At The Cash: Dividend Progress with David Bahnsen (August 25, 2026)
Dividends are among the many oldest and most extremely regarded types of fairness investing. However in an period of mega-cap progress, do you have to personal dividend-paying equities?
Full transcript under.
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About this week’s visitor:
David Bahnsen is founder, managing accomplice and chief funding workplace of The Bahnsen Group, a nationwide personal wealth administration agency. His new guide is “Revenue from the revenue: the previous, current, and way forward for dividend progress investing.”
For more information, see:
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TRANSCRIPT:
At The Cash: David Bahnsen: Revenue from the Revenue — Half 1
Bloomberg | Host: Barry Ritholtz
BARRY RITHOLTZ: How usually do you consider dividend investing and, particularly, dividend progress investing? Dividends are one of many oldest and most extremely regarded types of fairness investing. However in an period of mega-cap progress, do you have to be chasing dividends or shopping for progress? David Bahnsen is the creator of a brand new guide, Revenue from the Revenue: The Previous, Current and Way forward for Dividend Progress Investing. He’s additionally the founder and chief funding officer of The Bahnsen Group, managing over $10 billion.
So David, let’s begin with simply the title of the guide, Revenue from the Revenue. Clarify the distinction between making the most of an organization’s underlying financial exercise versus merely making the most of a change in inventory value.
DAVID BAHNSEN: Nicely, my view, Barry, is that every one investing comes down, at some type or one other, to the underlying income of what’s being invested in. And you might say, effectively, what about pre-profit corporations, pre-revenue, enterprise capital? All of these issues nonetheless are being invested in out of some outlook on future profitability.
And to the extent you need one thing that’s extra liquid and just a little extra secure and diversified, the sorts of issues that normally are present in public markets, then you definitely’re coping with underlying income and a few type of discounting of these future income into a gift valuation. And what I’m suggesting right here within the prepositional phrase, “revenue from the revenue,” is I’m saying, let’s take these income that we personal the corporate for and let’s enable the person investor to take part in these income in the way in which that, all through historical past, they usually did, which is the receipt of a dividend.
Now, after all, I acknowledge corporations can’t pay all of the income out to their risk-taking buyers. They should maintain onto some income and retain some for a wet day. They should pay down debt. They should reinvest in CapEx and progress of the corporate. However there must be some reward to the risk-taker, and dividends signify a palatable, tangible, repeatable revenue from these income.
BARRY RITHOLTZ: So let’s dive into that philosophy, which you describe as actually a philosophy of possession quite than merely an funding technique or perhaps a tactic. I actually like that framing. Clarify the inspiration of considering of your possession of a inventory as proudly owning an organization. I imagine it’s an underlying enterprise that has a market technique, that has a administration crew, proper?
DAVID BAHNSEN: It’s an actual firm. Each firm we personal is successfully a lemonade stand, and there’s totally different ranges of complexity and all of these issues, and it’s items or companies or each. However on the finish of the day, it’s a enterprise. And one of many issues with the success of index investing is we do begin to assume one thing that isn’t true: that we made our cash from the market, from the index going up.
Corporations go up, and you may mixture that, and the maths will get very sophisticated, however there’s solely worth being created when there are underlying companies which can be including worth, and there are prospects of companies which can be shopping for items and companies that meet the wants of humanity. So this underlying first precept drives what I imagine about worth creation, and due to this fact the technology of income, and from the technology of income, the power to reward shareholders with these.
BARRY RITHOLTZ: So among the writings you’ve put out over time that I’ve seen actually draw a distinction between what you simply described as worth creation, versus shopping for a few numbers on a display screen and the numbers go up. And also you’ve been fairly blunt about describing that there’s a distinction between proudly owning an organization and speculating out there. Focus on that distinction. How do you draw the road between financial investing and simply hypothesis and playing?
DAVID BAHNSEN: Nicely, I believe that, by definition, the best line is issues which can be zero-sum versus issues that aren’t. And so whenever you place a wager along with your buddy on the Mets recreation, to begin with, for those who took the Mets, you’re most likely gonna lose the guess. Second of all, there’s one winner, one loser. However whenever you put money into Procter & Gamble, I don’t imagine that’s the case. You’re investing in them creating new wealth, new income, new alternatives, et cetera. And in order that, by definition, de-speculates the funding to a point. But in addition there’s simply numerous investing that’s primarily based on a guess of a value in a sure time period.
