Considering (or have) an SMSF? Listen to this. April 19, 2024

24:10So there are examples and things that can follow. The other thing is, mate, I would go even further than you in terms of the options. I would effectively just say you pull the money, you run it in a preset range of ETFs run by Vanguard or BlackRock or whoever I don't really care and that's it. And so there are no consultants, there are no advisors, there are no fund managers, there are no fund selectors, there are no whatever. All you literally do is take a dollar from Andrew Page and put it in the future fund which is, or whatever, not the actual future fund itself but the future fund, that's why I do it by the future fund by the way so you keep the cost down.

24:44It'll be the Australian Pension Fund or the Australian Supervision Fund or whatever you call it. and you'd say, take your dollar and it goes, I don't know, 30 % Australian shares, 50 % US shares, 20 % global shares, done. And so you're paying Vanguard's 0.04 % fee for US stocks and you're paying, I don't know, imagine it'd be the largest super fund by miles if it was run by the Australian government so your fees would be half of what Australian supercharges for administration. So you're probably paying$25 a week and 0.04 % of the investment fee Like that's – it could not be – it'd have to be better.

25:21Now, if you let governments – the future fund still has, to my mind, way too many asset consultants and managers and funds and fund-to-funds and all that kind of rubbish. I think the Australian taxpayer is getting diddled by that because orthodox finance says, oh, we need all these things and so we do all those things. But, yeah, I could – well, I would absolutely guarantee, literally guarantee that you could run a government-run one better and cheaper if you did it appropriately and I think that would be an easy thing to do. Mate, we'll come up with five portfolios over a beer one afternoon, right?

25:49Exactly. Not stock-specific selection, but just sort of like, I'm just going to have a selection of buckets, you know, as you say, Australian equities, you know, US equities, emerging market, gold, whatever it's going to be, and you can always argue the toss at the final level of detail, but it's broadly not going to be egregiously, you know. And doesn't need to be changed. That's the other thing. Once it's done, like if you're doing it for long-term investing, which is the point. You don't need to change it based on current market conditions or asset price X or Y. You say, well, this is just what we're doing for the next 45 years.

26:22And that's all you need to do. Anyway. Yeah, yeah. Mate, can we take a slight, not too far, but a slight tangent? I want to talk about life insurance. And don't switch off, people. It's not that bad. SMSFs and life insurance. Yeah, we're hitting the big thing, aren't we? Helping you sleep. We're winning the clickbait race right here. So speaking of, this is all about us really, this podcast. Well, it always is, but even more than normal. I've been toying with cancelling my life insurance. Okay. And it's one of those really weird, weird, weird things. Now, I want to say I'm in a different position to most people.

26:57I've got a decent share portfolio. It's not massive. I'm still working. Don't get me wrong. But at some point, so I want to start from first principles, right? Life insurance I think is really, really, really important. So I want to say I'm going to cancel it. I want to be really responsible and cautious and really clearly outline my thoughts. So let me do that. and then I'll get into my personal situation. Life insurance is spectacularly great if you need to make sure your family will be okay if you're hit by the proverbial bus tomorrow. So if I'm 25 with three kids under three, my partner's not working, she's home looking after the kids and I get hit by a bus, the family's screwed, right?

27:34If I'm 65, the kids are growing up and left home, I have a million dollar superannuation balance and my partner's still working full time, then would a life insurance payout be nice? Of course it would. It's never – well, maybe she might top me for the life insurance, I'm not sure. But assuming not, you know, just that idea of, you know, would it be nice? Yes. Would it justify the premiums I might pay? Well, that gets a bit more difficult because I don't have independence. You know, again, the money is better than no money, but how much do I pay in premiums between now and then to try and, you know, ward off that risk?

28:10At some point, there's a sliding continuum. At some point you say the family is going to be okay. And so now any money I'm paying on life insurance is not necessarily the ROI or the return on investment it looks like. And so I guess I wanted to outline that because I really, really don't want anyone under 30 with kids to cancel. It's such a good point because I don't think you'd ever hear anyone say, you know, you don't need it. But well, you know, if you're at the point where you're not buying green bananas anymore, right? Like you're 98, you're a heavy smoker and you love like base jumping, you know.

28:38You're probably going to give it up. Yeah, I don't know. So I think there's almost certainly, I've done no research, there's almost certainly not enough people under 30 with life insurance and there's probably too many people over 50 with life insurance in my humble opinion for exactly those reasons, right? But so I find myself not over 50 yet but not that far away from it. I find myself having that conversation with myself at the moment of, and by the way, every year your insurance premiums go up because frankly you're more likely to die and that's completely appropriate. If you're 98, your life insurance premium is probably half a million dollars a year if you want to insure yourself for a million bucks because the insurance company's done the work and gone, okay, they're probably not going to make it through this year.

29:14If they do, they're not going to make it through next year. So if I'm going to pay a million bucks out, I'm going to make sure I get a premium that reconciles that. But at some point, as I get older, my insurance premium is going to keep going up. And at some point, my share portfolio gets larger and the family is in better, not the family, but my family, is in better financial straits of time so that if I was to fall off the perch tomorrow, you know we'd have the family have less discretionary income so that's still a thing but how much in insurance policy premium should i pay every month for that privilege versus just putting that money for example aside and putting the shares you know i'm not buying shares with it but i'm you know i'm i'm paying for the future one way or the other yeah i'm investing in the future of my portfolio or i'm investing in the chance that i get hit by a bus now if i don't get hit by the bus then i'm wasting that money i'm just throwing down the drain i never get a return on it.

