Dividends For Wealth?

As the market cools, now’s the time to seek income. [The Rude Awakening] August 04, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Dividends For Wealth? - Cash dividends are a great way to supplement your portfolio. - When you can’t rely on capital gains, income makes up the shortfall. - Let’s look at Buffett’s Coke trade to demonstrate. [$32.8 Billion PER DAY!]( [Click here to learn more]( Forget AI, cryptocurrency or anything else – [THIS]( is the biggest profit opportunity of your lifetime. It’s an obscure corner of the market… one which is quietly creating an average of $32.8 BILLION in new wealth PER DAY. [That’s $1.2 trillion per year…]( And if you act fast, you have the chance to get in on the action starting right away. Hurry, though – this video will be removed from the internet on Friday at 4PM. [Click here now for details](. [Click Here To Learn More]( [Sean Ring] SEAN RING Happy Friday from la bella Asti! I’ll be on [Rickards Uncensored]( this afternoon and hope to see you there. I’m opening a bottle of Barolo today, especially for the Rickards crowd! Today I thought I’d do a quick piece on dividends, as the market will probably move sideways for a while. We’ve had a big upturn, and August looks like a yawnfest for equity. We’re also at that point in the Presidential cycle when stocks take a breather. [SJN] Credit: [@allstarcharts]( So let’s review dividends and their vast income potential today. Two Types of Dividends There are two main types of dividends. One is a stock dividend, and one is a cash dividend. A stock dividend is when you receive payment for part of a stock for every share you already own. The advantage of this is that it's not an actual taxable gain like cash dividends are. Stock dividends are not usually taxed and give shareholders the choice to keep or sell the shares. Stock payouts are also optimal for companies that [lack sufficient liquid cash](. This piece will concentrate on cash dividends because this is the income portion of your total return. The total return is your capital gains/losses plus your dividend, all divided by the stock price. Dividend investing will become increasingly important over the coming months because capital gains will be tough. The ability to rely on dividends as an income return, the dividend yield, will be a safety net for most investors. [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here to learn more]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything. [Simply click here now to see how to survive America’s deadly inflation crisis](. [Click Here To Learn More]( Why Dividends? The main reason people tell you to invest in dividend-paying stocks is at least one of the following. - You're an older investor. - You're more risk-averse. - You want to create a stream of income for yourself that will last you through your retirement. That’s all good, but let’s say you are a younger entrepreneur who wants to build a solid foundation. There's no better way to do this than with dividend investing. Unfortunately, most advisors tell young investors they can take bigger risks with non-dividend paying stocks. They feel comfortable doing that because if you're young and lose some money, you have a long time to make up those returns. The Sooner, The Better. As Warren Buffett did, a far better and simpler way to invest is to start dividend investing while young. That's one of the reasons why [Warren Buffett’s net worth]( is roughly $70 billion today. He took advantage of the eighth wonder of the world: compounded interest. From a young age, Buffett would buy dividend-paying stocks. And when those dividends were paid out, he could reinvest those dividends to buy more stock. Here’s an easy way to think about it. Suppose you've invested in a tech stock, and it had a lousy year. Say it only had a 4% capital gain. That's all the return you're going to get. But let's say you invest in a “boring” company like Coca-Cola. If it has a 4% capital appreciation, just like a tech stock, but it also has a 3% dividend yield, you earn a total return of 7%. Now, that doesn't show up in the stock charts. That’s why many people, especially momentum funds, pile into tech shares. But you can be smarter by buying dividend stocks to take advantage of that compounded return. Why Don’t All Stocks Pay Dividends? Tech companies like [Microsoft]( in the 1990s and [Apple]( in the 2000s plowed their cash back into their companies to invest in their products. Microsoft had Windows and Office to install on virtually every PC. Apple came up with the iPod, the iPhone, and the iPad in quick succession. They used their cash better than investors would have, had they distributed the cash back to them. But the story is different when mature companies grow less or more slowly. A company's board must pay dividend income to entice fund managers and other institutional investors to own the shares. This makes up for the smaller capital gain. How Do Dividends Work? Luckily, you don’t need to know about dividends accounting. But you do need to know the order of