In this podcast, Matt Argersinger, who leads investing on The Motley Fool's Mogul and Real Estate Winners services, is joined by Motley Fool analyst Anthony Schiavone, Motley Fool host Chris Hill, and Motley Fool producer Ricky Mulvey to talk about dividend investing. They discuss:
Dividend stocks that have taken a recent hit.
A potential high-yield trap.
The power of compounding dividends.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on July 16, 2022.
Matt Argersinger: Remember when a company chooses to pay a dividend, it's choosing a set aside, you know, sometimes a meaningful portion of its excess cash to go out the door to shareholders. Therefore, it can't reinvest that cash in projects that might not work out or might not generate high returns on capital and if you've studied the history of companies. The biggest companies of today won't be the biggest companies for tomorrow and that's because a lot of companies really struggle to invest at high rates of return over long periods of time.
Chris Hill: I'm Chris Hill and that's Motley Fool Senior Analyst Matt Argersinger. We're going more in-depth on dividends that joined Anthony Schiavone and Ricky Mulvey to continue their conversation about investing in companies that pay some of their profits to shareholders.
Ricky Mulvey: First, let's hit a couple of basics. I don't think we really hit on this and last week show. I think it's worth bringing up. We always talk about dividend stocks, like this stodgy, old thing but I think there's a really compelling case that younger investors, people earlier in their investing journey should really pay attention to the value of compounding dividends?
Matt Argersinger: Absolutely Ricky. I think it's one of, I don't know misnomers, if that's the correct word, but there's a sense if you're younger investor that, you shouldn't care about dividend companies, you've got decades to invest, go for the hot, the home run growth stocks and leave the dividend stocks for stodgy old guys like me. But I think that is a terrible way of approaching it because dividend stocks are amazing and I'll illustrate it with this one statistic which is just mind-blowing. Anthony found this data point, it's almost unbelievable. It's from S&P Global.
If you go back to 1930, I know it's a long time ago, but if you invested $1 in the S&P 500 in 1930, that $1 would've turned into about $197 by June 2021 last summer. That's almost 200x in roughly 90 years. Fantastic but, if you also reinvest the dividends you got from that $1 investment, that $1 would have turned into get this $6,430 [laughs]. Now that feels almost impossible, but it's not because by reinvesting those dividends, you're compounding an increasingly large number of dollars. Over many years, that results in really exponential gains in total return. Anthony, actually, there was an unbelievable Coca-Cola example, that you and I talked about on the dividends show like a month ago.
Anthony Schiavone: It's pretty incredible. The price of a single share of Coca-Cola at its 1919 IPO was $40 and that's on a non split adjusted basis. If you bought that single $40 sheriff Coca-Cola at its IPO and reinvested all the dividends, you would've netted about a total return of about 21 million by 2019 a century later but even more impressive, that single share, which has been split many times over the last century, would be generating nearly $600,000 in annual dividend income, assuming you reinvest it all dividends. I would say that's a pretty good yield on cost there [laughs] and you hung on through Coca-Cola taking cocaine out of the drink itself, which some might call a thesis change.
Matt Argersinger: You went through some upheaval, but $40 into 21 million and paying you $600,000 today in dividend income It's mind-blowing. Now, none of us are able to invest for 90-100 years. Most of us won't even live that long, but compounding dividends can work even over much shorter timeframes. For example, let's say you started with just $10 thousand today, yet at $200 a month and invested in just an average basket of dividend stocks paying, an average dividend yield of three percent very easy to find today. As long as you keep investing and reinvesting the dividends and if history is any guide, you'll have over $1 million in 30 years, or let's say you're a little older, you're a little bit wealthier you could start with $100 thousand at a $1000 per month in new cash, you'd have almost $2 billion in less than 20 years. That just shows you the key of course is to get started as soon as you're able and above all, keep investing and adding new money and keep reinvesting those dividends. What that can do to your wealth even if you're a young person and you don't think dividends are cool it's pretty magical.
Chris Hill: One caveat to that, I would say though, is one of the appeal of dividend stocks is that you can continually get a dry powder for new investments. There is a trade-off of not reinvesting your dividends.
Anthony Schiavone: Absolutely. You can choose not to automatically reinvest the dividends and just get that cash that comes in and then sort of deploy as you see fit and even deploy that cash into non-dividend companies but I think it's just the power of having that extra yield when you make an investment in dividend company, that brings you dry powder, brings more cash into your account that you can then reinvest in your best ideas.
