Why Boring Stocks Might Be the Real Wealth Builders

SPEAKER_1 (0:01)

Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks. Invest in your life.

Kirk Chisholm (0:11)

Hello, Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. So today, I'm joined with Jonathan Nurick. How are you doing Jonathan?

Jonathan Nurick (0:19)

I'm good, thanks. Nice to see you Kirk.

Kirk Chisholm (0:21)

You too. Well, it's good to have somebody from down under today. So this will be an interesting conversation.

See how people's perspectives in the US differ from other countries. So Jonathan, tell us a bit about your background.

Jonathan Nurick (0:32)

I grew up the son of a hedge fund manager.

I was always very interested from a young age. And after a short career in law and then investment banking, and then inside our family office, decided to take the strategy to outside investors who were aligned with what we're doing. And the strategy tries to solve for the two key parts of investing. Everybody focuses on one part, but in our view, the second part is just as important. And that is what to hold, what instrument. We believe that high rates of dividend growth is a very productive pursuit. And then the second part is how to stay the course through the inevitable ups and downs on that investment journey. And we use that dividend growth behavior, that signaling, to try and educate ourselves about the fundamentals rather than how the market might be feeling at any point in time, and give ourselves and our clients a better chance of staying the course to ultimately realize the benefits of compounding in this strategy.

Kirk Chisholm (1:36)

You're a rarity in this kind of environment. Everyone wants to invest in Bitcoin and the trendy names. I tend to be value oriented in my nature, but it's hard because it's been out of favor for a while.

What is it about dividend stocks that makes sense in an environment like this when everyone just wants to put all their money on black and let it ride?

Jonathan Nurick (1:57)

Well, if we go back to Professor Myron Gordon at MIT, back in the 50s and early 60s, his research team ultimately went on to later win Nobel Prize. But they were trying to identify correlations between various financial data and share prices. What they found was, at least at that point in time, that dividends had a very valuable predictive aspect to where share prices are likely to go over time.

They ended up canonizing their Gordon growth model or the dividend discount model as it's often known today. Essentially, it boils down to where the dividend goes, the share price should follow over time. Every day, the market might be worried about the war that's going on, or an interest rate decision, or a presidential election going on. But in the fullness of time, where the dividend goes, the share price follows. Therefore, what we look at that and say, if we can build a skill set to identify those companies that grow their dividend at a very high rate for a very long time, our share price should follow that same trajectory over time. These tend to be boring businesses. We are not looking for the income today. We're looking for how much income this can be far down the line.

As a result, we're happy to sit out, whatever the excitement of the day might be, and sooner or later, simply the weight of money as the dividend goes from 1 to 2, to 4, to 8, to 16, etc. We have seen that happen in many of our holdings over time. That is a very good outcome over time and feels far less speculative than, as you say, bet it all on black.

Kirk Chisholm (3:46)

In theory, what you're talking about makes a whole lot of sense, but it's really hard for a lot of people to write it out.

There were certainly times historically in the market where you might be getting a dividend that was well worth the weight. It might be 5% or 7% or some number in that range. I don't know the number off the top of my head, but I believe the S&P dividend for the index itself is in the low ones and maybe even below one. It's hard to justify that as an attractive measure in this kind of environment. So how do you choose dividend companies that make sense to grow long term?

Jonathan Nurick (4:28)

A very important clarification point for us is we are not looking for current income. So we're not looking for high yields, what we are looking for, companies that are growing their dividend very attractively, and they tend to have very low payout ratios and not trade with very high yields. The market sees these things as growth companies, sort of persistent growth companies. And if you fast forward over time, with any asset, it doesn't have to be a stock, whether it's a farm, a house, or a company, or an interest in a company, the volume of cash that gets produced over time, the rate at which that grows ultimately becomes what people are willing to pay. If somebody is looking at an apartment, the first question is sort of what is the rent? And then the questions around that, are the schools nearby good? Are they getting better? Who lives in the neighborhood? Is there a new train station? What kind of development is going on? What all those questions really are asking is, what are the prospects for my rent over time? Because if my rent will double or quadruple over some period, I should expect the value or price that somebody will pay me for that cash flow stream to double or quadruple. So what we're trying to identify are companies that pay dividend today, that dividend can be extremely modest. At the extreme, one of our companies' yield today is 0.09%.