dates for dividends. Here they are: Your company’s board of directors will meet. At that meeting, they will calculate and declare that dividend. That's called the declaration date. A short time later, the stock will go ex. In Latin, “Ex” means “without.” You must have bought the share by the time the stock goes ex to receive the dividend. Theoretically, the stock will drop by the dividend slated for payout on the ex-date. Of course, it may move by more. But the dividend is taken out of the stock price. Because the person who buys it on the ex-date or after will not receive that dividend. Usually, two days after the ex-date is what we call the record date. That’s when the company registrar, who keeps track of who owns the shares, will record the shareholders’ names. Those shareholders on the company register will receive the dividend. An example: If the ex-date is Wednesday, you must own the stock by the market close on Tuesday. Why? T+3 settlement is the norm in equity. That means the trade date plus three days. If you buy it on Tuesday, you've got Wednesday, Thursday, and Friday. On Friday, the cash you pay to the stock exchanges is for the stock itself, and you’ll be the holder of record. Now the company registrar, who keeps track of who owns the shares, will know they must pay you that dividend. Then, a short time after that will be the payment date. That is the date you get paid your dividend. What are dividend stocks? Dividend stocks pay regular dividends... and, hopefully, increase those dividends over time. The more substantial the increase, the better. There are three different categories of dividend stocks. - [Dividend Kings.]( Kings are stocks that have consecutively increased their dividend payments for at least 50 years... so at least a half-century. - [Dividend Aristocrats.]( This is a list of about 50 stocks that have consecutively increased their dividend payments for at least a quarter of a century. - [Dividend Achievers.]( These stocks have consecutively increased their dividend payments for at least a decade. What are the best dividend stocks to buy? The best dividend stocks to buy regularly increase their dividends, such as the three types of shares we just mentioned. When filtering through stocks, we’ll look for stocks that regularly increase their dividend. But we don't want stocks that only increase by a penny yearly because they only do that to remain dividend stocks. We want dividend growth to be between 6% and 10%. Now, why is looking at cutting dividends so important? Failing a regular increase, we want dividend stocks that at least do not cut their dividends. That's important because once a stock cuts its dividend, that is when we want to exit that stock from our portfolio. It’s our “sell” signal. Best Case Study: Warren Buffett’s Coca-Cola Trade Let's talk about one of history's most outstanding dividend-investing trades. [Warren Buffett]( bought Coca-Cola in the summer of 1988, right after the 1987 stock market crash. The price of Coca-Cola at the time was about $10 per share on a split-adjusted basis. Over the ten months from June 1988, Buffett acquired nearly a hundred million shares, according to The Warren Buffett Way. Buffett's average cost per share was $10.96. At the end of 1989, Coca-Cola represented 35% of Berkshire's common stock portfolio. Buffett rounded his position out at 100m shares. Two stock splits later, Buffett now owns 400 million shares of Coca-Cola. The stock market value of Coca-Cola during the 1988 and 1989 purchase period averaged about $15.1 billion. But Buffett understood that the intrinsic value of KO was between 20 billion and 32.4 billion. It was an excellent bet for him to place. At $61 per share, Berkshire's original $1.3 billion investment is worth $25.4 billion. That’s a huge capital gain, but BRK benefits from receiving dividends. His annual dividend now is up to $704,000,000. The cost basis of the total 400m shares is $1.3 billion, [according to its 2022 annual shareholders’ report](. That brings his dividend yield to a whopping 54%! To see dividend investing in action, head over to the [dividend calculator]( at Marketbeat.com. How to make dividend investing work for you. Here are a few tips to help you with your research: - Pick companies that have been around for a very, very long time. - Pick companies that have regularly increased their dividends even during financial crises. - Look at a 4% dividend yield as a buy signal. - When a company cuts its dividend, that’s your sell signal. Then, make some easy purchases and let the portfolio sit there and compound. Wrap Up I hope that little ditty today on dividends wasn’t too simple for you. It’s crucial to revisit topics we know well to ensure we’ve covered everything. I’ll see some of[you at 11 am ET on Rickards Uncensored](. For the rest of you, I wish you a pleasant and restful weekend. