146: Why We Love Dividend-Growing Stocks

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:
All right. Hey, hey, hey. Welcome back to the Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.

Josh Robb:
And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management.

Austin Wilson:
Yes you are.

Josh Robb:
Yes. Austin, how can people help us grow this podcast?

Austin Wilson:
Well, you’re probably listening to this on a Thursday, which means the episode just dropped.

Josh Robb:
Yep.

Austin Wilson:
And it means you’re probably subscribed.

Josh Robb:
Yep.

Austin Wilson:
But if you’re not, you probably should be subscribed so you get every episode, every single Thursday, when it comes out.

Josh Robb:
That’s right.

Austin Wilson:
Comes out and it’s hot.

Josh Robb:
So you’re first to listen.

Austin Wilson:
First to listen, that’s right. So, we would love it if you would subscribe, if you’re not. And we would also love it if you would leave us a review on Apple Podcast, Google Podcast, Spotify, wherever you listen to it, just leave us a nice review. We wouldn’t complain if it was five stars because we feel like we give you five-star information here. So, today-

Josh Robb:
Yes. What are we talking about?

Austin Wilson:
I’m excited about this episode today, because this is something I am very passionate about. So, today we are talking about why we love, love, love, love-

Josh Robb:
Yep.

Austin Wilson:
… dividend growing stocks.

Josh Robb:
Yes. It’s like you’re a gardener, and you got your green thumb, and you have these reproducing plants that are perennials.

Austin Wilson:
They’re perennials.

Josh Robb:
That’s what they are.

Austin Wilson:
Not annuals.

Josh Robb:
Not annuals.

Austin Wilson:
You don’t have to put them back in because they’re providing you something over and over and over.

Josh Robb:
Over and over.

[1:33] – What are Dividend-Growing Stocks?

Austin Wilson:
So I guess, as a matter of background, we should probably say that dividends are cash payments from a company or a publicly-traded company, in this instance here, to shareholders, and this is excess cash that they have left over after fulfilling all of their other obligations. So this is like, if you have a share of Apple, the largest American stock in the world now, Saudi Aramco took it over, and changed the world because of the oil. But anyway, you own a share of Apple stock, you get a couple bucks four times a year.

Josh Robb:
Yep.

Austin Wilson:
Not even that, that’s a hypothetical example. But you get some cash into your investment account a couple times a year from Apple, that would be a dividend.

Josh Robb:
Mm-hmm.

Austin Wilson:
So you are receiving cash from the company and they do this, in America, typically on a quarterly basis most often.

Josh Robb:
Sometimes, semi-annual.

Austin Wilson:
Sometimes, semi-annually. And in Europe, it’s very popular, semi-annually.

Austin Wilson:
What we’re going to talk about today is companies that are growing their dividends. So that means, you get a dollar per quarter per share this year, next year you get a dollar five per quarter per share.

Josh Robb:
Oh, great.

Austin Wilson:
And it just increases and increases. And the compounding of that is going to be rather astounding and we’re going to talk about that in a little bit. So, that’s a little bit of a background.

Josh Robb:
Yeah. Pause real quick. Side note.

Austin Wilson:
Yeah.

Josh Robb:
You can give stock as dividends.

Austin Wilson:
Mm-hmm.

Josh Robb:
It’s rare.

Austin Wilson:
Yeah.

Josh Robb:
It’s a lot easier, cleaner, tax-wise. You see it more often for companies. They give cash.

Austin Wilson:
Yeah.

Josh Robb:
Then you can do what you want with that. Some have direct reinvestment programs, where they give you the cash dividend and automatically re-buys you new stock.

Austin Wilson:
Yep.

Josh Robb:
It’s great. But there is that caveat. You don’t see it. It’s rare. They could give you other forms, but cash is the way most often you see dividends.

Austin Wilson:
And companies like to give cash back to their shareholders as a reward for holding their stock, for being an owner in the company.

Josh Robb:
Yep.

Austin Wilson:
They can also return cash to shareholders via share buybacks.

Josh Robb:
Mm-hmm. Yep.

Austin Wilson:
And this is something that’s been a political hot button for some years now. But what really, since the ’80s, what companies have been able to do legally is go back and buy back their stock. And theoretically, a company would be wise to do that when they think their stock’s undervalued, right?

Josh Robb:
Yeah.

Austin Wilson:
This is something Buffet’s been doing recently with Berkshire Hathaway. But that is the other way that companies can return cash to shareholders, is by actually buying back that share that they own or whatever.