30:05But eventually, I might, you know, I don't know, I might touch wood to diagnose with cancer tomorrow or, you know, fall down a flood of stairs or, you know, the wife knocks me on. No, I'm kidding. But, you know, those things can happen and it's a real – it messes with your head, mate. There's a phrase for it that I won't use in a PG Radar podcast, but it messes with your head because you think, well, I'm paying a lot of money every month and that's just really annoying and if I had I could invest in shares. But I also think, am I not – I don't necessarily have been jinxed We all kind of do a little bit sometimes, I think.

30:36But, you know, am I being a little bit too reckless saying, hang on, I'm saving X hundred dollars a month, but if I do happen to fall off the perch, I think I've used about every death metaphor so far, fall off the perch. If I do fall off the perch, you know, I'm doing my wife and family out of a six-figure payout. And it's like that's a really difficult thing to try and reconcile. Yeah. Well, I mean, you don't know, right? Exactly. Exactly. If you knew the date of your death, this is a very easy conversation. That's right. Yeah. The way I think about it is I ask myself, what's the worst case scenario?

31:14Yeah. And am I happy with that? So like just take your situation, like you fall off the perch and then get hit by the bus on the way down to mix your metaphors. Exactly. Yeah, nice. And you don't have insurance. So the family misses out on, I don't know, whatever they pay out, 200 grand or something like that. and they would regret not having that money, but are they on the street? No, they're not. Right, right, right. And again, for some people it would be, well, actually, yes, well, I don't know how we would get by. Then it's sort of like I think when that's the situation or wherever that needle is for you on that gauge, then, yeah, because you don't know.

31:52But insurance is always the thing you regret paying until you need it. It's the most expensive thing in the world until it's the cheapest thing in the world. And then it's like, thank goodness we've got this. So, but, but again, it's like, yeah, there's different kinds of disappointment, but the disappointment of, oh geez, you know, Scott's no longer around. Hey! But we don't even have, you know, an extra 200K. Or he's gone around and I guess we're living in mom's garage from now on or something like that. There's, yeah, and there's no, it's like the SMSF thing. It depends is the frustrating answer with here.

32:29yeah I think life insurance is a very quick aside I was chatting about life insurance with someone the other day it's it's the best part of insurance because it is the most predictable yeah that's right so I don't know when you're going to die you don't know when you're going to die but I know with extraordinary precision your odds of dying yes right and the fact that I will at some point yeah right like it's a guarantee the actuarial tables when you're dealing with large numbers are so scarily accurate, right? So the maths behind life insurance is fascinating. It's just guaranteed that they will bring in more than they pay out if they're running it effectively.

33:09And we could have a whole conversation about that. It's very different. It came up because of talking about climate change and this kind of stuff and the impact that we've seen to those that ensure against weather-related damage and stuff. That's different because I don't – I mean, again, I've got models. I've got actuarial sort of – or I've got data that's there based on the past. But if things are indeed changing, then it's sort of like those models will sort of go out the window and the mass breaks down. And maybe I end up having to pay out far more than I've brought in. The reason why – and just to go full circle – the reason why health insurance, life insurance isn't as big a gravy train as it otherwise potentially would be is because it's so competitive at the same time.

33:53So they run on very thin margins. And I'm slowly meandering my way back to Warren Buffett because he hasn't had to mention this podcast here. So it's time that we brought him into the picture. What they do have is a float. And the float is all of the money that they collect that they just hold onto until that needs to be paid out. And they don't just leave it in the vault. They invest that. And if you like Warren Buffett and you can invest that really well, that can be really profitable. In fact, you can afford to run a very, very thin, in very marginally profitable life insurance business or insurance business, as long as you can invest that float to great effect.

34:31And as I say, that's way off topic. Yeah, but I do find the insurance industry fascinating. But I think that they wouldn't want what you're saying to get out too much, that basically at a certain point you don't need this if you're in a certain situation. Well, it's funny too, right? Because to your point, the price is – I mean, and here's the other thing, by the way. Insurers, people reckon they make a squillion dollars. They tend not to because it's a very competitive market. And so if you kind of take all the insurance results over the past, I know, 10 years, I would suspect there's a very modest, incredibly modest margin of maybe a couple of percentage points because they generally – they outcompete each other.

35:13You know, the difference of the way Buffett runs insurance is if it's not going to be profitable, don't ride it. Now, if IAG or QBE or one of the big insurers said, actually, we're going to have our insurance flow fluctuate by 10 % or 20 % or 30 % a year and profits will be all over the place, but trust us, the investors go mad. And so, the institutional imperative that most – and this is, by the way, why Buffett's so great at not only buying businesses but running the ones he runs is he just says, look, I don't want predictable steady earnings. Don't try to make up for things. If pricing is not attractive, don't write the policy.

