Human hands exchanging money - closeup shot..getty
We’re all about the dividends here at Contrarian Outlook. Often we take it for granted that we’re not looking to lose 17% in just just+1.9% a few weeks while we collect income! The share-price chart for Bank of America BAC (BAC) may appeal to dividend dumpster divers. And heck, it may work, as BAC stands to gain as more people pull their savings from regional banks and plunk them into “too big to fail.”
Why deal with this nonsense? This is exactly why we’re fading “cardiac” price charts like BAC’s and shifting toward the smooth and steady growth of dividends. That’s more like it! What you’re looking at is the strong upward growth (nearly 500% in a decade!) of dividends from health insurer UnitedHealth Group UNH (UNH), a stock I’ve recommended in my Hidden Yields dividend-growth service.
Record-Setting Year for Dividends = A Rich Hunting Ground for Us
The good news is that it’s never been easier to shift your return to dividends: according to S&P Global Indices, S&P 500 payouts jumped 10.8% last year—despite the manic market. Payouts are poised to set another record this year, which would mark the 12th in a row.
Find me a stock that rises every year for 12 straight years. Impossible, right? That’s another reason why we put dividend growth at the top of our list when picking stocks. And as we’ll see below, when you buy dividends that grow at UNH-like speeds, they tend to send share-prices into the stratosphere, too.
You’ll go one better if you add share buybacks to the mix. Repurchases get a bad rap from the press, but the truth is, when a company’s shares are cheap, there are few better ways for management to create value for us! There’s also a nice knock-on effect for us here, as buybacks leave fewer shares on which to pay out, setting the stage for bigger dividend hikes in the future.
Our play here, then, is pretty simple: buy companies with fast dividend growth and smartly executed buybacks. When we do, we can set ourselves up for some truly outsized returns indeed.
How Surging Payouts—and Buybacks—Sent Our TXN Buy Soaring
We’ve benefited from this trend many times at Hidden Yields. One of my favorites came in June 2017, when we bought semiconductor giant Texas Instruments TXN (TXN). The stock popped onto our radar thanks to CEO Rich Templeton, whose brilliant 13-year reign at the company had driven free cash flow flow+0.6% (FCF) per share up an astounding 586%.
That translated straight into a dividend that had nearly tripled in just the preceding five years. Meantime, Rich and friends took advantage of the company’s reasonable price-to-FCF ratio, which averaged around 16 over this period, to buy back 12% of TXN’s shares.
Check out what happened next. The dividend/share price link link+4.1% couldn’t be clearer:
Dividend/Buyback “Twofer” Drove TXN’s Gains Before Our Buy …
So we climbed aboard Rich’s dividend (and buyback) train and happily enjoyed 130% dividend growth over the next four-and-a-half years, plus 120% share-price growth, for a 148% total return! TXN is just one case of a company’s “Dividend Magnet” delivering the goods. Our buy of aforementioned UNH for Hidden Yields back in January 2020 is another.
During our nearly three-year holding period, UNH’s share price rode its rising payout higher (with a buyback assist!)—straight through COVID lockdowns, soaring inflation, rising rates and, of course, last year’s stock-market mess. The end result? A 73% price gain and 53% dividend growth, which combined for a quick (and low-drama) 83% total return.
The nice thing about this strategy is that it can tell you when to sell, too. With UNH’s share price getting a bit too far ahead of its payout, we sold the stock on December 16, 2022, sidestepping a 4.7% decline before taking another swing at UNH in February of this year—essentially buying back in for 95 cents on the dollar.
These are just a couple examples of the Dividend Magnet’s power. Sad thing is, most investors only pay attention to share prices when they invest. That’s too bad, because share prices tell (at best) half the story. But we’ll leave these folks to it and happily pick up the cheap—and accelerating—payouts they’re leaving on the table.
Now that the full extent of the market rout in 2022 is coming into view, some investors are reassessing their strategies and, in some cases, starting to consider dividend stocks and dividend-focused funds.
Record dividend payments in 2022
It’s no secret that 2022 was a bleak year for stock returns. However, companies in the S&P 500 paid out a record $565 billion in dividends throughout the year. Data from S&P Dow Jones Indices reveals that dividend payouts from the index grew an impressive 10% year over year.
In a press release in January, analyst Howard Silverblatt of S&P Dow Jones Indices said 2023 should bring another record year for dividend payouts—even in the event of a “full recession.” He expects rising interest rates and bond yields to “exert upward pressure on dividend payouts,” adding that competition for income will increase.
Of course, dividends aren’t the only way company managements incentivize shareholders to own their shares. Buybacks are another popular strategy, although some fund managers prefer dividends over buybacks for several reasons. In fact, investors who are considering buying into a company because of share buybacks should watch for a red flag.
Former PIMCO portfolio manager Austin Graff of Opal Capital, which just launched in 2022, warned that while many tech companies are buying back shares, they’re not reducing their share counts because they’re handing out stock-based compensation to executives and key employees — and issuing new shares to do it. In some cases, these companies are increasing their share counts even though they’re repurchasing shares.
A moral contract
Graff also prefers dividends because they act as a “moral contract” with management.
“For management to return capital to shareholders, it’s very public,” he added. “What companies are paying every quarter or year, they’re creating a moral contract to keep that up, or their stock faces negative ramifications. But they do buybacks when they want to, and there are negative consequences to buying back stocks at highs, not lows. It’s the opposite of what we would want to do with our own money.”