Austin Wilson:
So today, we’re going to focus on dividend paying.

Josh Robb:
Yes.

[3:54] – Strong Fundamentals of Dividend Growers

Austin Wilson:
Okay? So, let’s talk about why we love dividend-paying stocks. So number one, I have a few points here. Dividend paying companies typically-

Josh Robb:
Typically, yep.

Austin Wilson:
… not always, typically, have strong fundamentals. Why is that? Well, that is because these companies usually have stable and abundant cash flow from operations.

Austin Wilson:
So, the money they’re bringing in is-

Josh Robb:
You can’t give me money unless you have money left over.

Austin Wilson:
And you know where your money’s going, you’re fulfilling all of your debt obligations and everything. It’s very predictable. So, that is a sign of a generally pretty mature company.

Josh Robb:
What you don’t want is a company paying you dividends and they have to take debt out to pay the dividends.

Austin Wilson:
Yeah, that’s usually not a great thing. Another aspect of that is the fact that earnings are often, not always, growing consistently, which gives management that option to return that excess cash to the shareholders, instead of holding it in the business and reinvesting it in projects or whatever, or giving it as a share buyback, as we mentioned earlier. So usually, a sign of decently growing earnings or earnings growing over a long period of time specifically. There’s usually some fluctuation year over year or whatever.

Austin Wilson:
Another point is that debt burdens, usually, this is a common word here.

Josh Robb:
Yes. Usually.

Austin Wilson:
Usually manageable, so that companies can have confidence in their ability to pay those dividends going forward. So companies, most publicly-traded companies, have some debt on their balance sheet.

Josh Robb:
Mm-hmm.

Austin Wilson:
They borrowed money, usually in an effort to borrow it at X percent and they think they can earn more than that on the project that they’re invested in, or in on the acquisition they’re investing in or whatever. Usually, companies have some debt on their balance sheet. If they pay a dividend, that debt burden’s usually manageable enough so that it’s not a threat to them being able to pay. So, that’s another good point.

Austin Wilson:
And as an overarching theme, dividend-paying companies are generally confident in the future direction of their company.

Josh Robb:
Because if they want to give out their cash, they’re confident. They probably won’t need that cash.

Austin Wilson:
That’s exactly right. Yep.

[5:48] – What are Dividend Aristocrats?

Austin Wilson:
So number two, as opposed to large share buyback authorizations that we just talked about, that companies really can exercise as they see fit as long as it’s approved by the board, they can use some one quarter, not use some another and just kind of flex it up and down as they want to use cash, dividends, on the other hand, those are widely viewed as commitments going forward.

Josh Robb:
Once you start paying a dividend, analysts, investors expect you to continue.

Austin Wilson:
And if you cut your dividend, or you stop paying your dividend, your stock is going to be sold-

Josh Robb:
They do not like that.

Austin Wilson:
… very, very sharply because those dividends are, therefore, built into the stock price as part of what the stock’s worth today. All those dividends continuing in the future is built into that price today. So, that is very confident in the future of their ability to pay that dividend if they initiate one now.

Austin Wilson:
So, companies with a history of strong growing dividends are sure they’re going to do that going forward. So, growing those profits to continue to pay that going forward.

Austin Wilson:
The next question you might ask is, “Austin, I’ve heard this term, sounds like you should be wearing a crown.”

Josh Robb:
Yes.

Austin Wilson:
“Rolling around in a carriage.”

Josh Robb:
Yeah.

Austin Wilson:
The term is Dividend Aristocrat. Is that a movie?

Josh Robb:
The Disney movie, Aristocats.

Austin Wilson:
Aristocats. That’s not the same.

Josh Robb:
Well, the cats are the Aristocrats.

Austin Wilson:
They are.

Josh Robb:
Everybody wants to be-

Austin Wilson:
That’s it. Okay. Yeah. It’s been a while since I’ve seen that one.

Josh Robb:
Good one.

Austin Wilson:
So, what is a Dividend Aristocrat, Austin? Well, a Dividend Aristocrat is a company in the S&P 500 Index.

Josh Robb:
Yeah.

Austin Wilson:
They not only consistently pay a dividend to shareholders, but they annually increase the size of its payout.

Josh Robb:
Okay.

Austin Wilson:
So, it can just be a penny, but they do increase it every year.

Josh Robb:
A group of S&P 500 companies.

Austin Wilson:
Yep.

