At The Money: Profiting from Dividend Growth

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**Barry Ritholtz** (0:25)
How often do you think about dividend investing, and in particular, dividend growth investing? Dividends are one of the oldest and most highly regarded forms of equity investing, but in an era of mega cap growth, should you be chasing dividends or buying growth? David Bahnsen is the author of a new book, Profit from the Profit, the Past, Present and Future of Dividend Growth Investing. He's also the founder and chief investment officer of the Bahnsen Group, managing over $10 billion.
So David, let's start with just the title of the book, Profit from the Profit. Explain the difference between profiting from a company's underlying economic activity versus merely profiting from a change in stock price.

**David Bahnsen** (1:14)
Well, my view, Barry, is that all investing comes down at some form or another to the underlying profits of what is being invested in. And you could say, well, what about pre-profit companies, pre-revenue, venture capital, all of those things still are being invested in out of some outlook on future profitability.
And to the extent you want something that's more liquid and a little more stable and diversify the types of things that usually are found in public markets, then you're dealing with underlying profits and some sort of discounting of those future profits into a present valuation. And what I'm suggesting here in the prepositional phrase, the out of profit from the profit is I'm saying, let's take those profits that we own the company for and let's allow the individual investor to participate in those profits in the way that throughout history they often did, which is the receipt of a dividend.
Now, of course, I recognize companies cannot pay all the profits out to their risk-taking investors. They need to hold on to some profits and retain some for a rainy day. They need to pay down debt. They need to reinvest in CapEx and growth of the company. But there has to be some reward to the risk-taker and dividends represent a palatable, tangible, repeatable profit from those profits.

**Barry Ritholtz** (2:38)
So, let's dive into that philosophy, which you describe as really a philosophy of ownership, rather than simply an investment strategy or even a tactic. I really like that framing. Explain the foundation of thinking of your ownership of a stock as owning a company.

**David Bahnsen** (2:59)
I believe it's an underlying business that has a market strategy, that has a management team, right? It's a real company. Every company we own is effectively a lemonade stand, and there's different levels of complexity and all of those things, and it's goods or services or both. But at the end of the day, it's a business. And one of the problems with the success of index investing is we do start to think something that isn't true, that we made our money from the market, from the index went up.
Companies go up and you can aggregate that, and the math gets very complicated. But there's only value being created when there are underlying businesses that are adding value and that there are customers of businesses that are buying goods and services that meet the needs of humanity. So this underlying first principle drives what I believe about value creation and therefore the generation of profits and from the generation of profits, the ability to reward shareholders with those.

**Barry Ritholtz** (4:01)
So some of the writings you've put out over the years that I've seen really draws a distinction between what you just described as value creation, as opposed to buying a couple of numbers on a screen and the numbers go up.
You've been pretty blunt about describing there isn't a difference between owning a company and speculating in the market. Discuss that difference. How do you draw the line between economic investing and just speculation and gambling?

**David Bahnsen** (4:36)
Well, I think that by definition, the easiest line is things that are zero sum versus things that are not. And so when you place a wager with your friend on the Mets game, first of all, if you took the Mets, you're probably going to lose the bet. Second of all, there's one winner, one loser. But when you invest in Procter Gamble, I don't believe that's the case. You're investing in them creating new wealth, new profits, new opportunities, et cetera. And so that by definition despeculates the investment to some degree. But also there's just a lot of investing that is based on a guess of a price in a certain period of time. One of the reasons that we don't do option investing at my firm is because even if I have a lot of conviction in a company and I can go buy a call option on it, but I can't make any money doing that unless I also attach the time value to it. But I'm not interested in speculating on when an announcement may come or when the company may be honored in the market with a higher valuation.