particular list is actually maintained by S&P. They track it. So you can look at the performance of what S&P has tracked. It’s actually been fantastic. It’s outperformed the S&P 500. I guess that’s getting a little confusing. It’s outperformed the broad US market by about 2 percentage points a year over the last decade and has done so with lower volatility, which is very uncommon.
Jay: That’s pretty impressive. That’s a good base to get in on. Like you said, I guess you screen for… From that list, I guess you screened for the cheapest. If you really are just itching to get into.
Ben: Yeah.
Jay: I actually like the analogy you used at the very beginning when you just talked about this segment of passive income. I think most investors don’t think of it as passive income. They think of it like active income. Like “I’ve gotta trade. I’ve gotta make money.” That falls in line with the value approach. If you can set up and construct the portfolio in the right now, then, yes, it is a very good source of passive income.
Obviously what you do with that income is up to you, but I imagine you recommend just reinvesting that into those names?
Ben: Yes. There are a lot of people that like dividend reinvestment plans where the dividend is reinvested back into the stock that pays it. I prefer to reinvest dividend into whatever my best idea is at the time. So not dividend reinvesting, but it’s kind of splitting hairs. Either way works well.
But it depends on what phase of your life you’re in. If you’re younger and looking to build your portfolio, you definitely want to reinvest those dividends, but if you’re retired, probably something you’re living on.
Jay: Outside of that universe — and that’s a pretty good sector, a diversified list, outside of that list, what would you recommend for people to start looking for?
Ben: On a broad level, look for businesses, stocks where you understand the business model and that has proven itself over a long time.
Snapchat IPO’d not too long ago. Maybe it will be a great buy and you’ll make a ton of money, but they really haven’t proven that they can last over a long period of time. Where Walmart probably has. So that’s what I’d look for.
Jay: You bring up another good point. And this is something that’s come up somewhat recently. With innovation and technology, a lot of these older businesses are under threat of being disrupted, and a lot of them are actually changing their business models, like we’ve seen the likes of Amazon and these types of companies that have expanded their offerings.
What risks are there that some of these Dividend Aristocrats, this might be the end of them, or they might get phased out, or will they continue to outperform, do you think, in the long run?
Ben: There is always risk in investing, and there are stocks that used to be Dividend Aristocrats and aren’t anymore. I believe Bank of America used to be one, and Chase Bank cut its dividend in the financial crisis. Those are two examples.
But if you look back at the history of the Dividend Aristocrats index, they rarely go out of business, and they rarely cut their dividend. But, of course, there are risks, and you do have to look at that. But a lot of times people will extrapolate. Like Amazon and Walmart is a very interesting example. I was reading about that yesterday.
The story has been that Amazon is going to crush retailers, and we’re only going to shop online, I guess. Amazon, they’re building bookstores now, physical bookstores. They just purchased Whole Foods. Last time I went to Whole Foods, they’re not on the internet. They are, but they’re real stores.
So you’re seeing companies like Amazon go to a brick-and-mortar approach, and then you see Walmart. They acquired Jet, and they’re going to combine. They call it the omnichannel approach.
All businesses have to evolve over time. And you have to look at, well, what’s in the case of Walmart and Amazon? Walmart has, I believe it’s four times the revenue of Amazon, and it makes billions of dollars a year. Amazon struggles to be profitable, and they’re pouring everything back into growth. So there are a lot of arguments to be made there.
The Walmart business model is extremely profitable. Their revenues are growing again in the US, which is something that people didn’t think would happen or were very nervous about, and they’ve adapted just as they’ve adapted over the last… I believe they’ve been around for about 50 years.
So that’s kind of segmenting or going into a slightly different topic.
There is a really interesting thing called the Lindy Effect. It’s a rule of thumb that for non biological things, or basically ideas, businesses, things that don’t degrade over time, the average expected lifetime is twice how long it’s been around. So if a stock has been around 50 years, you’d expect the business to last a total of 100 years. And it’s a shorthand way of saying that things that have proven themselves are more likely to be around in the future than things that haven’t proven themselves, even if they’re young and exciting. And that’s kind of the mental model that I go with a Sure Dividend.
Jay: That’s pretty interesting. You were talking about the rare occasion that some of these Dividend Aristocrat stocks cut their dividends. To you, is that a sell immediately, or is it a watch list, a red flag that you monitor.
Ben: It’s not an immediate sell, but it’s probably going to sell at some point. I look at the reason for the dividend cut. A good example recently, ConocoPhillips, it’s not a Dividend Aristocrat, but it had been over 25 years where it hadn’t cut its dividend, and it cut its dividend, I think, a year or two years ago. And I recommended that it be sold but not until oil prices rebound because the reason it cut its dividend was nothing to do with the business itself. It’s just that oil prices fell a lot lower than anyone expected for a lot longer, and they couldn’t pay their full dividend.