Josh Robb:
Narrowed down, they pay a dividend.

Austin Wilson:
Yep.

Josh Robb:
And then narrowed down ever farther, that they increase that dividend.

Austin Wilson:
For at least 25 years straight.

Josh Robb:
All right. So, that’s the criteria.

Austin Wilson:
Yep.

Josh Robb:
So, they’ve 25 years of dividend increasing history.

Austin Wilson:
Yes.

Josh Robb:
To be called a Dividend Aristocrat. Okay.

Austin Wilson:
So, these companies tend to be large, established companies, that generally don’t enjoy supercharged growth anymore. So, they’re usually paying a lot of their excess cash, very stable in dividends, and they continue to do that year over year over year. So, a lot of these companies are more recession-proof, they enjoy some steady profits. They continue to grow their dividend in good times and bad. So, if you’re a Dividend Aristocrat today, that means you’ve increased your dividend every year for 25 years prior to today, which means you are increasing your dividend in two, three bear markets. Four, if you include the one right now.

Josh Robb:
Yep.

Austin Wilson:
So, you’ve got the dot-com bubble.

Josh Robb:
Mm-hmm.

Austin Wilson:
You got 0809.

Josh Robb:
Mm-hmm.

Austin Wilson:
You got COVID.

Josh Robb:
Mm-hmm.

Austin Wilson:
And now, you’re in another one now.

Josh Robb:
2022 Fed interest rate hiking bear market.

Austin Wilson:
Bear market. Yeah.

Josh Robb:
That’s the official name I just coined.

Austin Wilson:
That’s the exact one right there. So, you’ve consistently, and a couple of those one, two, three, maybe four, each of those pretty much has coincided with either some sort of economic slowdown or a recession.

Josh Robb:
Mm.

Austin Wilson:
That means that these companies have managed their businesses well.

Josh Robb:
Yep.

Austin Wilson:
I will point out, there is another level above Dividend Aristocrats.

Josh Robb:
Ooh, even fancier.

Austin Wilson:
So this is like, you want to put on-

Josh Robb:
You tell me. Tell me what they are.

Austin Wilson:
This is like the crown jewel of the dividend world.

Josh Robb:
Okay.

Austin Wilson:
Those are known as Dividend Kings.

Josh Robb:
Kings, because the Aristocrats they’re just a ruling-

Austin Wilson:
They’re just, yeah.

Josh Robb:
They’re hanging out. They’re the affluent people of the dividend-paying world. But then you got-

Austin Wilson:
But they report to the Dividend Kings, which are firms that have increased their dividends annually for more than 50 years.

Josh Robb:
50 years.

Austin Wilson:
And that’s a very small world. There’s a couple.

Josh Robb:
3M.

Austin Wilson:
Yep.

Josh Robb:
64 years.

Austin Wilson:
Coke.

Josh Robb:
Coke. 60 years. Johnson & Johnson, 59. Lowe’s, 59.

Austin Wilson:
All right. So yeah, that’s the Dividend Kings.

[9:25] – Dividend Growing Stocks are Lucrative

Austin Wilson:
Number three reason we like dividend growing companies is that they are lucrative.

Josh Robb:
Mm-hmm.

Austin Wilson:
It’s very good. They’re value-added.

Josh Robb:
Yes.

Austin Wilson:
For portfolios. Why is that? That is, for one, because dividend growth stocks have been, and when I’m talking about dividend growth stocks, I’m using the Dividend Aristocrat index.

Josh Robb:
Okay.

Austin Wilson:
Which is very easy to get data for.

Josh Robb:
Yes.

Austin Wilson:
And I’m comparing it to growth stocks and value stocks and the S&P 500.

Josh Robb:
Okay.

Austin Wilson:
Okay? So, dividend growth stocks have been some of the least volatile equity investments, with a lower annualized standard deviation than other large cap benchmarks.

Josh Robb:
Oh, you used a lot of big words there.

Austin Wilson:
This just means that they have less drastic moves.

Josh Robb:
Okay.

Austin Wilson:
Now that’s both up and down.

Josh Robb:
Up and down.

Austin Wilson:
But less drastic moves in terms of price swings than other large cap companies.

Josh Robb:
Okay.

Austin Wilson:
So, let’s put some numbers.

Josh Robb:
Yes please.

Austin Wilson:
So looking at the 15-year period, which is a pretty good stretch and involves a couple bear markets and everything.

Josh Robb:
Yep.

Austin Wilson:
This is 2006 to 2021.