35:46whereas most insurance companies say, well, it sucks, but I guess we've got to write the policy anyway because we've got to have market share. We've got to keep up. We've got to do this, got to do that. And so the institutional imperative takes over. But the reality is on life insurance, I would suspect they haven't done the numbers by insurance type. But largely, they're kind of, as you said, they know the maths, right? So they just say, well, this may be able to die this year in this age brackets. And so for the average 55-year-old, I've got to collect, you know, premiums of this much if the payouts are that much.

36:13It's just math. It literally is just, The actuaries are really smart, but at the end of the day, it's just still maths. And so that idea of let's just work this out, I think is kind of really important. In that context, that's where it makes – that's why, frankly, I'm having second thoughts about my own policy and not cancelling it is because if it is priced roughly appropriately, then I'm kind of paying exactly what I should be paying based on an eventual payout. kind of almost by definition, right? And as a society, every 55-year-old, 28-year-old, 32-year-old with life insurance is paying the right amount for their cohort because a certain number of them are going to die.

36:50And so as a group, the money that they all pay gets paid out with less a little bit for the insurance company's profit, but not all that much. And so there is, if it's massively mispriced, say, oh, I'm getting screwed on this one. This is not worth money, not worth paying. But I'm kind of like, well, it's kind of statistically probably exactly what I should be paying if I wanted to have that payout. The question for me is not do I want the payout, but is the payout likely to be statistically – sorry, necessary? Yeah. And it's why it's such a mess because you're betting against the insurance company, which generally is not a good idea.

37:23Yeah, yeah. Yeah, so I just put a bow on up by sort of saying I totally think your rationale is right, but I would probably guess that the majority of people keep your life insurance. Yeah, that's not a problem. You know, it's just depending on your age and circumstances, obviously. But it's one of those things, as we said, you don't need it until you need it. And shop around and all that kind of good stuff. But maybe this is something else that should be, you could make the case of a centralised sort of government-run scheme. Well, pooling is by definition exactly that, right? I mean, governments didn't have the facility to do this years ago when the first friendly societies and that kind of stuff started up.

38:00But, I mean, you're right. At some point, it's, you know, that's kind of, yeah, it's the ultimate pooling. There is no need for anything else as long as, again, as long as it's run properly. It's a big as long as. That's where I always hesitate. But, yes, in theory. You know where I'm kind of, well, there used to be. I mean, GIO is Government Insurance Office. They used to have them. They privatise them because people want to sell them off and spend the money on buying elections. But, you know, it makes sense. You talk about Super before and One Fund and many, free marketing i i've always kind of liked people don't like the states right the idea of having states this is a bit of a tangent but not too much um because like this extra lay bureaucracy in australia is really small and whatever and i kind of think my general response is yes but at least the major newspapers and television stations do a decent job of keeping state governments honest if you had only local councils and the federal governments we'd have no oversight of those federal those local councils we don't now like who knows what the local council is doing you assume it's dodgy you imagine having giving them more power and not having a state government I'm like, oh, that's scary.

39:00But the other thing I like about states though, and think about law enforcement or education or that kind of stuff. There is kind of, in Australia at least, eight natural experiments going at any one point in time because we have those eight states trying to do the best for their own citizens. And so you kind of get to see it. And so part of me is like, wouldn't it be easy with one set of road rules? Yeah. One education system? Yeah. One lot of police? Yeah. Because that, you know, why duplicate it? Such a good point you make. But I really like, and it's a bit anti-fragile too because if there's corruption in one, like the Queensland issues years ago, you have someone from some other state come and, you know, kind of solve the problem.

39:35So there is some benefit in that just from a fragility perspective. But even just that eight natural experiments, I'd probably take the old insurance system back. I'd probably say, you know what, I don't want one federal government one, but I'd probably take, I don't know, four or five state or regional. You know, maybe you have to put the smaller states together and maybe there's a VIC-TAS, you know, maybe there's an SAWA Northern Territory, maybe there's a coin in New South Wales or something, but a group of them or a subset of kind of government-owned corporations I think would do probably a much better job, frankly, because they wouldn't have that institutional imperative of right at any price.

40:08You'd end up with hopefully more rational, reasonable pricing. It's a competition of sorts. Yeah, I really like that idea. I think what you're getting at there is obvious is, well, it's in the name, the United States of America, right? Like they play that out to a much bigger degree. There are vast differences. The times that I've been to the US, that's always what struck me. I mean, Australia, I love it. But it's – I don't – I might annoy some people here, but I don't think – I can meet someone from Toowoomba, from Perth, from Adelaide, from Melbourne. Like we're all – we're not that far apart, I would say.

40:45You know, there's an Australian-ness that is – anyone outside of Australia would struggle to guess where you were from within Australia just by having a chat with you. but you know a Texan when you meet a Texan. You know someone from California. You know what I mean? Like that was the thing that I just thought, wow, there is really a difference there. And they have very different tax systems and incentives and that. And it's a good thing. They are in a competition of sorts for talent and people because if you're living in, I don't know, downtown Omaha and you look across at the next state, and my geography is terrible, so I don't know what that is.

