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Prepare for market volatility with long-term dividend growth investing. Companies like Visa and Microsoft prioritize future dividends over immediate revenue. Here are excerpts from a recent conversation with investment experts.
transcript
Rainer Scherbier: Eli from Dividendology, welcome to the Seeking Alpha podcast. Nice to have you. Thank you for joining us.
Which stocks are you paying most attention to? What do you think are the hot stocks you’re paying most attention to these days?
Dividendology: Obviously, we want to look first for quality companies that can grow free cash flow. In fact, I would say that the best companies in the world pay dividends.
Think of companies like Microsoft (MSFT) or Visa (V), and now we can even bring companies like Meta (META) and Google (GOOG) (GOOGL) into the conversation.
These companies have very high returns on invested capital. Their free cash flow growth rate is high. So typically when you hear these things you think, wouldn’t paying a dividend hinder their ability to grow? Wouldn’t they be better off investing that capital back into the business?
But here’s what you have to know. These companies have large cash positions on their balance sheets. They were inundated with cash. In fact, they generate so much cash that they can’t wisely reinvest all of it back into the business.
Meta is a good example. They just burned through $50 billion, but they didn’t get that $50 billion back on their investment in the Metaverse. It would be much better if they actually paid the money out as dividends. I think the management team is aware of this because obviously as we’ve seen over the past year, they’re paying dividends now.
So we don’t sacrifice growth for the dividends that we receive, we actually receive them because these companies are such high quality companies, they generate so much cash, I can receive dividend income that grows year over year.
So I would say one of the major companies that I’ve really built over the past year is Visa. Its starting dividend yield will be lower. So it depends on what your goals are. If you’re retiring or about to live off dividends, maybe this isn’t the best investment for you. You want to look for higher starting yields.
But if you take a long-term view, you’ll see the projected earnings growth rate of a stock like Visa that will allow them to grow their dividends at a very high rate over the next few years, over the next several decades.
So I’m looking for such a company. Visa plays a big role in my portfolio. Microsoft is a big part of my portfolio. Of course, I also have the Dividend ETF (SCHD).
I’m a long-term dividend investor. I don’t necessarily have a high risk tolerance, but I know I can handle the volatility because I’m investing for the long term.
What do we know about the market in the long run? Well, the average return is between 8% and 9%, and the inflation-adjusted rate is probably closer to 7%.
But here’s where it gets interesting. As we think about when to retire and when to live off dividends, my long-term goal is to one day live off dividend income. If someone were trying to retire in a year when the market was down 20%, it could be quite a financial hit to their ability to retire at that time.
So what does this mean? If I’m willing to live off the dividends, then, I don’t really have to worry about sequence risk. I don’t have to worry about how the market is doing at a particular point in time.