Josh Robb:
Okay.

Austin Wilson:
Okay. The Russell 1000 Growth, so growth stocks, like tech stocks, high growth stocks, annualized standard deviation of 20.41%.

Josh Robb:
Okay.

Austin Wilson:
The S&P 500, very similar to that, 20.37%. Russell 1000 Value, so oil companies, financials, stuff like that, 21.57%.

Josh Robb:
More volatile.

Austin Wilson:
More volatile.

Josh Robb:
Crazy.

Austin Wilson:
Yep.

Josh Robb:
It hurts my head. That’s fine, keep going.

Austin Wilson:
The Dividend Aristocrats Index.

Josh Robb:
Yes.

Austin Wilson:
Annualized standard deviation of only 16.01. That’s substantially lower than the other peers. Okay. Next point. Total returns for dividend growth stocks over long time periods have been between growth-oriented stocks and value-oriented stocks.

Josh Robb:
Okay.

Austin Wilson:
So if you think of the stock market environment we’ve been in for some time, until recently, it’s very growth-oriented stock market. Growth was what worked, value was what did not work.

Josh Robb:
Yep.

Austin Wilson:
The Russell 1000 Growth over that same time period returned an annualized 12.54%. The S&P, 8.85%. The Russell 1000 Value, 4.59%, so that’s low. And the Dividend Aristocrats, 6.52%. So right in between growth and value there. So now, I’m going to get a little bit more technical, but I’ll boil it down to a way we can understand. So risk adjusted returns, as measured by the Sharpe ratio, have been extremely favorable for dividend growth stocks. So, when I’m talking about Sharpe ratio, a good way to think about that, and really all you need to know is, higher is better.

Josh Robb:
Okay.

Austin Wilson:
And it is a way to look at return for a given unit of risk.

Josh Robb:
So, I want a million in this.

Austin Wilson:
You want a million? One-ish is probably pretty good.

Josh Robb:
Okay.

Austin Wilson:
Okay. So, the Russell 1000 Growth over that same time period has given you a Sharpe ratio of 0.77.

Josh Robb:
Okay. So I’m not looking at a million?

Austin Wilson:
Nope. The S&P 500, 0.62.

Josh Robb:
Okay.

Austin Wilson:
The Russell 1000 Value, 0.45. Dividend Aristocrats, 0.98.

Josh Robb:
0.98. That’s the best of that group.

Austin Wilson:
That’s the best of that group.

Josh Robb:
And that’s because-

Austin Wilson:
Much less volatile, even though they got a lower return.

Josh Robb:
The total return 6.52 is awesome, when you consider they only took 16% standard deviation or volatility to get that return.

Austin Wilson:
Absolutely.

Josh Robb:
Gotcha.

Austin Wilson:
So Sharpe ratio, very good. So those are the reasons, a couple of the reasons, why we think dividend growth stocks are particularly awesome.

Josh Robb:
Okay. So that’s good history, kind of setting up what dividend growth stocks are.

Austin Wilson:
We’re setting it up.

Josh Robb:
Gotcha. Now I know what they are, got a way of tracking it. Dividend Aristocrats. Those are-

Austin Wilson:
Everybody wants to be a Dividend Aristocrat.

Josh Robb:
I can Google that and find those names.

Austin Wilson:
Yep.

[12:53] – Dad Joke of the Week

Josh Robb:
Gotcha. Let’s take a break. Dad joke. Got one for you.

Josh Robb:
Okay. Did you know that if you delete all the phone numbers in your iPhone, your pictures get blurry because iPhone doesn’t have its contacts.

Austin Wilson:
That’s funny.

Josh Robb:
Yeah.

Austin Wilson:
That’s funny.

Josh Robb:
Does to have good iPhone.

Austin Wilson:
Android does?

Josh Robb:
It uses glasses.

Austin Wilson:
Okay, good. That’s good.

Josh Robb:
Had LASIK.

Austin Wilson:
Classic, Josh. Classic.

[13:13] – Reinvesting Dividends

Austin Wilson:
All right. So, another thing I wanted to talk about today was dividend reinvestment.

Josh Robb:
Okay.

Austin Wilson:
So that’s when you get that, you’re owning all those shares of Apple and you get those couple bucks here and there over time, when you take that and you reinvest it into more shares essentially, or into your portfolio, into the market, whatever you want to do, you’re reinvesting it. You’re not just sitting on the cash. That reinvestment is really key for long term total returns.