41:23Which state? Go on, which state? Nevada? I don't know. Sorry, American listeners. And wait a sec, our rate of tax is lower. We get more benefits in whatever type of form. You'll move there. It's a sort of a free market check and balance, I guess. Mate, you're not that far wrong, but you're miles out. Omaha is 21 hours drive or 1 ,300 miles from Nevada. You have to cross. You start in very, very eastern Nebraska in Omaha. You cross the entire state of Nebraska, then through Wyoming, through the top of Utah, and eventually you hit Nevada. So not miles away. In the ballpark. Yeah, exactly. I couldn't have guessed either, by the way.

42:08I've always wanted to go to Wyoming. Is it Yellowstone that's done there? I believe so, yeah. I'm going to go and check that out. I've been to Nebraska a few times. I've been to Omaha. You and I have been there as well, which was awesome. Can I just say, just another thing, tangentially related to investing and the rest of it. America is such a powerhouse, obviously, economically, in so many different ways. Part of it, I think, is that structure that they have. But the other thing, like the geography is, I think, fascinating as well. Okay, well, this is more than a tangent, well-off topic. But when you look at Australia, you could overlay Australia onto the continental US and we're bigger, I think, right?

42:46But broadly sort of speaking, it's just like there's 10 times as many people. And when you look at a satellite, like a nighttime image of the US, it is just lit up from coast to coast because there is fertile ground, you know, all in between that. The natural abundance and wealth that they have is a big part historically of how they came to rise to dominance. And, yeah, for Australia we've done incredibly well, but we don't have – there's a whole bunch of desert in the middle there, right? And I don't think it's going to be any time soon that we're threatening the power and significance of the US.

43:19But it's just, I forget the book I was reading, but it's just like the geographical advantage slash disadvantage that you have. I think it was actually first written about in Guns, Germs and Steel, when you really want to go back and look at the evolution of man and civilization and the rest of it. But it is sort of, why is it that this one area over here were building castles and this other area wasn't? And it's largely, it's geography, right? And just to bring it, make it a bit more relevant, we saw that even in more recent decades play out with the coal seam gas boom in the US. Fracking is what they called it there.

43:57And here was a country that was dependent wholly and solely on foreign markets and not the best friendliest of markets. It was an interesting relationship there. And then this new approach was developed and they became self-sufficient and a net exporter of oil, right? Like it's, it's amazing. And again, you think what are the geopolitical strengths and advantages and economic advantages in all of that? You spoke of Norway before. Why is that tiny? What is it? 6 million people? It's a tiny, tiny country. It's like one of the world's biggest sovereign funds because of that advantage. And so it's just, I feel as though, this is where I lament so much with Australia because we are so, so gift despite that, you know, agriculturally in the middle, there's a lot of desert.

44:41that we do have a lot of very valuable rocks in our backyard. And I think that while we might like to sort of ascribe our wealth and prosperity to our genius, I think that explains a lot of it. Oh, gotcha. I mean, I think, you know, and, you know, the colonisation itself was an issue. But you think about the waves of prosperity in Australia. There was a whole lot of land that was taken over to be used for sheep grazing and send back what was then very valuable wool. Then we found gold. and for a while Melbourne was the richest city in the world. It was. And then iron ore, of course, becomes a big deal because China wants a lot of it.

45:18Australia is genuinely the lucky country. So lucky. And I think that's important, mate. I think to bring it back to investing a little bit, the difference between luck and skill, one of my favourite podcasts, I haven't listened to it ages actually, How I Built This. Guy writes at the end of that every time he asks the successful person who's built a billion-dollar fortune, how much of your success is luck and how much is skill. And I always cringe because there's a group who say, oh, look, it's all luck. There's so many sliding doors moments. Of course, it's luck. And the group say, no, no, it's all my skill.

45:50If I hadn't done this, I wouldn't have been successful. I built this myself. And I just, I really cringe at the hubris, lack of humility and that kind of answer because everything is luck. I mean, frankly, the skill you were born with was luck. There is your ability to work hard. Parents that you had. Right, your ability to work hard. Genetics. Political system you grew up in. Yep, yep, yep. So anyway, but even that, I think, so the reason I guess I'll put on what I'm trying to make on top of that though was there's the stuff you're born into, but the genes that you have that determine your, you know, general ability to do whatever you do, whether that's skill with your hands, skill with your brain, whether it's your ability to work hard, discipline, that kind of stuff, those who want to tell themselves it's all about them, the ego that says, no, no, I made this all myself.

46:37You know, anyone could have done it. I've just done it better than them. It's just such a wrong-headed approach because my ability to work with numbers is just a fluke of my brain wiring that people who live next door to me don't have, right? That's not – I didn't do anything to deserve that I'd get that. Have I worked harder than other people? Probably not. There's traders out there who are working all day every day much, much harder than me. There are people in my job who are working harder than me. It's just luck. And I'm not saying you shouldn't be thankful for the luck and take advantage of the luck for sure.

47:09Go for it. But the hubris of saying, no, no, it's all my skill is amazing. Back to Australia, I think that's – your Norway example is why I am so incredibly frustrated about the lack of a sovereign well-funded Australia. Did you see – very quickly to interrupt, did you see that viral video this week? Oh, no. A guy who was doing that thing of, oh, Australia sold more gas than anywhere else, whatever. Right. And he was personifying Norway and somewhere else. and they're saying, how much money did you make from that? I made$3 billion. It's like,$3 billion? We made like$70 billion. Right, right, right.

