Handling Volatility With Long-Term Dividends

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Handling market volatility with long-term dividend growth investing. Prioritizing future dividends over immediate income, companies drowning in cash like Visa and Microsoft. This is an excerpt from a recent Investing Experts conversation.

Transcript

Rena Sherbill: Eli from Dividendology, welcome to Seeking Alpha’s Podcast. It’s great to have you. Thanks for joining us.

What stocks are you most focused on? What would you say your top stocks that you’re focused on these days?

Dividendology: Obviously, we want to start with looking for quality companies that can grow their free cash flow. And I would actually make the argument that the highest quality businesses in the entire world all pay out dividends.

Think of companies like Microsoft (MSFT) or Visa (V), and now we can even throw companies like Meta (META) and like Google (GOOG) (GOOGL) into that conversation.

These are companies that generate really high levels of return on invested capital. They have high free cash flow growth rates. And so typically when you hear those things, you think, well, wouldn’t paying out dividends prohibit their ability to grow? Wouldn’t they just be better off reinvesting that capital back into the business?

But here’s what you have to understand. These companies have massive cash positions on their balance sheet. They are drowning in cash. And in fact, they generate so much cash, they can’t intelligently reinvest it all back into the business.

And a good example of this again is going to be Meta. They just burned $50 billion with no return on that 50 billion by investing into the metaverse. They would have been much better off actually paying that out as a dividend. And I think the management team has realized that because obviously like we’ve seen over the past year, they’re now paying out a dividend.

So we’re not sacrificing growth for these dividend payments that we’re receiving, we’re actually receiving them because these companies are such quality companies, they’re generating so much cash that I can receive growing dividend income year-over-year.

So I would say, one of the main companies I’ve been really building up over the past year is Visa. It’s going to have a low starting dividend yield. So it depends on what your goals are. If you’re someone closer to retirement or someone closer to living off dividends, maybe that’s not the best investment for you. You want to look for a starting higher yield.

But if you have a long-term time horizon, you look at the earnings projected growth rates for a stock like Visa, and it’s going to allow them to grow dividends at a very high rate over the next few years, over the next few decades.

So I’m looking for companies like that. Visa is a huge position in my portfolio. Microsoft is a huge position in my portfolio. And then, of course, I also have the Dividend ETF, (SCHD).

I’m a long-term dividend investor. I wouldn’t necessarily have a high risk tolerance, but I know that I can handle volatility because I’m investing for the long term.

What do we know about the market over the long term? Well, the average return is somewhat between 8% to 9% and inflation adjusted maybe closer to 7%.

But here’s what’s interesting about this. When we think about when it comes to retire, when it comes time to live off dividends, again, my long-term goal is to one day live off dividend income. If somebody were to try to retire in a year when the market goes down 20%, that can be pretty financially devastating for their ability to retire at that point.

So what does this mean? If I’m willing to live off dividends, well, I actually don’t have to worry about that sequence risk. I don’t have to worry about what the market is doing at that specific point in time.