Austin Wilson:
Now, total return is encompassing price return plus dividend return, right?

Josh Robb:
Yep. So when I get paid that little bit of money from the company, I shouldn’t just go out and-

Austin Wilson:
Spend it.

Josh Robb:
… splurge on it.

Austin Wilson:
Yeah.

Josh Robb:
If I want to get really amped up returns on these things.

Austin Wilson:
Yeah. Like if you want to supercharge it.

Josh Robb:
Okay.

Austin Wilson:
But you’re going to reinvest it.

Josh Robb:
Okay.

Austin Wilson:
So, nearly half of an investor’s total return can be attributed to reinvested dividends over a 30-year time period.

Josh Robb:
Okay. So, like a full working year career. My savings years-

Austin Wilson:
Yeah. So, let’s put some numbers to it.

Josh Robb:
Yes.

Austin Wilson:
So over a one-year period, very short term, dividends only represent about 6% of an investor’s total return.

Josh Robb:
Okay.

Austin Wilson:
So, that leaves 94% of that return to price. Over a three-year period, dividends are about 10% of total return, while that’s 90% for price.

Josh Robb:
Okay.

Austin Wilson:
Take it out to five years, that’s dividends at 15% of total return and 85% price. See the trend we’re getting here. 10-year period, dividends 22% of a total return.

Josh Robb:
Ah.

Austin Wilson:
78% for price. Over 20 years, dividends represent 38% of total return, 62% left to price.

Josh Robb:
Ooh.

Austin Wilson:
Over 30 years, dividends represent 47% of an investor’s total return.

Josh Robb:
Wow.

Austin Wilson:
53% at price. So, about 50-50.

Josh Robb:
Yeah.

Austin Wilson:
That is crazy. So said another way.

Josh Robb:
Say that same thing a different way for me.

Austin Wilson:
An investor who reinvested their dividends would achieve nearly double the total return of an investor who did not reinvest their dividends.

Josh Robb:
Yep.

Austin Wilson:
So looking at that same 30-year period, let’s look at one year, so this is ending 12/31.

Josh Robb:
Okay.

Austin Wilson:
So looking back one year, back three, five, 10, 20, and 30 years. The prior year, S&P was up 27%. Someone who had reinvested their dividends into the S&P, they were up 29. So, not a very big difference.

Josh Robb:
Yeah.

Austin Wilson:
Over prior three years, the S&P was up 90% while someone who reinvested their dividends was up a hundred. So, 10%.

Josh Robb:
Mm-hmm.

Austin Wilson:
Over five years, S&P was up 112. Someone who reinvested the dividends, they were up 132.

Josh Robb:
Oh boy.

Austin Wilson:
Over 10 years, the S&P was up 278. Someone who reinvested dividends, they were up 359.

Josh Robb:
Pause.

Austin Wilson:
Yeah.

Josh Robb:
10-year.

Austin Wilson:
Yeah.

Josh Robb:
Stock return. If you had dividends, you’re up 359% heading into this year. So that 20% correction makes, I lost all my money.

Austin Wilson:
Of course.

Josh Robb:
Right?

Austin Wilson:
Yeah.

Josh Robb:
That goes back to our thing of just perspective of why investing long-term matters.

Austin Wilson:
And we’ve had exceptionally strong stock market returns for years and years and years, fueled by low interest rates and a very easy federal monetary policy.

Josh Robb:
Yeah. But even that 10-year period had 2018, which was a 19% drop.

Austin Wilson:
Yep.

Josh Robb:
2020, which we saw 34% drop. So, it’s not without volatility.

Austin Wilson:
No.

Josh Robb:
Right. We did have a good year.

Austin Wilson:
Ride it out.

Josh Robb:
But 360% growth in 10 years.

Austin Wilson:
Yep. So, let’s take it out another 10 years.

Josh Robb:
Yep.

Austin Wilson:
20 years, the S&P was up 309%. While if you reinvested dividends, that was up 501. And over 30-year period, ending end of last year, ending in through 2021, the S&P was up 1043%.

Austin Wilson:
So that’s what, a 10-bagger?

Josh Robb:
Yes.

Austin Wilson:
While someone who reinvested their dividends, they were up 1979%.

Josh Robb:
Oh wow.

Austin Wilson:
So, that’s almost double.

Josh Robb:
Wow.

Austin Wilson:
Same kind of thinking.

Josh Robb:
That’s crazy.

