Unlocking dividend growth with The Dividend Kings

0:00Thank you.

0:30Scott Kaufman:Softly, and that continues from your last outfit. So for those following along, you're still writing on Seeking Alpha, Undertreading Softly, but now you are with Dividend Kings. Do you want to talk for a second to our audience, to listeners about the specifics that you're now focused on in the dividend world? Sure. So we did the transition from what I was doing before with High Dividend Opportunities, working with Rita Mora and the high income, high focused, high yield side of things. I made the opportunity to switch over to Dividend Kings. Adam Gayless, known as Dividend Sensei, was the prior author there.

1:06He decided he wanted to explore other opportunities. And so the opportunity for my wife and I came up for us to actually take over full ownership of the Dividend Kings platform. And so we actually own, operate, and run Dividend Kings now. We still have Cody Kester and Justin Law with us who have been longtime contributors and annualists over at Dividend Kings. And we really focus on dividend growth investing more so than specifically high yield. And I'll actually touch on that in just a moment. But a little bit about myself offhand here is that I have been writing on Seeking Alpha for almost a decade now, just about eight years under the moniker of treading softly, working with different investment groups.

1:53I've actually worked with three over the whole time that I have been on the Seeking Alpha platform. And so it's been a lot of fun just to see different angles and different ways that people operate and run their platforms. My specific style of investing focuses heavily on value investing. I don't want to buy something that is overvalued as well as dividend investing. So if it doesn't pay a dividend and it's overvalued, it's really not in my sphere of focus or interest overall. As far as Dividend Kings itself as an investment group, we focus on some core principles as a group as a whole. The first one is that we're a long-term focused investing group, which means that we don't invest for short-term picks.

2:36We're not a weekly or a monthly trading service. When we buy something, we want to hold it for at least 12 months, if not longer. The goal there is to maximize the returns that we can get out of our investments and see that value really expand over time. The other side of things here, another one, is that we're very risk management focused. We wanted to maximize our upsides and minimize our downside. Preservation of capital is very important. If you're investing for a decade, 15 years, 20 years, you don't want to see your capital go down in the pursuit of dividend yield coming up. and so we safeguard that.

3:14We focus heavily on doing data-driven analysis which helps protect our capital. We use valuations as far as chowder numbers and PE ratios and payout ratios and we use a lot of that to provide really bite-sized pieces of information for an investor. Any research we provide, I like to call it a cup of coffee length where you can sit down with a warm cup of coffee, read the article, enjoy it, understand it and not feel like you're reading a novel. And so we do this through a educational focus. We're trying to develop and grow all of our readers, all of our members. We provide them the tools that they can then go and do research on their own.

3:55We have quite a few very powerful tools within Dividend Kings that a number of our subscribers specifically love and stay for over the longterm. And we just want to educate and be as transparent as possible.

4:05Scott Kaufman:What are some of those tools that you mentioned that subscribers really like? Or is that something that you can't talk about? So yeah, we can definitely talk about them. We have one that we call our Zen Research Terminal. And it actually predates me, but we're constantly updating it and refining it. And you can actually see it in some of our public articles. We'll take a screenshot of it sometimes when we're discussing. And it evaluates companies based on what their fair value ratio or value is compared to what their PE and earnings are going to be. talk. It shows payout ratio as far as the dividend.

4:37We have a risk analysis score for every company that's in there. And there's about 400 different companies that you can go in and you can pull up their ticker and you can see quick evaluation tools of what we think of that company and where we think that company is going and how that company is run. And so even if it's not something that's directly in our model portfolio, you have access to this powerful database of information 24-7 at your fingertips.

5:00Scott Kaufman:And given that you're focused on value and long-term and the dividend side of things, what would you say are the metrics that you most use or you're most focused on when it comes to dividend investing? Yeah, that's a great question. We actually just gave an educational article to our subscriber base last weekend discussing the three most in portrait metrics that we think of when we are doing dividend investing and research. The first one that we gave out was a comparison to historical normal P.E. ratio. So we will look at the P.E. ratio of a company over the last 10 years, and that really creates a strong pulling or a pulling force up or dragging force down on a company.

5:47If a company is trading well above that 10-year P.E. ratio, we'll see that it often gets yanked back down towards it. When it's trading below that, we'll see that often gets pulled upwards towards that P-E ratio over time. And so when we're looking at an investment, before we're deciding if the yield is attractive or if the dividend growth is attractive, we will look very specifically at that P-E ratio as a good first level of evaluation. What is trading for now versus what it's historically been valued for. The next step we'll look at is the ability for it to pay its dividend. I'm really interested and always have been interested in a cash flow first type perspective.