47:44You know, it's sort of, yeah, despite our great abundance and good fortune. And yeah, I guess the numbers sound big when you hear them, but we are giving that stuff away. Oh, man, we are doing our best to wreck the luck we've been given. Sorry, I interrupted you. No, no, no, that's good. Anyway, that's insurance. insurance um so my yeah insurance that's where we started i want to underscore your point actually because i really really really really really don't want anyone listening to this and cancel insurance they need i think anyone with dependents who would struggle if the ink their income in a way should have life insurance very very very very simple let's just do as you say do the maths if your income stopped tomorrow what would happen could could your could your family survive on on what they otherwise make probably not could could your partner go back to work yeah do you want them going to have to?

48:31Is it worth spending a couple hundred bucks a month on insurance to make sure they can not do that? It might not even be a case of go back to work. I am at work. I'm working already. We need two incomes to pay rent in Melbourne, for God's sake. Exactly. So there's all that. So I think absolutely. I will say, just to add in quickly, my income protection insurance, I reckon is also as valuable as necessary as life insurance for similar reasons. And particularly because if you are struck and you can't work, you've probably got needs that need to be paid for. So you go from a net earner of cash to a net user of cash for your family.

49:06Again, whether you've got a partner who's working or not, whether they're already working full-time or not, the lack of income and the additional costs probably add meaningfully to the burden for the household. So for me, total disability, again, I'm no insurance expert, I'm no medical expert. That one I can kind of take or leave. Sorry, critical illness, I mean. But income protection insurance for sure, life insurance for sure. I'd have income protection up until I stopped working, frankly. I'd have life insurance until I had no dependents or the store of wealth that you've been able to accumulate would take care of those dependents should you – let's go drop off this mortal coil to throw a third hand for you in.

49:45That's the other one, yeah. Just for your benefit. What's your thoughts on income protection and other? I've not looked at it closely. I just went and ticked the boxes that I thought were appropriate and gridded my teeth and thought, this sucks. It is one benefit though of superannuation, just quickly back to super. A lot of super funds included by default, people who are doing SMSFs, just be aware of that because it may not be an extra, you don't have to incur the extra cost, but don't see it as a benefit. Oh, look how much money I'm saving by changing. It's like, well, you are, but you're dropping insurance policies, which is fine if you choose to, but just make sure you allow for the fact that if you want to replace that policy, and you probably shouldn't, as we just said, that'll cost you more money than maybe you realize you're paying now.

50:28Yeah. Yeah, look, for me, I tend to be very much, just give me the most basic no frills version, right? Because I know that, you know, I would want the full, fully featured kind of expensive insurance should I need it, but I just want some, I'm really just planning for the worst case here. So it's just like no frills, lowest cost, just a bit of cash should the worst sort of kind of thing happen. I think like any industry, there's always the upsell and every, you know, a company, an insurance company is no different from others. They have high margin products and they have low margin products. And guess what?

50:59They want you to buy the high margin products, which is why, you know, some insurers will give you what free yoga lessons and, you know, a visit to the chiropractor or some nonsense, you know, and it's just don't get me started on that. Whereas kind of like, yeah, but I, they're not, they're making more money from this by offering these things. Just, I would go, nice, easy, vanilla, basic, cheap. That's me in a nutshell. Not just your insurance policies, exactly. We'll put that in your gravestone, speaking of death. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

51:39Mate, I want to change tack entirely, actually. Talk about something that's coming up, but not so much the thing that's coming up, but how we think about it. So with that vague introduction, dividend aristocrats. It's a phrase used in the US, frankly, because I have them. We don't have any yet. And it talks about the companies that have been able to for 25 years pay, I think it's increasing dividend. I think that's right. Oh, no, I haven't gone backwards. I haven't gone backwards. Okay. Yeah, I believe. There you go. Over, no, increased apparently according to NASDAQ. Oh, increased. Okay. Yeah, apparently.

52:15Dividend aristocrats, I'm quoting from the NASDAQ website, are companies that are part of the S &P 500 and have increased their dividends in each of the past 25 years. And that sounds really, really attractive. It looks like on this list there's probably 20 or so. A dozen? Okay. I'll read the names actually just for – no, we don't cover US companies a lot. A lot of our listeners won't cover them, but you'll know some of these names. 3M, Walgreens, one of the US chemists for mobs. What else have we got? Chevron, the oil company. Kimberly Clark makes toilet paper and toiletries and stuff like that.

52:49IBM, interestingly enough. Coca-Cola. Clorox. Exxon Mobil. Johnson & Johnson. Yeah, PepsiCo. There you go. I bet you those as a basket of companies on a total return basis have outperformed the market. So here's where this is fascinating. I think I would imagine you're right. Maybe I said that and I thought, oh, maybe this is a surprise reveal. I would suspect you're right. No, I don't have a reveal for it. What I wanted to talk about. So Solpat, a business I own, we've talked about a lot, is in line to hit that benchmark I think at some point next year or so, which kind of will be a big... They'll talk about it.