Austin Wilson:
So, those are some numbers that really make you want to reinvest your dividends.

Josh Robb:
Yeah.

[16:59] – The Rule of 72

Austin Wilson:
So speaking of dividends, Josh.

Josh Robb:
Yes.

Austin Wilson:
There’s this other term that I’ve heard thrown around.

Josh Robb:
Yep.

Austin Wilson:
You taught me this many years ago.

Josh Robb:
Yes.

Austin Wilson:
This is called The Rule of 72. And I think you just made it up, but I think you should explain it.

Josh Robb:
The Rule of 72 says, at a 72 required distributions are needed out of your port. No, I’m just kidding. That’s another 72 rule.

Austin Wilson:
Oh yeah. We don’t want to talk about that.

Josh Robb:
Forget that one.

Josh Robb:
The Rule of 72, actually-

Austin Wilson:
Wait people back up.

Josh Robb:
Yes. That’s a formula, a math rule, that stipulates, if you are wondering how long will it take for my money to double.

Austin Wilson:
Yep.

Josh Robb:
And I know what my rate of return is, then I can tell you how many years. Or you could go the other direction, if I know how many years, how much return do I need to double. But the idea is looking at doubling, all right?

Josh Robb:
So, there’s a whole equation for this, but this is the simplified, I can do this in my head most of the time, or at least on a simple calculator to figure this out. So, we use that 72.

Josh Robb:
So first, some history. The Rule of 72 dates back to the year 1494.

Austin Wilson:
That’s like Christopher Columbus era.

Josh Robb:
Yeah. He just landed, he’s hanging out.

Austin Wilson:
Yeah.

Josh Robb:
This is Luca Pacioli.

Austin Wilson:
Sounds Italian.

Josh Robb:
I’m guessing. He referenced this in his comprehensive mathematics book called Summa de Arithmetica.

Austin Wilson:
Good.

Josh Robb:
I’m not really good at Italian, but that’s pretty much as far as I’m going to go. He made no explanation of how this rule works.

Austin Wilson:
He just put it in there.

Josh Robb:
So, the thought actually is he took this rule from a pre-existing rule from somewhere else. He didn’t come up with this because he wasn’t explaining how this whole thing works.

Austin Wilson:
Yeah.

Josh Robb:
He just said, “Hey, I know this rule. Let me put it in my book.”

Josh Robb:
There’s an actual mathematical equation for calculating this. And if you use The Rule of 72, which I’ll describe, you get close, I mean it’s rounding, but it’s close enough where if you’re saying I need to know doubling.

Austin Wilson:
Yep.

Josh Robb:
Okay. So, The Rule of 72 works like this. You say, okay, I’m going to divide 72 into that rate of return. And so, for instance, the easiest one, the simple one is, if I have a 10% return.

Austin Wilson:
Yep.

Josh Robb:
That’s 7.2 years, right?

Austin Wilson:
Yep. 72 divided by 10%.

Josh Robb:
All right. We got 7.2 years. So, if I have something earning or growing in dividends, 10% per year, in 7.2 years, I should expect it to double.

Austin Wilson:
Gotcha.

Josh Robb:
Now there’s a couple caveats which I just learned, I did not even know this.

Austin Wilson:
Yeah.

Josh Robb:
If you want to be very precise, then-

Austin Wilson:
Which we always do.

Josh Robb:
… you’ll only use The Rule of 72 between the range of six and 10%.

Austin Wilson:
Huh.

Josh Robb:
If you want to then make that adjustment to have a calculation be better to the real formula, you add one to the number 72, you add one point to the number 72, for every three points you get away from 8% threshold.

Austin Wilson:
Really?

Josh Robb:
That was really weird if I said that, and if you are listening on the podcast, so let me give you an example.

Josh Robb:
If you go up or down from 8% three points, that’s when you start adding, so eight minus three is five.

Austin Wilson:
Yep.

Josh Robb:
So, that’s why that six to 10% range. If I am doing 5%, I should actually use 71 as my factor in there.

Austin Wilson:
Yeah.

Josh Robb:
Or if I’m using 11%, eight plus three, I should use 73.

Austin Wilson:
Huh.

Josh Robb:
If I’m going to go to 14%, I should be at 74. You see how that works?

Austin Wilson:
It does make sense.

Josh Robb:
It just gets you closer. I looked up and did the numbers, in high level, you’re within the same year, you would’ve just been off by six months.

Austin Wilson:
Right.