6:28I don't like companies that are selling pieces of themselves to create a dividend that they pay you. Because you can only trim so much fat off a stake. And so if a company is forced to use debt or to sell assets to pay you, that's not going to be long term sustainable. So we look for a solid payout ratio, a good value. And then last of all, we'll use a chowder number, which is a combination of the current yield and the five-year compounded annual growth rate dividend growth of a company. And that's a good kind of final tool that if this is not having an attractive chowder number, it doesn't make past that final yes or no go.

7:06Scott Kaufman:And are you getting into and out of stocks? When do you get into and out of them? How many names are in a portfolio? Do you work off a model portfolio? Are you personally invested? How exactly does that all line up? We do have a model portfolio in our investing group that it makes it easy. If you want to match our returns that our portfolio is generating or that we're quoting for our investing group, we have a model portfolio of hand-selected companies. I'm personally invested in every single one of the companies that are inside of our model portfolio because I want to eat my own cooking. I'm not going to point at a company and say it's great and then put it in my model portfolio if I don't believe in it enough to put my own money into it.

7:50And so our model portfolio is targeting a 42 number of holdings ratio. It can be a little more, it can be less at times. Right now, we're about the halfway point where we have put in 21 different picks into our model portfolio right now as it continues to grow. I'm not looking to rush into too many picks too quickly because I'm very strict about when I think that they're attractive and adding them at that time. And so we're right at that 20 pick mark. We're working our way to 42 picks at the moment. And this is a combination of not just common equity, but also preferred securities and baby bonds.

8:25Our model portfolio focuses on a, on average across the entire portfolio of a 6 % to 8 % yield. We have some common equity picks that are yielding 2%. And then we have some baby bonds that yield close to 9%. And so this allows us to get that combination of a good yield, strong dividend growth, and preserving capital at the same time.

8:46Scott Kaufman:Can we hear about some of the names in particular that you like? Sure. Yeah. And so I want to actually give an example here of a way that we would evaluate almost a sector or a series of companies that look really similar on the surface, but provide a way of how you could kind of filter through them if you'd like. These are three companies that have all arguably have had absolutely terrible years. If we think of Lindell Basil, and then we think of Dow, and we think of Eastman Chemical Company, they're all companies that are in the chemical sector that is currently in a sector-wide downturn. They're very cyclical.

9:22And so we'll see them rise up, their earnings rise up and then fall down kind of as a pattern. And so if we were to look at these three companies offhand, we would almost feel like Dow or Lindell-Basel would be the better option because they're down further and their yields are more attractive. You've got a 6 % or a 12 % yield. The downside here though, right out of the gate as a dividend growth investor, Dow cut its dividend at the beginning of the year. So they would be completely out for me at that point, just as a quick evaluative tool. So then we're left with Eastman or Lindell Basil. And so if we kind of dig deeper into those, we can see this is just pulling up a fast graph chart, which is something that we'll use as a strong evaluative tool across the board for evaluating companies, because it lets us see a level of not only earning growth and development, which is the dark gray section, But we can see along the blue line, which is historical normal PE of what the company's trading for.

10:22And then the yellow line lets us see what the dividend is. And if the dividend is above what they're earning, that yellow line will be above the green section. And so at this point in time, Lindell Johnson or Lindell Basil is well in the throw of things as far as difficulty for earnings. And earnings aren't expected to recover until next year. The dividend isn't expected to be covered until beyond 2027. And so even though offhand, it looks like it might be a better value than Eastman Johnson because it's been down 42 % this year, we can actually see that it's not that attractive overall. That dividend is going to get cut most likely.

11:02So far, management has refused to cut the dividend, but we do expect that it will be cut eventually. When we compare that to Eastman, we can see that Eastman has a much better dividend coverage level. It's also trading very closely to what it should be as far as its value. And so even though both of them are secularly in a period of downturn, we actually can expect that Eastman will provide us with better returns over the long run going forward. And Eastman is actually a company that we do hold in our model portfolio because we do expect that it'll provide us with strong returns going forward.