Chris Hill: It sounded like I was disagreeing with you, but I wasn't actually disagreeing with you that's the magic of podcasting. Moving on, let's look at some of the frameworks you guys have laid out for finding a sustainably high dividend payer. Matt, you want to walk through that and then basically how investors can view that framework.
Matt Argersinger: Sure, we did this special show on the Dividend show. If you're a member of any of our Motley Fool services you can catch the Dividend show on Motley Fool Live. It's every Friday at 10:30 a.m. Eastern. Sorry Ricky had to put that plug-in. On the dividend show we did this exercise looking at high yielding dividend payers and we asked three questions. Is the dividend for real? Is that 7-8 percent, 10 percent yield really reflective of what the company was paying now? Two is the dividend sustainable? Meaning is the payout ratio reasonable, are our current and future earnings able to support the dividend and grow it over time and three, simply, has stock of the company been a good investment over time? I know the old saying past performance is no guarantee of future results, which is true but I think when it comes to dividend payers, especially history, can tell you a lot about the future. That was the three questions we posed as we're analyzing high-yielding dividend payers to see if those dividends were for real.
Ricky Mulvey: Let's look at some of the strong dividend payers that are down right now because in addition to seeing these high fliers get knocked off their perch brought back down to earth. I think you're also seeing some really strong companies get brought into that mix. It reminds me of the sibling who's punished even though they haven't necessarily done anything wrong. Does that analogy makes sense to you or am I stretching there?
Chris Hill: No, I think that sounds about right.
Matt Argersinger: Let's start it out. One dividend payer that's been knocked off a little bit is Texas Instruments, ticker TXN.
Ricky Mulvey: That's right. Texas Instruments, long time dividend pair, I think they're short of being Aristocrat. Anthony, we'd have to check, but then I know they've been paying a dividend for a long time. If you think about the chip space semiconductors, but a company that's been innovating for many decades and has these business lines that really no one has been able to touch for a very long time. We tend to think of semiconductor and technology companies being highly disruptive and disrupted over time and you can see some companies like Intel has struggled, or even a company like NVIDIA, which had an enormous stretch run the last decade or they certainly have been through periods of tough times as well. Look at the chart at Texas Instruments and you'll see this business that has just been so steady. Company that's grown shareholder value for decades and steadily paid a dividend.
Here's a company that, because of the fears in the market, because of worries about chip supplies, especially their stock has been hit pretty hard. I think it sound about 30-35 percent from its high and now you're getting that dividend yield of right around three percent and it's just one of those companies, I think just has so many competitive advantages. Works in markets that no one's gonna touch long-term customers that rely on their technologies. That's one passes a lot, checks a lot of boxes for us, for Anthony. We're looking at dividend companies in terms of a company that you can buy, hold, feel reasonably good about their ability to raise that dividend over time and grow the wealth of the company. John Rotonti today did a great deep dive on Texas Instruments on a podcast called chitchat money that came out back in April. If you want a deep dive on Texas Instruments, Rich Templeton strategy, it was good, I recommend it. How about another beaten-down dividend player, Anthony? What you got on Vail Resorts, ticker MTN.
Anthony Schiavone: When we talk about dividend paying companies, they usually have some moat that leads to pricing power. I think that's exactly what Vale has. They have that pricing power because they own some of the top skiing resorts in North America. There's just generally a limited supply of ski resorts because there's a limited supply of mountains, and it's also very expensive to build new ones as well. So with the recent market volatility, the stock is down a little bit more than 40 percent from its high and it's yielding about 3.6 percent right now, which is well above its historical yield prior to the pandemic. This is actually a company that grew its dividend eight consecutive years and at a pretty good rate as well. So their pricing power definitely showed up there.
Then COVID hit and management really had no choice but to suspend the dividend since all the resorts were forced to close. There's really nothing that the management could have done. As COVID started to subside, the business starts to recover and they reinstated the dividend last September, albeit at a lower payout. Then they raised the dividend above its pre-pandemic payout this past March, the business seems to be back. They have a strong track record of dividend growth if we were to look past the pandemic. So I think this is an interesting income and growth play with the stock down about 40 percent off a tie.
Matt Argersinger: What do you think about the climate change issues for someone like Vale, where one of the beef side here with them. I guess that has kept me a little hesitant on the company is the idea that they have lots of years with minimal snowfall and then some years with record snowfalls, and that it's going to be hard to predict revenues out into the future when you have that much variability in snow conditions now.