Josh Robb:
It’s not really breaking your formula. But if you want to be more accurate, that’s something worth knowing.

Austin Wilson:
That is interesting.

Josh Robb:
So one more, before we get there.

Austin Wilson:
Oh, bring it.

Josh Robb:
Continuous compounding, which dividends don’t have, but if you have an interest rate that’s continuously compounding, you actually use 69.3.

Austin Wilson:
Instead of 72?

Josh Robb:
Yeah.

Austin Wilson:
Yeah.

Josh Robb:
There you go.

Austin Wilson:
Of course you would.

Josh Robb:
Yes.

Austin Wilson:
Why not?

Josh Robb:
How does this apply though? So if you are, and we know that dividend payers tend to continue to pay their dividend.

Austin Wilson:
Yep.

Josh Robb:
And the ones that are popular are the ones that are growing their dividend.

Austin Wilson:
Absolutely.

Josh Robb:
Unless you don’t want the same dollar amount because of inflation. If you can know or calculate what that anticipated growth rate is, that growth rate could tell you how often your income from that dividend-paying stock is going to double.

Josh Robb:
So like you said, if I’m getting a dollar per share in dividend payments, and it’s growing at 10%, how long is it going to take me before I’m getting $2 per share?

Austin Wilson:
7.2 years, according to The Rule of 72.

Josh Robb:
7.2 years, that’s right. So, that’s a way of just saying, “Okay, if I’m looking at maybe using dividends to help my income in retirement, I can kind of factor in what will that dividend dollar amount be if I know an annual or average growth rate on those dividend paying stocks.”

Austin Wilson:
Awesome.

Josh Robb:
So, that’s what you use it for. It’s a great way, easy way to calculate that.

[21:37] – How Can You Invest in This Trend?

Austin Wilson:
Yeah. So the question everyone’s asking, as they’re listening to this right now, is-

Josh Robb:
Yes.

Austin Wilson:
Hey Austin, Hey Austin. How the heck could I invest in this trend? And first of all, the two caveats we’re going to give is, number one, you might already be.

Josh Robb:
There’s a good chance.

Austin Wilson:
There’s a lot of companies who grow their dividends well, who are in the passive indexes. You probably-

Josh Robb:
We mentioned a couple those Kings.

Austin Wilson:
Absolutely.

Josh Robb:
Not unknown.

Austin Wilson:
So, you may already own some of these.

Josh Robb:
Yes.

Austin Wilson:
Number two, I’m going to name some tickers, companies, symbols. These are not recommendations.

Josh Robb:
No.

Austin Wilson:
Do your own due diligence. See if it fits your investment philosophy, your risk tolerance. Well, talk to your advisor about them. That’s great. So, take everything I say with a grain of salt.

Josh Robb:
Yep.

Austin Wilson:
I will also say that we do actively manage a dividend growth strategy in-house. So, that’s one of the reasons I’m so passionate about it.

Josh Robb:
Yep. You like it.

Austin Wilson:
Because I know so much about it. So, if anyone has any questions about that, send us an email for one, or check out the Invest With Us tab on our website.

Josh Robb:
But the things you’re going to talk about are not necessarily in our portfolio one way or another.

Austin Wilson:
Correct. They might be or they might not be.

Josh Robb:
Not a recommendation. Just some examples.

Austin Wilson:
Absolutely.

Josh Robb:
There you go.

Austin Wilson:
So individual stocks, you could obviously buy individual stocks. We mentioned a couple of them before, but these are ones that we haven’t mentioned, but I looked these up.

Austin Wilson:
So Visa, the credit card issuer, they have a low yield. It’s less than 1%, but they have a high dividend growth rate. It’s actually over 14% annually over one, three and five years.

Josh Robb:
Wow.

Austin Wilson:
So, that’s a dividend growth stock.

Josh Robb:
Not bad.

Austin Wilson:
Bank of America is another one. They have a mediocre yield. It’s decent. It’s two and a half percent, something like that. But they’ve got more than an 11% growth rate over one, three and five years. So, those are some dividend growth stocks.

Josh Robb:
With individual stocks, I mentioned before there’s reinvestment programs, some have direct investment programs with the company where you are-

Austin Wilson:
A DRIP.

Josh Robb:
Yes, and that’s the acronym for it. The idea there is it’s cost saving because you have lower costs for setting this up. They automatically reinvest those dividends for you. You avoid those transaction fees. It was really a bigger deal years ago, when there were individual transaction costs that were in the twenties.