11:34Scott Kaufman:When you talk about a dividend cut, is it always a thing to be concerned about as an investor when you see a dividend cut? Or for that matter, to your point, when there isn't a dividend cut, but there perhaps should be one, and you see that as a dividend investor, perhaps you're looking at different factors and sussing out the fact that there should be a dividend cut coming. like you mentioned, are those always times to be concerned? And when you see that a dividend cut should be coming, are you ever wrong about that? So there's never like a guarantee when you see a dividend that should be cut that it will be cut.

12:10Some management teams are very persistent as far as holding on to their dividend as long as possible, especially when they have decades or years of dividend growth in the background. They will sometimes be very persistent to hold onto that dividend. But usually that over persistence to do so, unless there's some major turnaround for the company or for the sector, harms shareholders more than it helps them. When a dividend is set to be cut, there's a well-known saying that a dividend cut is never priced in, right? There's always going to be a group of investors who have no idea that that dividend cut is coming.

12:51And when it does cut, they sell. And so a company like LYB that's already down 42 % this year, when they cut their dividend, whether it be this year, next year, or into 2027, it's going to sell off even harder. There can be attractive times to buy a company that sold this dividend after the dividend has been cut, but rarely when a dividend is uncovered and should be cut is it attractive value because there's going to be that sell-off afterwards. Lindell has been so focused on selling assets to fund the dividend that they're struggling to be able to find new assets to create value that will cover the dividend in the future.

13:39And so then you create a cycle of where you have less to cover and it just makes us a cycle of pain for them and for their shareholders.

13:47Scott Kaufman:I'm looking at the dividend grades for LYB right now and seeking alpha and the dividend safety is a B, but the growth is a D minus. Do you use those grades? Do you find them helpful for your investing? So I do find the dividend grades can be helpful when comparing different companies in the same sector. So you can sometimes wonder, you can look at a sector or utility and the company's dividend growth is poor compared to what you might expect other companies to provide. But then when you use those dividend grades, you can at times see that it's actually beating the sector as a whole because maybe your personal expectation of what the dividend growth should be for that sector is outside of what is normal.

14:29And so a lot of times those grades can be helpful when evaluating a sector as a whole and then comparing your individual holding or the company you're looking at versus the sector. And that's the same reason why, you know, chowder numbers can be helpful because of that, adding the yield and the compound annual growth for the five years, it kind of gives you a level playing field where you're kind of not just enamored by yield and you're not just enamored by growth, but you're getting a good combination of both of them together.

14:55Scott Kaufman:Anything to say, anything to add about the notion of baby bonds, the notion of dividend aristocrats in investors' portfolio? Any other context you would provide there? I find baby bonds to be, or even preferred securities, to be a wonderful tool to get the income that you need now, recognizing that they don't grow. And so we use baby bonds and we use preferred securities as a tool to generate a higher yield today, as well as capital preservation, recognizing that those instruments predominantly aren't going to be major total return providers. They're going to provide you with an expected level of income or expected dividend and a relatively flat or slow total return compared to maybe common equity.

15:43But that's what you're trading. You're trading lower risk for overall lower return for a more assured return. And so we really use baby bonds and preferred securities. And what I recommend people use them for is for that income now to create a stable base for your portfolio outside of maybe using traditional bonds that have a lot more loopholes or things you have to jump through regulations and fees and their whole separate exchange. There are a lot more barriers to entry versus maybe a baby bond or preferred security that can provide you many of the same benefits, especially baby bonds, without all of the extra work that a traditional bond would require you to do.

16:26And so when we use them in our portfolio, they're there to help create a higher level of dividends today for retirees especially or for fixed income investors, recognizing that the other half of our portfolio that's focused on dividend growth is going to give you that income that you need tomorrow. And that organic growth, you don't have to reinvest as much in your retirement to be able to enjoy a growing income stream or dividend stream.

16:51Scott Kaufman:And what would you say, is there anything that you've recently gotten out of that you feel like might be instructive for listeners? So with our model portfolio still being relatively new with the changeover from the old leadership to us with Dividend Kings, we have not exited a position as of yet. We have some that we projected a certain amount of total returns from within a 12-month period that are closing in on those numbers. And so we're watching those. And if earnings don't grow as much as expected in the next quarter or two, we may be having to exit them because then they'll become overvalued.

17:26But at this point, we've not exited a position because there hasn't been necessarily a need to or we haven't reached our targets for what we expect them to give.