53:26The media will talk about it. We'll talk about it. We'll probably write about it. And it's important. We should celebrate that. Well, yeah, right. It's very rare. Except that. So, yes, and I want to be very, very clear. This is where it stops being about Solpats at all and even about dividend aristocrats generally. There was a time way back in the day, not that long ago, when General Electric, run by Jack Welch at the time, who was lionised as one of the great managers in corporate America, used to beat earnings forecasts by one cent per share, almost every single time. Now, you can't do that unless you're managing the books.

54:01Not cooking the books, I'm not alleging anything wrong at all, but accounting has lots and lots of different options and different rules and different tools you can use to increase or decrease earnings or reported earnings as you wish. Now, someone who's doing that, now, Jack Welch at the time was lionized and told he was great, and look, he's dependable, and they're reliable, and gee, he's a great stock, because it always does this. And there was kind of that sense, and it wasn't unreasonable for the first little while of, you know, this is what we're looking for. You and I might say in a different conversation, I don't think actually either of us would in the event, because we're going to talk about nuance and why not.

54:35But the, you know, that will be seen as positive and good and desirable. and people who are risk-averse would say, that's exactly what I want. I don't want volatile earnings. I don't want volatile dividends. What I want is reliable rising dividends over time so I can always take this to the bank. And that's not unreasonable to ask for, except where it kind of creates potentially perverse incentives for good people or, frankly, outright fraud opportunities or not even that bad, just kind of, you know, take people for right opportunities for those who want to take advantage of that. If I know as a business manager or a shyster that regular, reliable rising dividends is good and people like it and I can manufacture that, I can use that as a selling point.

55:19Now, again, as you say, we should want 25 years of rising dividends, except that in some cases it's probable one of those companies on this list of those I've mentioned and those I haven't mentioned, some of them are probably paying more dividends than they should be, probably jeopardising the company's balance sheet. Or sometimes not enough. right so they can remain on this on this list you know I can't really afford to pay the dividend but if I don't I'm going to drop off the list if I drop off the list people won't call me a dividend aristocrat anymore and if I don't do that then people mightn't buy my shares and the share price might fall so I'm going to and sometimes outright you know mischievously sometimes with every intent that I'll make it back next year because hope springs eternal you do that sort of stuff and it's not just dividends that's why why I wanted to raise it why I want to talk about it particularly was you talked about kind of some red flags and things that we think we like about businesses that we absolutely do.

56:10I want Saltpats to be a dividend risk crap for the next 45 years. And frankly, it's probably got a pretty good chance because internally the culture is what it is. But if there was another business that was doing inappropriate things or a company, for example, that had a volatile earnings stream or to pretend it had flat dividends or rising dividends, sorry, to earn a title. And you say, no, it's not paying enough dividends. You know, Dicker Data is a great little business. I don't own shares. It pays about 100 % of its earnings as dividends. Why? Because it doesn't need the cash. But earnings rise and fall.

56:38So it's paying out five or five and a half percent dividend yield. But that goes up and down every year based on the earnings of the business. Now, it'll never, unless it changes, be a dividend aristocrat. But if it paid 2 % every year and kept the cash in an unproductive way just because it wanted to earn that title, as you say, maybe it should be paying more. Some of these companies should have paid more last year and paid less this year. Shareholders would be better off, but they didn't because they wanted to keep this title of dividend aristocrat for, I don't know, ego reasons, maybe because they like to be that because their shareholders think they want that.

57:10It's just a reminder not to dig a little bit deeper. The second order impact of some of these things are really, really important. Yeah. Yes. And just to complicate it even more, I mean, I would say while that is all true, the great thing about these companies is that it enforces a real discipline with capital expenditure decisions so that's a profitable established business you make so much money each year and for better or worse you've just committed to paying it out and the market has expected you to pay a little bit more out yep and and obviously by doing that there's less money at your fingertips now the counterfactual here is let's say you keep it all you just don't pay a dividend now you will invest that and hopefully invest that for good returns.

57:55But we know, I mean, business is hard. We've got to keep making this point. And it's a complex, challenging world that's out there. And most, a majority, more often than not, most capital expenditure growth projects and new initiatives just don't work out. And it's not a bad thing. It's not a feature. It's not a bug. It's a feature, right, of capitalism. We're trying new things and sometimes things stick and we're all richer for it. But when you are forced to pay out money, you will have some left and you are required to be more disciplined with those kinds of decisions. So, okay, to do this, we're going to have to borrow some money or raise some capital or just wait a bit longer until we save up more money.

58:33We're going to have to be more certain of it. I would almost go out to this extent and say that there is nothing more dangerous than a CEO on a board with lots of money sloshing around the bank account and a market that's hungry for growth because you will do acquisitions is basically what you'll do. And acquisitions, as we've said many times before, statistically don't, sometimes they're brilliant, but they don't always sort of work out. So there is, there is that element to it as well. And it would depend, like there are some companies where it's just like, Walmart's is a good example, where their earnings are so reliable, they will fluctuate like any company, but they're not going to move around massively.