Austin Wilson:
Right.

Josh Robb:
$20 range. Where, boy, for me to buy these individual stocks every time is going to be expensive. So, these companies set up this idea that, “Hey, you want to be a shareholder of ours? Let’s help you out.” Low cost, held directly. It’s very easy.

Josh Robb:
Now, there are low trading costs across the board. Most custodians, it’s a lot less needed because you can have stuff in one spot, but those are out there for people that are interested. They’re still there.

Austin Wilson:
And you can even, most custodians, you can set what to do with your dividends.

Josh Robb:
Yes. And tell them to re-buy.

Austin Wilson:
And you can tell them to reinvest them into the security or not.

Josh Robb:
Yes.

Austin Wilson:
So, those are options you have. Okay. So, those are individual stocks.

Josh Robb:
Yep.

Austin Wilson:
ETFs. Josh, you love ETF.

Josh Robb:
Yes. I hope there’s a good one.

Austin Wilson:
There might be some tickers you might like.

Josh Robb:
I hope so.

Austin Wilson:
One is, again, no recommendations here. The iShares Core Dividend Growth ETF.

Josh Robb:
Okay.

Austin Wilson:
Ticker DGRO.

Josh Robb:
Okay. Dividend growth. Yeah. Okay.

Austin Wilson:
Another one is the ProShares S&P 500 Dividend Aristocrats.

Josh Robb:
Ah. The Aristocrats.

Austin Wilson:
Ticker NOBL.

Josh Robb:
Ah. NOBL. Ah, there you go.

Austin Wilson:
Okay. That’s pretty clever.

Josh Robb:
Someone put some time in that.

Austin Wilson:
There are some mutual funds that are focused on this as well. Again, no recommendations, but one is the Vanguard Dividend Growth Fund, ticker VDIGX.

Josh Robb:
Mm-hmm.

Austin Wilson:
Not a great ticker.

Josh Robb:
Well, we’ve talked mutual funds-

Austin Wilson:
We talked about why mutual funds tend to have-

Josh Robb:
Exactly, boring.

Austin Wilson:
They’ve got always got to be five letters and there’s multiple share classes.

Josh Robb:
Yes.

Austin Wilson:
Another is the T.Rowe Price Dividend Growth Fund and that’s ticker PRDGX. So, those are some options just to get the wheels turned.

Austin Wilson:
Again, do your own due diligence. Talk to your advisor. Ask us if there’s any questions, but those are some ways to get exposure to dividend growth in your portfolio that may different than you already have, but you probably already have.

Josh Robb:
Like you said, you probably already have it in that, if you own the S&P 500 Index.

Austin Wilson:
Yeah, absolutely.

Josh Robb:
There are dividend payers in there.

Austin Wilson:
Yeah.

Josh Robb:
So, if you’re a globally diversified portfolio, you probably have dividend payers in there somewhere.

Austin Wilson:
Yep, absolutely. So that’s why I love dividend growth stocks in a nutshell, Josh.

Josh Robb:
There you go.

Austin Wilson:
How do you feel about them?

Josh Robb:
I appreciate them as well.

Austin Wilson:
That’s good.

Josh Robb:
And again, going back to that diversified portfolio, you saw the variation in returns and there’s going to be years where dividend payers do well. This year is one of those years, where more value-oriented, more stable companies have outperformed. There’s other years where growth-oriented outperformed. So, again, it goes back to a diversified portfolio.

Josh Robb:
But if you are looking or needing income from your portfolio, man, dividends are nice.

Austin Wilson:
They are.

Josh Robb:
We didn’t even get to the tax structure, but there’s different types of dividends, a lot of them are qualified, which is just a better tax rate.

Austin Wilson:
Yep.

Josh Robb:
So, there’s some really positive ways to earn some income from those stocks while you’re holding them.

Austin Wilson:
Absolutely.

Austin Wilson:
Well, that’s dividend growth. Again, please let us know if you have any questions and share this episode if you enjoyed it, with friends and family, or if you ever have someone just asking, “Man, dividend-growth, what is that all about?”

Josh Robb:
What is it?

Austin Wilson:
We would love to be able to help them.

Austin Wilson:
As always, send us any questions, ideas, whatever, comments to hello@theinvesteddads.com. And until next Thursday, have a great week.

Josh Robb:
All right.

Austin Wilson:
See you later.

Josh Robb:
Bye.

Thank you for listening to the Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to the theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions.

Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecast provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.