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( In Case You Missed It… You Made Bankers Rich! [Sean Ring] SEAN RING Good morning Reader, Greetings from beautiful Il Piemonte! I had such a good laugh earlier this week. If you’ve been reading the Rude, you know that my in-laws are visiting from the Philippines, and we are doing our best to entertain them. We’re driving them around Italy, trying to introduce them to new food and wine, and generally showing them a great time. To restock the fridge, Pam and I went food shopping the other day. I noticed Pam pick up a jar of Nescafé instant coffee. I said, “Who is that for?” She said, “My parents.” I said, “Isn’t that what they drink at home?” Pam said, “Yes.” I asked, “Why would they want to drink that here when they’ve got all this wonderful Italian coffee around them?” She said, “Well, they don’t like it very much…” Of course, the Italian in me recoiled. But the economist in me thought, “Well, that’s their preference.” Steak a la Trump I have a confession to make. Growing up in New Jersey, my mother made London Broil for the family at least once a week. It was always well done, and I always ate it with ketchup. So when people started making fun of Donald Trump, I never entirely understood why. Don’t get me wrong. There are better ways to prepare a steak. For instance, in London in the early Naughties, my good friend Freddie made fun of me at the Gaucho Grill in Shepherd Market, one of our favorite Argentinian steakhouses. He challenged me to give up my American obsession with “burned” steak and eat a “blue” steak. In British terms, a blue steak is a barely seared and cold (raw) in the middle. Freddie said how much you cook your steak and how smart you are, are inversely proportional. So I took him up on this challenge and ordered a blue steak with béarnaise sauce. The flavor exploded in my mouth. I had never eaten something so delectable, and I quickly understood why Europeans love their steaks practically raw. Now I prefer my steaks blue. But I don’t frown upon people who like their steaks well done or with ketchup instead of béarnaise sauce. And that’s the issue. What are people’s preferences? Some of “their” preferences defy “our” expectations. We think these people are crazy, but they’re ideally within their rights to choose something we may feel is not in their best interests. [DR-MR] Now imagine these preferences comingling with government-sponsored incentives. [Crypto Legend Reveals: “The Next Bitcoin”]( He called Bitcoin at $61. Now he says this next crypto will be even bigger. In fact, he’s targeting 25X gains over the next year alone. [>>Click here now for the details]( [Click Here To Learn More]( Preferences and Incentives “Show the incentives, and I’ll show you the outcome,” famously said Charlie Munger, ace coffin dodger and bestie of Warren Buffett. Governments incentivize people to stay in one place. That makes it easier to keep tabs and collect taxes. And nothing will keep you in one place better than owning your house. And if you can’t pay cash for your house - and most people can’t - then the government would need to set up a long-term financing scheme to get you your house and keep you there. In his excellent book, Walk Away: The Rise and Fall of the Homeownership Myth, Doug French writes: In his book American Individualism, Herbert Hoover viewed American individualism stripped of “the laissez-faire of the 18th century” as Abraham Lincoln’s “ideal of equality of opportunity” whereby “fair division can only be obtained by certain restrictions on the strong and dominant.” Hoover associated homeownership with independence and initiative, believing that an American must own a home to be considered a true American. Disturbed that the 1920 census showed a decline in homeownership, “Hoover offered a vigorous, new approach to the housing problem through the application of federal, voluntary, and business cooperative activity,” Janet Hutchinson writes in “Building for Babbitt: The State and the Suburban Home Ideal.” At Hoover’s direction, the federal government threw its weight behind four organizations to promote homeownership: the commercial “Own Your Own Home Campaign” and Home Modernization Bureau, the nonprofit Better Homes in America Movement, and the professional Architects’ Small House Service Bureau. This concentrated effort served to foster, as Hutchison points out, “an idealized vision of American home life rooted in the ownership of a suburban residence replete with modern amenities.” So while it may seem that Americans by their nature have genes that make them aspire to homeownership, this notion is nonsense. “Homeownership was sold to Americans with “carefully calculated governmental policies that proselytized Americans about the virtues of suburban homeownership while opposing outright market intervention,” explains Hutchison. With that in mind, let’s look at the United States mortgage market. You Made Bankers Rich Oh, you didn’t mean to. But what did you expect? As of the end of 2022, the [total mortgage debt outstanding is $11.92 trillion](. Even if all mortgages carried a 1% interest rate, that’s still $119,200,000 billion in revenue for the banks. That’s a lot of pasta! If that were spread evenly across the roughly 5,000 banks