59:14And it makes, it's more appropriate for those companies to try to commit to a certain dividend policy and sustain that. If you're something that is just not in a business, if you're not in an industry where that is any reasonable expectation, then it is a recipe for disaster to even try and do that. I always appreciate CEOs are very forthright and honest. It's like, well, we'll pay it if we can. If we won't, we won't. Don't buy my stock if you're expecting a nice even dividend payment each year. And that will be a real turnoff to a lot of people. But to me, it's just sort of like, no, here's someone who gets it, right?

59:49Like it is – think about it if you have your own business, right? You make money after you pay your bills and your corporate tax, there's a company profit that's left over there. How are you going to get it out, right? You can pay yourself a salary or you can pay yourself a dividend. And most people who own their own business will pay themselves a dividend because you get the franking credits that come with that. But you'll only do it, right? If there is this, your business is going gangbusters and it's like, I can open up another office in Adelaide or something. You're like, why would you do that?

1:00:20But sometimes it's like I've actually got no use for the money. It's sitting here. It's in a business bank account earning 2%. I'm going to pay it out, right? And I don't think you would say, oh, I'm definitely going to do this every year. That would just be stupid to do. So it's exactly the same kind of thing just at a different kind of scale. and I'll just – I think the data will back me up, but these dividend aristocrats, at least the index that used to track them and on a total return basis pretty much outperformed the market. So these are generally not many companies can do it. Those that can do it for the most part and have been able – here's the key I think in the way they measure the index, 25 years.

1:00:59You can be a bit sneaky for a little while, but it's hard to do it over 25 years. So it's a good thing. and I don't want to suggest that it's a bad thing, but I do want to say it's the exception to the rule. And even as someone who's a dividend and income focused investor, don't be too upset if you don't see that steady rise each year. Sometimes it's entirely appropriate. In fact, sorry, a lot of thoughts here, but I have seen this more often than I care to admit, which is where a company pays out a dividend and then raises capital like three months later. And it's like, well, we've committed to paying dividends to investors, so we're doing it.

1:01:37But we've got this acquisition. Yeah, but I would rather you just didn't pay me. Dividend's nice, but it's not life-changing, right? Keep that, right? Keep that money. And if you've got somewhere to invest it, invest it, right? Don't give me money and then turn around and say, oh, we're raising more money. Do you want to put some more in? It's like, well, you just pay. It's as crazy as it sounds to me. Hey, by the way, over the last 10 years, the dividend aristocrats have actually underperformed the market. Okay. But I would suspect - On a total return basis? Yeah. I would suspect that's got more to do with the – think about the gainers of the last five, seven years have been the Apples and Amazons and Googles.

1:02:12The sheer share price appreciation of some of those non-dividend payers, which frankly have been around less than 25 years, let alone paid a dividend for that long. Interesting. So it was line ball up until about early 2023. I was going to say, yeah. But if you look at the – it's horrible to do this on radio or whatever passes for radio. If you look at over the last 10 years, so during the boom pre – the tech boom coming out of COVID, it jumped. And then, of course, tech stocks fell back again. So it was line ball again by the beginning of 2023. Then since then you've had Amazon. Amazon's up. I own shares, by the way.

1:02:48So this kind of ended up being a humble brag. It's not supposed to be. I just know because I looked at it. Up 80 % over the past year and had gone nowhere for like the two years before that. So, yeah, I think it's probably more to do with the current market dynamics than the dividend aristocrats necessarily. Yeah. I mean, again, horses for courses. I will say this. If you are a dividend investor, there's a great place to start. I wouldn't just say go out and just buy every one, but it's a great place to start. And I tell you what, just going back to Soulpats, it is on my list of positives for the company.

1:03:21It's like that they have done that. I'm going in expecting that, and I think that they'll be very clear on maintaining that. And it's just like that. And they may even, and actually they're pretty forthright people. I reckon they'd even admit that, yeah, we probably leave some money on the table by doing this. But we're just being honest with you here. This is the value proposition. We earn this much. We're going to pay this much out. We're going to try and grow the rest, right? And that's the deal. If you're interested, sign up to it. And they've got a very long track record of delivering on that.

1:03:47So you know what you're getting. And that deserves somewhat of a premium. Not a premium, but it is worth calling out for those that find that aspect appealing. Yeah, I think that's a really, really good point, mate. I think you – it's one of those I struggle sometimes with. We've talked a little bit before about demergers, creating value or not creating value. And they don't create value in any real physical sense, but different shareholder bases do pay different prices for different types of assets. The people who own salt pats aren't going to all of a sudden abandon that and go and buy shares in whatever the most recent tech or biotech, whatever it is.

1:04:25And so there is some value in them saying, I will pay for this. And each shareholder chooses a bit like it. We just talked about sub, I talked about super, we kind of end up with the same kind of idea. The way you create your portfolio, I create my portfolio, someone creates their portfolio, means we will pay independently more for those companies or just pay for them at all because we see a different potential or we want different things or we value different things. To your point, you know, sub-bats could pay a higher dividend should they choose out of their earnings, but they kept it low personally because they're reinvesting some of the money, which you just talked about.

1:04:55Secondly, I'm absolutely sure they're trying to increase the dividend every year. And so if they go too hard in the next couple of years, it makes it harder like GE, makes it harder the year after that to then keep increasing it if you had a bad year. All of a sudden you go, oh, what have we done? We've kind of put ourselves into a bit of a hole here. Running it for the long term, and this is back to kind of the illusion I made at the beginning. Running these things for the long term, we kind of like to find metrics because we're humans like heuristics. We like trying metrics. Okay, dividend increasing every year for 25 years, that must be good.