One of many causes that we don’t do possibility investing at my agency is as a result of even when I’ve numerous conviction in an organization, and I can go purchase a name possibility on it, I can’t make any cash doing that except I additionally connect the time worth to it. However I’m not fascinated about speculating on when an announcement might come or when the corporate could also be honored out there with a better valuation. Lengthy-term worth creation will not be essentially gonna be inside a timeline. And so, you recognize, there’s alternative ways individuals can get to this, however our view is that hypothesis, you recognize it whenever you see it.
And on the finish of the day, we’re proper now in a speculative mode. I by no means thought I’d see hypothesis like we noticed within the ’90s once I was beginning my investing profession, and what we noticed going into actual property with the pre-’08 interval. There’s been numerous moments of speculative mania and fervor in my profession. Proper now, the instrumentation that exists for hypothesis, with literal hypothesis in DraftKings and sports activities markets, and now these prediction markets, single-day possibility ETFs, all of these things, it’s unbelievable. They’re all consciously geared in direction of hypothesis.
A dividend portfolio is saying, “Hey, I actually imagine persons are gonna purchase soda pop,” or they’re gonna proceed needing oil and fuel to warmth their houses, et cetera.
BARRY RITHOLTZ: Yeah, it’s actually turning into an issue, particularly to the present technology of younger males.
DAVID BAHNSEN: Yeah.
BARRY RITHOLTZ: Who just about have grow to be playing junkies. It was dangerous sufficient when individuals had been betting on the end result of video games, however for those who’re betting on, is he gonna hit this free throw? Nicely, you recognize, you’re simply throwing cube. You would possibly as effectively go to Vegas.
Associated to this, you’ve mentioned within the guide the distinction between endogenous and exogenous returns. Dive into that just a little bit and clarify what these variations are, and what it means to an investor, not a speculator.
DAVID BAHNSEN: Nicely, primarily, we’re simply speaking in regards to the distinction between making an attempt to get your return from elements which can be exterior, which can be exterior of your management, which can be exterior the underlying actuality of the enterprise. So, on this specific case, we’re type of referring to what you imagine others’ psychology will likely be, how different buyers are gonna reply. I believe the P/E ratio’s gonna get bid up as a result of this inventory goes to be in style. That will be an instance of an exogenous issue, and I believe it’s by far probably the most, let’s consider, prevalent mind-set about investing.
However whenever you’re speaking about stuff that’s throughout the enterprise, that my return is gonna come from the efficiency of the corporate, from their success in rising income and competing and creating worth, then that’s endogenous. And it’s a completely totally different mentality and method. I don’t counsel everybody’s self-aware of this. I don’t assume it’s completely self-conscious. However I believe that the implicit mentality or goal of many buyers immediately is that they’re betting on what others are gonna do, versus betting on how an organization is gonna carry out.
BARRY RITHOLTZ: Actually, actually attention-grabbing. So this guide, Revenue from the Revenue, is a follow-up to your 2019 guide, The Case for Dividend Progress. It’s been seven years. I’m curious, what has modified, both within the financial system, the markets, or your individual considering, that made an replace of the guide essential?
DAVID BAHNSEN: I believe that you simply had mainly the S&P practically triple in seven years.
BARRY RITHOLTZ: Which is loopy, by the way in which. Loopy to consider.
DAVID BAHNSEN: However we had had a little bit of a dip in 2018, and so there’s just a little little bit of handy timing right here. The S&P, I believe, was down 5% in 2018 from the combo of just a little little bit of Fed tightening and President Trump’s commerce warfare then. After which it rallied enormous on the very starting of 2019. We had a hiccup in COVID, however then actually that solely lasted a couple of month, and ended up having a really strong interval. There was one dangerous 12 months. It’s actually the one dangerous 12 months we’ve had for the reason that monetary disaster, in 2022. However then Nvidia, three 100% years in a row, you simply have had an enormous rally.
So it’s value saying, “Hey David, your thesis from seven years in the past, has it grow to be antiquated?” And also you have a look at it and say, effectively, truly, Barry, I don’t wanna jinx myself for 2026, however when dividend progress was up 5% in 2022 and the S&P was down 18, and dividend progress did effective within the three years in between, not as a lot because the Nvidia stuff, however nonetheless did effective. And now a 12 months like this 12 months, the place dividend progress is thrashing the market by 400, 500 foundation factors, I believe you’re gonna find yourself with a five-year quantity that’s higher than the market, however that’s due to that first 2022 12 months. This story, to me, could be very possible for the following three, 5, seven years.