So in that case, you can probably be comfortable holding it until those oil prices rebound.
Jay: That’s interesting too. On that same topic, I want to talk about some of the red flags that we can look out for when we’re screening for these high-growth dividend stocks. Obviously, if a company is paying too high of a dividend that is not sustainable, that is kind of a red flag because you know it could be a one-hit-wonder or just a one-off. What are some other red flags or pitfalls that dividend investors encounter that you can talk about?
Ben: The quickest way to tell if a dividend is safe or not — and there is a lot more to it than this — but look at the payout ratio, which is just the dividend divided by earnings. If the stock has a payout ratio of 25% and it’s only paying one dollar out of every four dollars of earnings of dividends, so even if earnings fell 50%, the company wouldn’t even worry about paying its dividend. It would be fine.
So a low payout ratio, there is going to be a lot of safety there.
Something to look out for is a high payout ratio. A payout ratio of 100% means the dividend isn’t sustained by earnings, so something has got to change. The company needs to make more money, or it’s going to cut its dividend at some point. It’s not going to just borrow money indefinitely to pay its dividend.
So a high payout ratio is certainly something to look out for.
Jay: What is the threshold that you usually use as a benchmark?
Ben: I don’t have a specific threshold because it does depend on the industry. Some examples are if you look at Phillip Morris or Altria, they have very high payout ratios — 80-90% — but their earnings are unbelievable stable because their customer base is pretty stable. So they can maintain that, and they have for a long time.
But if you saw an oil and gas company, or an oil exploration company that had a 90% payout ratio, when oil was really high, you’re probably going to see a dividend cut.
Jay: Yeah. It goes back to the long-term mentality and the need to actually be following these companies actively and watching the history of it, studying it, and not just chasing that dividend yield as a one-off, which a lot of investors end up doing. They’ll just rotate out of underperforming names and just chase yield without even looking at the fundamentals or maybe even the history as to why the payout ratio was so high. It could have been — I don’t know — a one-off corporate action that gave them a higher payout for that year or that quarter that was not sustainable and not replicable in the future. So, again, long-term investing, that mindset and doing your work and just being aware of… Knowing these companies. It just comes down to you can’t come into the markets and try to trade and try to make a quick win. I think that’s sort of the underlying theme.
As far as — we talked about this a little bit — diversification. Is there any sector preferences? On the institutional side, a lot of fund managers have their different investing styles or mandates or sector specializations. How do you break down the investing universe?
Ben: I look at sectors, but I’m a bottom-up investor. So at the end of the day, I look for whatever looks like the best individual stock rather than what sector it’s in. And then you try to have some diversification amongst sectors. You don’t want a portfolio that’s just very, very heavily into one sector, but it doesn’t bother me to go well overweight any one sector.
What’s interesting is, going back to the Dividend Aristocrats, there are only 51 Dividend Aristocrats, but that index is heavily overweight at consumer defensive stocks and healthcare stocks. So there are sectors that have outperformed other sectors over long periods of time, and those are the consumer staples/consumer defensive and the healthcare sectors. To me, that’s very interesting. And over time, I think you’ll see a higher concentration of stocks from those sectors if you’re looking for really stable dividend growth stocks.
Jay: Speaking of diversification, a topic that’s quite popular amongst investors is asset allocation across asset classes. Do you look at anything outside of equities as for your portfolio allocation?
Ben: I personally don’t. It absolutely depends on your risk tolerances. Just broadly speaking, equities have outperformed other asset classes over the long run. But, of course, you can really reduce your volatility by investing in other asset classes, but for me, I focus on equities. So that’s really where I put my focus.
Jay: Again, I think another tenant of value investing is trying to… It’s more of a benefit I would think. You’re able to filter out a lot of the noise that comes from macro and geopolitical events and this sort of thing. We just talked about earlier how the markets have been on this eight-year bull run. A lot of people are very wary about where we’re sitting right now, especially in the US equity markets. With our new administration, obviously, and there is a lot of macro data points and headwinds coming up. From a value/high dividend investor standpoint, do you even care? Is it something where you’re kind of like… Obviously, for value investors, you get happy when there is market dislocation because that is an entry point. It gives you an opportunity. But what’s your personal style when you’re hearing news flow? This sort of stuff is funny because you can’t ignore it as an investor, but at the same time, it’s how you manage it that will affect your portfolio.
Ben: Absolutely. I try not to pay attention to too many of the news stories or financial news in general other than whatever stock I’m researching. I like to know the opinion on it.
But the market is incredibly overvalued, in my opinion, the US market. The average price to earnings ratio of the S&P 500 is like 15.6 or 15.7, and it’s at 24 right now. So we’re way, way beyond what’s normal.