Anthony Schiavone: That's a great point. Vale, they've actually made a pretty strong push in recent years to get most of their visitors on annual passes, so that reduces their dependence on good weather and ski-able days since there's passes are already purchased ahead of the ski season. The weather doesn't play as big of a role. But yeah, if more weather keeps on happening, it's definitely going to have an effect on their business down the road.
Matt Argersinger: I'll just add Ricky the Vale pass it's almost like the Costco membership in a way. It's become that way where there's such loyal customers, loyal visitors to Vale Resorts and that cash that just comes in from those passes. Whether or not the skis, how to the extent this gears utilize that those passes, it's just a regular stream of cash flow that they all can rely on.
Ricky Mulvey: If they've also cut the cost of a lot of those passes in recent years too which is an investor. I don't know if that's a good or bad thing. Now with that same framework, let's look at some high dividend payers. First-up, Starwood Property Trust ticker, STWD, seen a nine percent dividend yield here. Is that real?
Anthony Schiavone: Yeah, Ricky. The dividend is for real. For those who don't know, Starwood is a mortgage rate that primarily focuses on commercial lending, but they also have a portion of their portfolio that owns physical real estate. So to me, it's more of a hybrid rate between a traditional equity rate and a mortgage rate. But yeah, for the last four quarters, their dividend payout ratio was about 82 percent of their distributable earnings. That's after accounting for a onetime boost in earnings that was related to a property sale. One thing that is interesting about Starwood's dividend is that they were one of the only mortgage rates that didn't suspend or cut their dividend during the COVID crash in 2020. I think that speaks to the broad diversification of their commercial loans where the underlying assets are located across varying property sectors, and geographical regions. The fact that owning that physical real estate makes earnings a little bit less volatile. If they absolutely need to, they can even sell off those properties to support the dividend. That's not ideal, but it does give them a little bit more optionality than you'd see in your traditional mortgage rate.
Ricky Mulvey: Alright, let's look at a sin stock. You're not going to hear this on other financials. So let's talk about tobacco, Altria, ticker MO, that is an eight percent dividend yield. Hey, invest in your best vision of the world, but this is a lot of dividend yield from a highly addictive products, right Matt?
Matt Argersinger: Altria Group, formerly Philip Morris company, is famous for paying a relatively high dividend. No comments here about what you think about cigarette companies are tobacco companies, but there's no question about Altria's incredible performance over the decades. It's been, in fact over the last 50 years I think it's in the top ten still in terms of total return, in terms of best-performing stocks. That might have changed recently. But anyway, it's been a wonderful investment for a company that does something I'm sure a lot of people take issue with. But you look at that dividend yield, it's over eight percent and is the dividend for real? Absolutely, it's for real. This is a dividend that they've been paying and that's what they're guiding for. Is the dividend sustainable? Yeah. Anthony, I looked at it and you've got to pay out ratio.
That's right around 80 percent, but which would seem high for your typical dividend company, but Altria's business is relatively more stable, or at least it has been over the decades. So they've always been comfortable paying a much higher rate of their earnings as dividends. The third question hasn't been a good investment. I already mentioned that it has been, but the numbers for Altria Group or just stunning, just from the late eighties. If you invest in Altria Group late eighties, reinvest the dividends. You made over a 10,3000% on your investment. 103,0000 %, which is about 50 times more than the return of the S&P 500's. It's again, whether you inflect cigarettes or not or the tobacco business, there's no doubt that Altria has been just a monster of an investment for shareholders. That's one of those high-yielding companies out there. I cannot come fault with if you're looking for higher income in the market. Altria has got to be on your list. Judgment-free zone. There you go.
Ricky Mulvey: This is this is one of those things where I was like because you want to have your investments reflect your best vision of the world, how you want the world to progress. There's part of me for that where I'm like, I don't like investing in private equity companies for that reason. But then there's also a part of me that's looking at a cigarette stock with a dividend yield of eight percent, thinking like, I think they can probably sustain that. Like this actually might be a great investment.
Matt Argersinger: Ricky, if your best vision of the world is you're generating more income for yourself, Altria could fit that vision.
Ricky Mulvey: Let's look at a dividend trap. Potentially we've talked about some sustaining or sustainable high-yielding companies. Let's talk about Vale. Not Vale Mountain Resorts, which is paying about a 15 percent dividend. What's going on with Vale?