At a 23 occasions entry a number of on the S&P, earnings progress is nice, however except you assume you’re gonna get a 29x, for those who’re gonna truly must combat towards a number of contraction for the following few years, the maths of the index return is what it’s. I’m not being bullish or bearish right here. I’m simply being a mathematician. It’s gonna be very laborious for the S&P to ship continued 15% returns.
BARRY RITHOLTZ: Yeah. Up to now few years we’ve had 25% returns. Good luck maintaining with that.
DAVID BAHNSEN: Precisely. And I believe that the story of my first decade professionally managing cash is what I’m now coming again to, saying, look, the market can retreat right here even with good underlying fundamentals. It’s simply that the Intels, Microsofts, Ciscos of the 2000s, all of them grew their earnings, their income, their money flows. All of them had been decrease on the finish of the last decade than the start of the last decade. And I don’t know that that’s gonna occur with Nvidia. I’m not making a bearish AI name. However I’m asking buyers to comprehend that issues are usually not as straightforward as they could have appeared the final three or 4 years.
And I believe that the replace of the guide was my try and restate, replace the argument. New charts, new numbers. However then additionally, Barry, I believe it’s just a little bit extra philosophical. I’m including just a little extra as to the place I take into consideration doomsday investing in dividend progress. After which I’m encountering among the objections. There’s people like Meb Faber that notoriously speak about how a dividend is completely nugatory, that every one you’re doing is taking from one a part of the corporate, the stability sheet, and giving it to another person. It’s zero-sum. And I’m contending with that argument, contending with inventory buybacks, contending with tax effectivity. Some might not discover my arguments persuasive, however I’m making an argument on all of these factors.
BARRY RITHOLTZ: So sometimes dividend-paying shares are sometimes concentrated in mature sectors: financials, vitality, utilities, staples, issues like that. How do you stop a dividend progress portfolio from being an unintended sector guess or worth issue guess?
DAVID BAHNSEN: Nicely, the worth issue guess is more durable to keep away from than the sector aspect. For us, it’s true that we’ve all the time been very restricted in our publicity to shopper discretionary as a result of the buyer discretionary names, by definition, it’s laborious to pay a sustainable dividend whenever you’re relying on 16-year-old ladies liking your garments on the mall. It’s only a very discretionary sector.
BARRY RITHOLTZ: A bit of bit fickle, yep.
DAVID BAHNSEN: Precisely. However there’s truly numerous sturdiness. And the entire cool children from the ’90s are actually dividend growers immediately. You understand, your Qualcomms and Ciscos and even Microsoft; it seems like a low yield ’trigger the inventory value has gone up a lot. However after George W. Bush’s second tax reduce modified the tax fee on dividends, Microsoft abruptly turned an important dividend payer. So I think that numerous these tech names might find yourself turning into good dividend growers, and a few of them already are. Texas Devices, Broadcom. However they’re kinda previous tech. They’re not the cool tech stuff.
However you wanna hold a benchmark agnosticism, for my part, however you continue to wanna be sector diversified. So we personal mainly each sector to a point or one other, however my weightings to these sectors, I’m agnostic to what the benchmark is. We’ve been chubby vitality and underweight shopper discretionary for many of my profession. It’s labored out simply effective.
BARRY RITHOLTZ: Yeah, to say the very least. Let me throw an attention-grabbing curveball at you. Probably the most attention-grabbing corporations that doesn’t pay a dividend has been Berkshire Hathaway. They’ve created huge worth with out ever paying a dividend. They often, when the inventory will get, quote-unquote, low cost, they’ll do some buybacks. And so they’re sitting on this huge, what’s it, $300 billion money pile. How do you distinguish between an organization that ought to retain its earnings so it could make these opportunistic acquisitions versus one that basically ought to be paying its shareholders some type of dividend?
DAVID BAHNSEN: You understand what’s fascinating, Barry, is that Berkshire Hathaway is the corporate that proves my level, not the exception to the purpose. They aren’t an organization. They’re a holding firm, and what do they maintain? An entire bunch of corporations that pay dividends to them. Now, they might select to not return that money to the shareholders as a result of that’s what the buyers consciously purchased: a maintain co the place you’re asking Mr. Buffett and Munger within the years previous, now a brand new administration crew, to take a position that capital. It’s way more like a mutual fund of personal and public corporations. However the Coca-Colas and Wells Fargos and Apples and, by the way in which, even the personal companies, the railroads and See’s Candies, have made huge money funds to the maintain co. So it isn’t actually contradictory to it.