17:34Scott Kaufman:Is there a typical time frame, how long you're typically in a stock and then get out of it or that it's not like that? It's unique in each situation. So whenever we're buying something, we're looking to hold it for at least a year. When it comes to common equity, we project out what we expect the total returns to be for our position for the next 12 months. And so if we reach that goal and then we look at the next 12 months after that and the total returns aren't meeting what we're desiring, when we're looking at common equity, we want at least double digit total return projection for the next 12 months.

18:10And so if we complete that first 12-month period and the next 12 months aren't expected to provide us what we're looking for, we will exit so we can rotate to another position that will provide us the maximized returns that we're looking for there. With our fixed income side of things, our preferred securities and our baby bonds, we're looking for long-term stability in what they can provide. And so we will buy investments that we think will either be called in the next 12 months, or we will have a much longer holding period for those because their job predominantly is to provide us that recurring dividend yield that can be used either to live off of or reinvest it into the common equity positions going forward.

18:51And so those positions we will hold for a much longer period of time. So we're buying only the most conservative opportunities that are present. We're not looking to buy things that are of higher risk or that are in riskier companies or sectors. We have a lot of banking preferred securities in our model portfolio because they provide that qualified dividend income dividends, as well as strong 6 % to 7 % yields from companies that we're really not going to have to worry about their ability to pay us.

19:23Scott Kaufman:We had David Auerbach on recently from Hoya Capital, and he was talking about REITs and the notion of REITs and interest rates tends to go together and a lot of discussion lately about the interest rate picture. What are your thoughts on REITs these days and how much is the Fed side of thing, the interest rate conversation, how much does that affect your analysis and strategizing? So with REITs as a whole, many of the higher quality REITs do a trade almost as bond alternatives. If we look at like realty income, historically, it trades less on the performance of its portfolio and more on a spread between what its yield is offering versus the 10-year treasury yield.

20:11And so we actually recently covered realty income publicly. And when we chose to value it, we didn't value it based off of their FFO or their AFFO. We actually valued it based off of a spread between the 10-year treasury yield and the yield presented by realty income because we find that to actually be a pretty consistent spread as those 10-year treasury yields move. And so with the higher quality REITs, we can actually see that they do typically trade more on their yield and a yield spread than they do on their own growth. I do find that there is a number of attractive REITs out there, but there's not that many that are readily growing their dividends on a consistent basis that give us a nice attractive chowder number that we're targeting.

21:02Realty income actually kind of falls on the lower side as far as looking for a good dividend growth plus yield number. But its consistency in growing its dividend and its yield right now warranted a good value to be able to purchase it for. When we're looking at companies as far as what's worth holding, the movements by the Fed on interest rates impacts more our preferred securities and our baby bonds than they do our common equity holdings, because all of the common equity holdings we have are not super heavy debt-laden companies that are needing to issue debt to be able to function. They have strong cash flows and they have strong coverage ratios.

21:43We've actually purchased a number of very discounted preferred securities that were issued by banks or other companies during the early 2020 period, 2021, whose coupon yields are in the 4 % to 3 % to 5 % range. And those are going to be more heavily impacted by interest rate cuts. Because as those interest rate cuts happen, the interim trading prices of those are going to climb. And we saw that with one of our preferred security holdings. We own Regions Financial Series E. And the moment that the cut happened, immediately it jumped about one and a half to 2 % as far as its trading price, because then the market was reevaluating how much they want to have as the yield required before they buy it.

22:29And so with interest rate cuts or with Fed price movements or interest rate movements, it more impacts our fixed income side than it does our common equity.

22:38Scott Kaufman:When it comes to the dividend kings, when it comes to your subscribers, I assume you have subscribers of all ages. Are you having to navigate and how do you navigate those different timelines? I mean, I know there's, you know, the traditional methods of when you're younger, you do this. And when you're older, you do this. Is it designated like that? Do you think about it like that? Or what are the different timelines and horizons that you strategize for? As far as dividend investing in retirement or building up towards retirement, for investors who are not in their retirement years yet, they will want more common equity then they'll want a fixed income.

23:16We're building our initial portfolio to predominantly have a spread of picks of a standard 60-40. 60 % focused on common equity, 40 % focused on fixed income. However, younger investors who have more space to grow would potentially want to focus more on the common equity picks we have to see that dividend growth benefit them more over the long run. While investors who are in their retirement and want more conservative nature could benefit more from heavily weighting more towards the fixed income side of our model portfolio. As a whole, though, we find that the 60-40 split does very well regardless of your age because a lot of our common equity picks are growing their dividend quite strongly and quite rapidly.