Matt Argersinger: Right. Yeah, not to confuse. This isn't available mountain. This is Vale, the South American mining company, Vale V-A-L-E. What's fascinating about this Vale is that yes, they've always paid a pretty high dividend. The dividend is actually variable. This is not typical, but Vale tends to pay out dividends based on its earnings, not based on what they want to pay and just as they go, Vale says, this is what we earned. We earned this amount, so therefore we're going to pay this percentage out. The first question is the dividend yield for real? Well, it's actually not for real, because if you're an investor and you see this, you're thinking, oh my gosh, I can buy the shares. I get almost a 15 percent dividend yield, that's fantastic. Well no, that 15 percent dividend yield is based on the prior 12 months worth of earnings where they paid out.
They earned a lot and they were able to pay out a significant amount to shareholders. So that is not the dividend you're probably going to get by buying the stock today. Now, is that dividend sustainable? Well, it is if Vale, again, makes a lot of money and they can pay out a higher dividend. But you have to remember Vale as a mining company has really benefited from a lot of the increases in commodity prices. Be it iron ore, copper that we saw over the past few years. Their earnings have really been boosted by this business cycle we've been in. If that reverses or if inflation comes down and they're not earning as much revenue from their mining operations and that dividend yield is probably going to come down. So is the dividend sustainable? Probably not. Now, final question, has the company stock been a good investment? It actually has. It's been incredibly volatile. But if you go back to the early 2000s. Vale is up about 1700 percent versus the market about 400 per cent. Despite this volatility and despite its dependency on high commodity prices, Vale V-A-L-E has also been a fairly good investment.
Ricky Mulvey: Let's finish off with one interesting income opportunity. Anthony, I think you got one with Iron Mountain.
Anthony Schiavone: Yeah. Iron Mountain, a former Warren Buffett real estate play in the 2000s. But, yeah, they've had a tiny different business line over their history. But that's best well-known for their storage business. That business mostly centers around the storage of paper records, fine art storage, entertainment storage, pretty much anything that you can think of. A couple of key advantages to this business. Just that the quality of their brand. If you're a financial institution or healthcare provider and you need to store, important documents, Iron Mountain is the place to go. I think about 95 percent of the Fortune one thousands still utilizes Iron Mountain services. The thing I really like is once they get those customers, those customers tend to stay there.
The retention rate is about 98 percent, and the average storage Xbox in one of their communities stays about 15 years. One of the reasons for that stickiness is that the Iron Mountain charges service fees for removing records, so that switching costs there tends to keep those customers in lock. Iron Mountain is in a pretty big portfolio transformation right now. Obviously our world is shifting away from paper storage and more toward digital storage. They're focusing more on data centers and digital storage. That's really a big driver for the feature for them. Looking at their dividend is well covered about 68 percent in the most recent quarter. That's come down a lot from the same time a year ago. The stock currently yields about five percent. I think this is still an interesting storage play for Iron Mountain.
Matt Argersinger: I'll just add one thing we did with Iron mountain that you don't get with a lot of us rates is that they have a lot of exposure internationally. They've made some investments in Europe. They made some investments in India, I believe Anthony recently. You get the old-world storage business that's feeding the cash that's generating this datacenter business that's actually growing internationally.
Ricky Mulvey: Anthony Schiavone, Matt Argersinger from our Mogul and Real Estate Winners services. Appreciate you joining the show.
Anthony Schiavone: Thanks, Ricky.
Ricky Mulvey: Alright, I got one quick plug for you, the listener. If you'd like to show, you got a stock, you want to hear us talk about, please call our voice mail. The number is 703-254-1445. Give us a company any question you got about it than maybe we'll make it podcasts segment out of it. Really prefer if you call us from somewhere that's quiet. In that means not the checkout line of a grocery store. Again, that number 703-254-1445. Thanks for joining us and see you soon.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against them, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. I'll see you tomorrow.
Anthony Schiavone has positions in Iron Mountain and Vail Resorts. Chris Hill has positions in Costco Wholesale and Nvidia. Matthew Argersinger has positions in Coca-Cola, Iron Mountain, and Vail Resorts and has the following options: short August 2022 $60 calls on Coca-Cola, short October 2022 $42.50 puts on Iron Mountain, and short September 2022 $165 puts on Texas Instruments. Ricky Mulvey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Iron Mountain, Nvidia, Texas Instruments, and Vail Resorts. The Motley Fool recommends Philip Morris International and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.