There are corporations on the market which can be working corporations that additionally haven’t been dividend growers which have been very profitable. However I might argue that I might discover 100 examples of ones that didn’t return capital to shareholders and set cash on fireplace for each one I might discover that proved to be a greater steward of that capital. Within the appendix of the guide, I speak in regards to the comparability of Viacom, and now that Sumner Redstone’s not with us, I make him the foil, as a result of the sum of money these individuals set on fireplace over time. They wouldn’t pay a sustainable dividend. Loads of their opponents did, after which they only did these media M&A orgies, and all of them had been capital damaging. That, to me, is way more frequent than an organization that, by not paying a dividend, is creating extra worth.
BARRY RITHOLTZ: Once we go to lunch, remind me to let you know the story of an organization I used to be affiliated with that had a possibility to do a particular large one-time dividend, and as a substitute they lit the cash on fireplace.
However Berkshire, because the exception that proves the purpose, raises an attention-grabbing query. Do dividends, regularly paid and really elevated dividends, does that impose a self-discipline on administration? And the way might you distinguish when having to fulfill the dividend is a constructive factor versus when it would discourage funding or innovation or clever risk-taking?
DAVID BAHNSEN: You understand, it’s such a considerate query, and I’m not simply saying this to blow smoke right here, however I very a lot doubt that very many different interviewers are gonna ask that to me, ’trigger it’s actually an essential query, and also you get it. Barry, that’s a trade-off that exists, proper? There’s a sense through which a possibility would possibly get missed as a result of the faithfulness to the dividend causes somebody to not pursue a threat that may have ended up paying out.
What I might counsel is that’s a threat value taking for many buyers. Not these with a extremely speculative or high-risk, high-beta, high-octane a part of their portfolio. However in the end, if somebody had stated, “You understand what? I’m not gonna do that AOL-Time Warner merger as a result of we’re not gonna have the ability to maintain the dividend doing it,” that will have protected about $300 billion of capital. And I might go on and on. These are usually not nut-picking examples; they’re the norm.
Now, there’s been loads of good and wholesome M&A. Exxon’s cope with Pioneer, Chevron’s cope with Hess, Exxon’s cope with Mobil. They didn’t reduce the dividend throughout COVID, for God’s sake, when oil was damaging. They didn’t reduce the dividend throughout Valdez, in the course of the monetary disaster. Having the social contract the place your money circulation, your payout ratio, your stability sheet enabled you to maintain it doesn’t imply you’ll be able to’t do M&A, nevertheless it ought to imply you’ll be able to’t do reckless M&A. And I might counsel that Comcast has been a extra devoted person of M&A than Viacom and Paramount had been.
BARRY RITHOLTZ: Huh. I saved my favourite query for final, which is you argue dividend progress permits buyers to learn from volatility quite than merely having to endure it. Clarify what you imply by that. What’s the philosophy behind benefiting from volatility?
DAVID BAHNSEN: So once we say endure volatility, an S&P investor who’s an accumulator, not a withdrawer, doesn’t endure from the volatility. And in the end the premium return they get is a trade-off to the volatility that they’re anticipated to cope with. In order that’s all what it’s.
Nevertheless, a dividend progress investor has an computerized buy occurring throughout a diversified portfolio. You assume volatility is a given. It’s going to occur, so there’s due to this fact no strategy to escape the truth that you’re mathematically benefiting since you are already compounding. Your return goes the place it goes, and then you definitely’re getting extra the following 12 months, the following 12 months. Now you’re getting extra purchases of the factor that’s compounding. So it creates an automatic compounding machine inside a compounding funding.
And that leverage over time is monumental, and it must excite individuals which can be 30, 40, 45 years previous accumulating long-term, as a result of you’ll be able to say to your self, “Each time the market’s down, I’m shopping for extra shares of the issues which can be, sooner or later, gonna be creating money circulation for me.” And that’s how you find yourself with the type of shares which can be paying 30, 40, 50% of the unique buy value yearly, which sounds loopy, however the math is smart.
BARRY RITHOLTZ: Sure, sir. That’s precisely proper. So to wrap up, for those who’re fascinated about dividend progress investing, for those who’d wish to try to generate market-equaling portfolios with much less volatility and better wealth creation, take a look at the brand new guide, Revenue from the Revenue: The Previous, Current, and Way forward for Dividend Progress Investing by David Bahnsen.
I’m Barry Ritholtz. You’re listening to Bloomberg’s On the Cash.
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