Dividend Investing: Let Compounding Do Its Thing

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Ryne Williams shares why he favors dividend investing (0:20). Sometimes dividend cuts make sense; pay attention to dividend history (2:40). Visa (V) a favorite dividend stock, though some argue its status (5:15). Beware of juicy yield traps (8:20).

Transcript

Rena Sherbill: Ryne Williams, named after one of my favorite baseball players. Welcome to Seeking Alpha. Welcome to the show. It’s great to have you on. Thanks for joining us.

Ryne Williams: Thanks, Rena. I am so stoked to be here with you today. It’s going to be fun.

RS: It is going to be fun. We’re stoked to have you. We’re happy to have you part of the community. Share with our investors, share with our audience, who may not know you from your YouTube channel, from your analysis on dividend stocks. How do you approach the markets, and why do you approach them that way?

RW: When I started getting into this stuff, I came into investing with no experience whatsoever. I was completely brand new to all of this. I was a clean slate. And so, for me coming into this, dividend investing just seemed so simple.

I learned a lot about it initially from watching YouTube videos. I got to shout-out some of the people who really put me on this path, PPC Ian, got my man Russ Knopf at Dapper Dividends. So a lot of really good channels there that I was able to learn the ropes from. And it just made sense.

I really liked the idea of buying these companies and collecting that paycheck and then reinvesting that. And then the next time you get that paycheck, it’s even larger. So that really resonated with me.

A lot of the great dividend paying companies as well are ones that I was familiar with. They’re some of the world’s most recognizable companies, Microsoft (MSFT), Apple (AAPL), Walmart (WMT), Coca-Cola (KO), PepsiCo (PEP).

Just buying and holding on to these companies, it was a very long-term thing. You just buy the stocks, collect that passive income, collect that paycheck, and then reinvest it, and then the next time it comes around, it’s even larger. And then that’s the dividend snowball effect that creates that great powerful compounding effect that makes this thing so wonderful.

I really like the idea that you don’t have to sell your shares someday down the road. You’re buying the stocks just to get that paycheck. And as soon as you let that go, that’s gone. So, I like that aspect of it as well.

RS: In terms of this passive income coming your way, what happens when a company cuts their dividend? How do you approach that? Is it unique to the specific stocks and what they have going on or do you have a blanket rule for that?

RW: That’s a great question. I know some investors do have a blanket rule to where if a company cuts their dividend immediately, it’s getting axed from the portfolio.

And I think there’s a little bit more nuance to that. I think you have to look at just things holistically. And with that said, I don’t immediately sell when a company cuts its dividend.

It’s unfortunate, but oftentimes it makes sense for the company. And I think, if I think the company holistically is still a good investment, then I still think it’s worth holding on to.

And sometimes companies do cut their dividends. It’s rare. Sometimes they cut their dividends for reasons that really aren’t so bad. Like, if we look at a company like W. P. Carey, ticker symbol (WPC), they had reduced their dividend by a decent amount, but it wasn’t because the business was struggling, it was because they spun off a certain part of their business and couldn’t afford to keep making the payments just based on that.

But overall, just based on the restructuring, it seemed like an overall positive move for the business.

And in my position, I still have probably 20 or 30 years before I’m living off these dividends. So, I’ve got time to let that recoup. And so, in that instance, that’s one where the dividend was cut, but I didn’t end up selling out of it. So, I think it just depends.

And I think one of the worst things an investor can do is make a knee-jerk reaction there and say, oh, this happened. And so, just immediately selling just upon hearing the news. I think you got to let the dust settle a little bit and see what’s going on under the hood.

RS: So, based on a narrative of the stock and also maybe where you’re at in your investing timeline, how far you are away from retiring, how far away you are from needing that really passive income.

RW: It’s really not all too different from investing in non-dividend paying stocks. I think if you’re investing in individual companies, all of the same rules apply. At the end of the day, you’re looking to invest in healthy and growing businesses.

And so you still want to look at things like revenue and earnings and especially free cash flow because dividends are paid out of a company’s free cash flow. Those are really important things to look at. You want to make sure the company’s not too highly leveraged, too in over their heads with debt.

So all of these things are things that you’d look at with non-dividend paying companies. And yeah, that still applies to the dividend payers, but in addition to that, some of the things you want to look at, which Seeking Alpha makes it super easy to do, by the way is, just look at the dividend history.

Are the dividend payments stable over time? Are they growing over time? How much of their earnings and their free cash flow are they allocating towards the dividends?

Because that can tell you a little bit about the dividend safety as well. So there are some dividend specific metrics that you want to look at like those, but that aside, I think it’s just like looking at any other company. You want to make sure you’re investing in something that’s fundamentally strong.

RS: What would you say are some of your favorite dividend stocks to be looking at right now?

RW: Oh man, this could be a can of worms. One of the first ones that comes to mind, and a lot of people might not think this is a dividend stock, but I guess maybe I have a different definition than some, but Visa (V). I think Visa is like the gold standard of just companies to invest in in-general.

If you look at the financials on that one, everything is just straight up and to the right. The company has just negligible debt. It is basically printing cash and qualitatively they’ve got some great tailwinds working in their favor as well, they’re the largest payment network in the world and digital payments are expanding over time.

And in that industry, like trust and brand recognition is a huge factor, and they really have that working in their favor. Those are just a few examples, but long story short, I think that’ll continue to be a great business for a long time and a more important business tomorrow than it is today and then it was yesterday, but as it applies to the dividend that all trickles into the dividend.

I mean the starting yield isn’t the highest and this is where I get into trouble with some dividend investors because some people think for it to be considered a dividend stock and maybe they’re right, I don’t know, maybe I’m wrong, but some people think for it to be considered a dividend stock, it’s got to have at least a 3% or a 4% or a 5% dividend yield, but I think anything that pays a dividend, technically, you can put it in the dividend stock category. At least that’s what it means for me.