and credit unions the FDIC insures, that’s $23 million in revenue each. But we know that’s not how it works. JP Morgan alone had $43 billion in revenue for the second quarter of 2023. But it’s not even the biggest mortgage lender in the US. Here’s a list of the largest US mortgage lenders: [DR-MR] Credit: [ADV Ratings]( Rocket Mortgage, the biggest lender, [earned $5.8 billion in revenue for 2022 on their loan originations of $133 billion](. Do you know who paid these guys? You did. And in America, it makes complete sense. American Homeownership Versus European Homeownership What’s the difference between these two types of homeownership? In a nutshell: the 30-year fixed mortgage. [DR-MR] Credit: [FRED]( Americans have access to these. Most Europeans do not. And it makes an enormous difference. Let’s look at how 30-year fixed mortgages change the game. Mortgage Math Though it’s tough to tell from the above chart, between April 1971 and June 2023, 30-year fixed-rate mortgages averaged 7.74%. The lowest rate ever recorded was 2.65% in January 2021. The current rate is near the average, clocking in at 7.26% as of August 1st. Let’s do the math. In my example, we’ll use the US average house price of $344,000. And I’ll be a bit more generous on the down payment; I’ll use 10%, or $34,400. The current median down payment is $26,000. I’m also going to assume that the homeowner makes no prepayments. I’ll also assume he stays in the house for the entire 30 years, even though the average American only spends ten years in one house. At the current rate of 7.26% on a 30-year mortgage: [DR-MR] The numbers are alarming. While the monthly payment is a mere $2,114.12, the total interest paid on the house is $451,482.52. This brings the total purchase cost to $795,482.52. If you notice the top line of the mortgage amortization table I drew up, the last column is the principal reduction divided by the monthly payment. In this example, it’s only 11.40%. It takes a long time to cut into the principal of the mortgage. But here’s the thing: Americans only have to worry if they can make the $2,114.12 payment. It never changes. That’s the beauty of the fixed rate. My friend and colleague Alan Knuckman asked, “Where was everyone when rates were low?” Let’s do the same example… but with the 2.65% historical low: [DR-MR] The difference is enormous. The total interest paid and, by extension, the total home cost is over $300,000 less. That’s because far more of the monthly payment reduces the principal (45.20%) from the get-go. Now, looking at those examples, how are Rocket Mortgage, JPM, and Bank of America feeling about these higher rates? Pretty damn good! And they’re feeling especially good because the US housing market is still strong, despite Chairman Pow’s steep hiking cycle. [DR-MR] Credit: [The Daily Shot]( As you can see, most US mortgages aren’t linked to market rates. That is, they are fixed and not variable rate mortgages. [DR-MR] Credit: [Charlie Bilello]( To put this further into perspective, household debt service is a small part of disposable income: [DR-MR] Credit: [Charlie Bilello]( The cost of all this is that starter homes are more expensive than ever. [pub] Credit: [Charlie Bilello]( This just puts more pressure on our poor demographics. After all, it’s much harder to start big families in little apartments. All in all, the US housing market looks pretty good. But how is it different in Europe? European Blues In Europe, usually, you can’t get a 30-year fixed mortgage. In the UK, prospective homeowners can get a 2- to 10-year fixed mortgage, and then after the fixed term, it becomes a monthly floating rate mortgage. Anecdotally, most people I know either get a 2-year fixed rate and keep rolling it or get an interest-only mortgage. On the continent, most mortgages are floating rate mortgages. The rate is Euribor, the "Euro Interbank Offered Rate." It’s the benchmark interest rate at which a panel of European banks offers to lend unsecured funds to one another in the euro wholesale money market. Euribor is published daily by the European Money Markets Institute (EMMI) and serves as a reference rate for various financial instruments, including loans, mortgages, and derivatives, denominated in euros. The floating rate mortgage is usually priced at Euribor plus a spread. The mortgage I’m looking at right now is Euribor + 190 bps (1.90%). So Europeans have far less certainty about their monthly payments and, therefore, can’t plan as well as Americans can. It may also explain why Europeans don’t mind renting for long periods. Wrap Up Since Americans have 30 years of home security, they can plan out their lives well in advance. But the cost can be the exorbitant interest they pay on their houses. It’s their prerogative, but we shouldn’t wonder why bankers make so much money… especially when the American public pays them. When preferences meet government-sponsored incentives, strange outcomes result. Have a lovely day! All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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