1:05:24That tells me something about the company. And other things besides, those things matter. But far more, I think, what matters is understanding, you know, not just the decisions being made. It's like insider selling. Same thing. We talk about that all the time, right? Some people say, well, it's just always bad. It's like, well, maybe it is or maybe it's not. The rules are made for the lowest common denominator. They are made because you can't know. And metrics are the same. It might be, I'm going to pick Woolies for the fun of it. They went through some grief. Oh, how long ago, mate? 10 years ago, maybe eight years ago, something like that, where they did the Masters thing and all, it was all terrible.

1:05:58I haven't looked at their numbers at all, but I would suspect over the last 25 years, they probably increased the dividend 22 or 23 years of that. And so because they had a really bad stuff up, one year they lost it. Now, you can say, I'm going to ignore Woolies until it's a dividend aristocrat in 15 years' time. I'm not saying it's a good investment now either, by the way. What I am saying is, as you say, it's a great place to start. Don't exclude companies that don't quite make it. Don't include companies that make it just because they've made it because they could well, part of the thing about dividends, the flip side of what you said before is not having opportunities to grow and invest that money maybe means you're in a mature business with a less attractive future.

1:06:34So maybe it is true that at some point a mature dividend-paying business, depending on what the share price is, doesn't give you the opportunities for great long-term return. So it's that kind of combination I think that makes a difference and probably I just encourage people to dig a little bit, just a tiny bit deeper, scratch the surface and say, what are they doing? Why are they doing it? How have they got here? How much of that is explainable, excusable, justifiable? Don't, you know, and frankly, how much is supported by activities, outcomes outside management's control? One final point I'll make just a while for those that are looking at dividends.

1:07:12Back when I was at the full around the dividend service there, I often made the point that don't focus too much on the yield either. Yeah, yeah. Because companies, a company that's, I'm going to make up the numbers as I go here, but a company that's paying 5%, all it's paid is a 10 cent dividend each and every year. And it just does that for the next 10 years. And even you might be buying it at a current yield of 5%. Yeah. That'll give you less income than a company that's paying a 3 % yield, but whose dividend is growing 10 % every year. Yes, exactly. That's absolutely true. And there's a lovely rule of thumb, it's based on the Gordon growth model or something like that, which is just a really easy heuristic way to figure it out.

1:07:48So you just basically take the starting yield and you add to that your expected average annual growth rate in the dividend. So for example, with Solpats, I'm just looking at the forecast. They're forecast of forecasts, so we'll see. But they've traditionally lifted their dividend sort of up a single digit, low double digit rates for a long time there. And they're offering you a 2.7 % yield. So if you added that together, roughly speaking, maybe my total average annual return dividends all thrown in, reinvested, would be about 12 % per year. If I look at another company that's paying me 8 % per year but is only growing its dividend at 1 % or 2 % per year, I'm actually getting a less return.

1:08:26Again, not in year one, not in year two, but again, if you're looking at this over a cycle, that tends to be the way. So just it's a bit off topic, but if you are looking at yields, don't just say I'm an income investor so I don't care about growth. Growth always matters. It always matters. You know, not every company is a 30 % per annum grower, but even the most big established boring businesses need to grow 2 % or 3 % kind of a year just to stay in the same space and really to make the return profile worthwhile because otherwise you just bleed out and inflation eats you away. Yeah, that's a good point.

1:09:01If I should be the key one, I think, mate, because, you know, Telstra is a great example. I'm not sure when they last increased it, I think they cut it more recently. You know, the purchasing power. Exact excellent example. I tell shares, as I've said before, for different reasons. But you've made the argument before about the fact that prices never go back down. So you start with a 7 % dividend yield, which I think it probably was way back in the day. Call it – I'm going to pick some numbers. I apologize for doing this in advance. Probably 15 years ago, 7 % dividend, right? So think about the inflation over that 15 years, not just the last three or four years, which have been extraordinary.

1:09:32Grocery price is up 20 % we've talked about before in the last four years. Add that to the previous decade of inflation. You're 7%. It's still 7 % of whatever you paid, but your purchasing power has gone backwards in a really big way over that period of time because the dividend hasn't grown. It doesn't have to keep up every year with inflation. It doesn't have to keep up with inflation in years like the last couple of years because, you know, you're just not going to get the sort of growth for most dividend-paying companies, and that kind of needs to be okay. But in large part, well, for Saltpats it has, but in large part that idea of just, you know, making sure you get some growth in the dividend because, as you say, you want the company to grow as well.

1:10:06Yep. Yep. I think that's a great place for us to finish, mate. I've got to get back on the road. No, I'm recording this in advance. But thank you for doing this. We will come back with another Sunday Mailbag episode as we always do. I assume you'll come back on Sunday. Absolutely will. Try and stop me. The only thing that can stop you coming back on Sunday, mate, is a horrible marathon injury that you may – Anything's possible. Let's assume that doesn't happen. And if it doesn't, we'll see you on Sunday. Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:10:38General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.