But Visa has a low starting yield, less than 1%. So if you’re close to retirement and need that income today, this one may not be the best fit, but if you look at the sustainability on the dividend, the payout ratio, very low. I think it’s maybe in the 20% range, maybe 30%. I’m not 100% sure off the top of my head, but it’s low. And that dividend growth rate is strong. Double digits with no sign of slowing down.

And for someone in my position, who has a long time to let the compounding effect do its thing, that’s exactly what I’m looking for. I’ve got time to let that dividend continue to grow. I think that one’s a great example of just a rock solid dividend growth stock.

There are some others that are maybe, similar to Snap-on’s (SNA) another one of my favorites. Lowe’s (LOW), those have been great dividend growth stocks. What else, what else we got? Williams-Sonoma (WSM) has been a big winner as well.

And then I just bought, this one’s interesting. I just started investing in a company called Clear Secure, ticker symbol (YOU). And that company, and I don’t know if you’ve seen these at the airport, right next to where you go through security, there’s those blue and white kiosks that basically helps you cut the line when you’re going through TSA.

And so I just started investing in that company, and I think that has a lot of the financial makings to be a good dividend growth stock as well moving forward. Those are a few examples.

RS: And what are some that you’re staying away from or are there ones that you would encourage investors to stay away from?

RW: Absolutely. There’s a type of dividend paying stock that we, stock or ETF that we talk about called yield traps.

And essentially, I mean, these yield traps are exactly what they sound like. They’re companies or ETFs that come with high starting yields. Typically, it’s, 11%, 12%, 15%, sometimes even higher percentages, but very juicy and very tempting dividend yields, but you got to look beyond just the dividend yield. And that’s where you got to look at the dividend history.

And so, these yield traps, while they may have these high starting yields, and I’ll give you some concrete examples in a moment, if you look at the dividend history on these companies or ETFs, the dividend per share is going down over time.

If you hop on Seeking Alpha, just search (AGNC) or search (ORC), that’s Orchid Island Capital or AGNC Investment Corp, look at the dividend history on those and you’ll know what I’m talking about.

Over time, if you look at the last 10 years, the dividend per share is, I think in both of their cases has been cut in more than half. So yeah, you might have a high starting yield and 10 years ago you might have had a high starting yield, but over time your cash flow returns with those companies are going down.

And those are the exact opposite types of things that you want to invest in. You want to see that going up over time. So no matter how high the yield is, you got to look out for those yield traps.

But also, just dividend aside, as it pertains to investing in individual companies, look out for ones that are also showing some negative sales growth, negative earnings growth. And if you’re noticing trends there, that can be a red flag as well. So, you got to look out for those things too.

RS: Something that people have been talking about and investors have been noting is that in this environment that we’re in, given where interest rates are thought to be going, given where the Fed is looking to go, that dividend paying stocks will be doing better in this environment.

Does macro affect your investing style or strategy or companies that you’re looking at, at all?

RW: I would say not from a long-term perspective, but if those things can impact price movements in the short-term, which I think they can, and we’ve seen that, especially with REITs this year, I do think that’s worth taking into consideration, especially if you’re waiting for the right time to buy a certain company.

They say don’t time the market or whatever, but when it comes to buying individual stocks, timing is a factor that – you want to get the timing right. You want to get that margin of safety.

So, if looking at the macro environment tells you that a stock could potentially be heading in a certain direction or if interest rate changes could be having a short-term impact, then I do think that’s worth taking into consideration, and you can try and base your next move around what you think is going to happen there.

RS: What else would you say to investors either that are already invested in dividend stocks or what would you encourage investors to think about that may be getting started in that case? I guess for the novices and the more experienced among us.

RW: Yeah, I think it just goes back to the whole yield trap thing. Don’t buy a stock just because it has a certain dividend yield. You really have to look at the big picture. You really have to look at things holistically. And some people don’t want to do that. Some people don’t want to spend the time looking into the financial statements or reading the annual reports or listening to their earnings calls or anything like that.

And I also think as a new investor, that’s something that you should come to understand about yourself as fast as you can because if you don’t want to do those things, then just stick with ETFs. And I think that’s a great way to go as well. You just really have to know that about yourself as an investor.

But on the other hand, if that stuff sounds interesting and you want to learn how to learn how to do that stuff, then I think that’s great too. But I think that’s important to know about yourself.

For a brand new investor getting into dividend stocks, you want to buy some individual companies: number 1, look out for those yield traps; number 2, start by, if you want to get some practice and start by thinking about which companies you know and understand, go where you’re familiar.

And that’s going back to what I was saying earlier. That’s one of the things that I really liked a lot about some of these great dividend payers is they are – a lot of us are going to be familiar with McDonald’s (MCD). We know how McDonald’s makes their money and maybe why customers might want to spend their money there.

Think about companies like that that would be within your wheelhouse and maybe start with those, but I would say, those are the two big things, invest in what you know and stick with that, and watch out for those yield traps.

RS: Ryne, I really appreciate this first conversation. Really happy to have you on Seeking Alpha, sharing your insights with our audience. Share with our listeners where else they can find you, where on YouTube they can find you, where else they could find your analysis.

RW: Yeah. So, if you guys want to check out more of my stuff, more on my gibberish, just hop on YouTube and just search Ryne, and my last name is Williams, and you can find me there.

Or you can visit my website at Retire With Ryne. That’s also my handle on pretty much all the social media platforms. Although I will say that YouTube is my bread and butter. I’m not super active on Twitter or X. Doing a little bit on Instagram. Definitely check out the YouTube though and the website.