Part of that is that interest rates are so low, but now interest rates are starting to rise. I can’t see someone who is buying a broad US index right now getting that 9% a year that some studies cite over the next several years. I can’t see how that’s possible with markets valued the way they are.
Like you said, we’ve been in the bull market since… It’s gone basically straight up since March of 2009, so it’s been a long time since really anything has happened negatively. And it really does make finding companies that are just trading close to their historical average valuation difficult, let alone undervalued.
The Dividend Aristocrats or dividend growth stocks in general, there are very few names that I’m comfortable with right now. They’re still out there, but it’s not like you can just go and buy, “I’ll pick 10 stocks at random, and we’ll probably be doing pretty well here.” It’s more difficult now than at any point I can remember.
Jay: Absolutely. A lot of investors are nervous and trying to figure out what could actually bring this market down. It’s very interesting times. We’re sitting at the front seat, at the forefront of this.
What are a couple of ideas or names or sectors that you might think there is still some room for growth or potential for investment at this point where we’re sitting right now?
Ben: The oil, energy industry. There is still some value to be found there just because oil prices are pretty low with the stronger names there that are able to withstand it. And then I like to look for really strong businesses that have been around a long time, how they have some temporary trouble. And a couple good examples of those are WW Granger. They are, I believe, the global leader in the MRO, maintenance repair industry. They basically distribute parts. Their stock has declined from, I think, around $220 or $240 a share. They’ve gone down like 30-40%. They are still very profitable. They just haven’t really been growing. They’ve slightly declined.
The reason is because, if you look behind why this happened, their margins were too high. They got too greedy, and they had to cut their margins a little bit to remain competitive, but they still have solid, long-term growth prospects. So that’s an example of a company that the stock is really beaten down right now. It looks like a good value, and I think five or ten years from now, it will be worth a lot more than it is now. And it’s a Dividend Aristocrat as well. So it’s raised its dividends for… I can’t remember off the top of my head — but well over 25 years.
So WW Granger is one of my favorites right now. I like Target a lot too. Target’s another large US retailer. It’s a Dividend Aristocrat that’s really beaten down alpha fears of Amazon and if it can compete. It’s growing its ecommerce at about 30% a year, so it has a real fast growth there. They’re redoing their stores, and it’s still, again, extremely profitable.
What I look for is a company that’s returning a lot of money to shareholders, it’s extremely profitable, and something has happened to push that price down. And Target and WW Granger are two examples of that.
Jay: Awesome. Thanks for sharing those with the audience. Cool, man. I appreciate your thoughts on dividend investing. I think it’s very insightful.
Let’s talk about your site for a minute, Sure Dividend. You said you’ve been up and running for around three years. Is that right? I know you write quite frequently on the site. There is a lot of free articles that you put out. And there is some more detailed stuff that you can pay for, right? What offerings do you have that could help investors or audience members that want to get involved in dividend investing?
Ben: The site is Sure Dividend. We do have a tremendous amount of free content on there. Almost everything you see on there is free. We do several articles a week, typically writing up a high quality dividend stock with those articles or covering some aspect of dividend growth investing. So it’s a good resource to learn more about it and learn the reasons behind things and how to do it yourself.
And then the paid products we offer, we have the Sure Dividend newsletter which looks for the high quality dividend growth stocks, which is what we’ve been talking about. And then we have the Sure Retirement Newsletter. I created that newsletter because so many readers were saying, “I like these dividend growth stocks, but I need high-yields now because I’m in retirement, and I’m not looking to grow my dividends over 20 years. I just want to high-yield now.”
And the Sure Retirement newsletter looks for stocks with 5%+ yields that are also expected to grow over time. So it’s a different universe of stocks.
Jay: That’s awesome. I really like your site, by the way, because it’s really clean. I don’t know if that was intentional, but it’s very easy to read, unlike probably 99% of the financial publication sites out there. It’s very pleasing to read your site, and you’re very concise and articulate with how you write. So I enjoy reading it.
Ben, it’s been a pleasure. Thank you so much for your time, and thanks for sharing your insights and thoughts on dividend investing. Where is the best place that our audience members can find you, follow you, or connect with you if they want to learn more about dividend investing?
Ben: Sure, I’m on Twitter. I’m @SureDividend. SureDividend.com is my website. If you download a list there or opt to receive our updates, I’m in contact with a lot of my readers personally. So if you want to email me and ask me a question, I do a lot of that every day. That’s the best way to reach me, really, is email.
Jay: Thanks for opening up and offering that. We appreciate it. Appreciate your time and all the best, man.
Ben: Thank you. Thanks for the opportunity.
Jay: Alright. Take care.