Warren Buffett and other high-profile investors speak very highly of dividend stocks. He added that if management teams did repurchase their shares at lows rather than highs, it would be great, but that’s not something most companies end up doing.
While dividends are anti-dilutive, many tech companies are in unique situations with heavy stock-based compensation. As a result, their stocks have declined as such companies lay off significant numbers of workers.
“Think of what that means,” Graff explained. “If they pay X dollars, and their stock’s at $100, they issue fewer stocks to that employee than if they’re paying X dollars and the stock is at $50. If the stock goes down, it creates more dilution for stock-based compensation than what was experienced at higher stock prices.”
How Warren Buffett rakes in billions on dividend stocks
Warren Buffett also likes dividend stocks, and it’s easy to see why. In fact, dividend stocks are one of the reasons the legendary value investor outperformed in 2022. Buffett’s Berkshire Hathaway is expected to generate over $6 billion in dividend income in the next 12 months.
Nearly half of Berkshire’s dividend income is estimated to come from only three stocks: Chevron CVX , Occidental Petroleum OXY and Bank of America BAC . Other top dividend payers for Berkshire include Apple AAPL and Coca-Cola KO .
Aside from Graff and Buffett, others started to see the value in dividend stocks in 2022. According to MorningstarMORN , investor interest in dividend-focused funds has jumped after the robust performance put up by dividend-paying names last year. Monthly net sales of the 128 U.S. equity funds with “dividend” in their names have jumped since the fall of 2021, while sales of those without “dividend” in their name have dropped.
Morningstar reported that dividend funds averaged a loss of 6.68% in 2022, versus the Vanguard Total Stock Market Index’s 19.6% plunge, which was similar to the average loss of other U.S. equity funds that don’t focus on dividends. One reason dividend funds performed better in 2022 is the lack of technology exposure.
Another reason is valuation. Last year, investors started to refocus their attention on valuations and multiples. Morningstar revealed that the price multiples of the companies that dividend funds tend to own are below the stock index average.
Protecting their dividends
At the end of the day, fund managers aren’t the only ones with a preference for dividends over buybacks. When the going gets tough, corporate managements have demonstrated a preference for protecting their dividend payments at all costs, meanwhile sacrificing their share repurchases to ensure their ability to keep paying their dividend.
S&P Dow Jones Indices reported that buybacks reached a new record in the first quarter of 2022 at $281 billion but declined in the second quarter to $220 billion and in the third to $211 billion.
While share buybacks ticked higher in the fourth quarter, Silverblatt said it may have been because companies accelerated their purchases to avoid the new 1% buyback tax that went into effect this year. In fact, that new 1% tax is one reason some fund managers prefer dividends over buybacks.
On one hand, a 1% tax isn’t much, but on the other, once a tax is in place, it creates the possibility of increasing that tax over time.
I am the founder and CEO of ValueWalk. What started as a hobby ten years ago, has turned into a well known financial media empire with millions of monthly
Last week was a bit of a flashback to 2022 with bond yields weighing on stocks...getty
Despite the overall earnings picture improving, the S&P 500 fell by 1.1% for the week. There was little economic data, but rising yields weighed on stocks, especially growth stocks that had performed well year-to-date. According to FactSet, 69% of companies have exceeded earnings estimates, below the 10-year average of 73%. This week earnings season starts to ease, with only 60 S&P 500 companies scheduled to report.
Blended earnings, which combine actual with estimates of companies yet to report, are lower than forecasts at the end of the quarter but improved last week. The high earnings growth rate for the industrials is misleading since the airlines reported a loss in the fourth quarter of 2021 and posted a profit this quarter.
Consumer staples, real estate, health care, and materials remain the four sectors expected to post higher earnings than forecasted on December 30th. The energy sector earnings estimates held steady and retained the crown with the highest expected growth rate driven by increased energy prices, with expected earnings slated to increase by 58% year-over-year.
Berkshire Hathaway BRK.B+0.9% continued to buy shares of Occidental Petroleum OXY+3.8% (OXY) in 2022 and now owns over 20% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway likes its holdings in Occidental Petroleum.
Blended revenues improved again last week and are well above the expected level at the end of the quarter. Energy, industrials, real estate, consumer staples, health care, utilities, and consumer discretionary have better estimates than at the end of the quarter. Sales in the energy sector illustrate the robust increase in energy commodity prices.
With 69% of the earnings season complete, the blended earnings performance remains below expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter strengthened to -4.9% year-over-year, below the expectation of -3.2% at the end of the quarter.
Despite the improvement in fourth-quarter earnings expectations, expected earnings growth for the calendar year 2023 declined again this week and now stands at 2.5% year-over-year.
The communications services sector was the most significant contributor to the improvement in blended earnings for the S&P 500. Earnings beats by Walt Disney DIS-2.1% (DIS) and Activision Blizzard ATVI+0.3% (ATVI) positively impacted the communications services sector. As discussed previously, margin pressures have become more evident, with sales coming in as expected but earnings disappointing during this fourth-quarter earnings season.
Outside of earnings season, comments by Federal Reserve Chair Powell left the path of future hikes as data-dependent. Fed statement combined with recent data pointing to a stronger-than-expected economy, including the breathtakingly robust jobs report, have boosted bond yields relatively rapidly. Since last year, rising bond yields have generally weighed on stocks; last week was no exception.
After the better economic data and Fedspeak, markets are pricing in two more short-term interest rate hikes of 25 basis points (0.25%) in March and May hikes, with one possible cut by January 2024. This week holds some meaningful reports for financial markets and rate hike expectations, January consumer inflation (CPI), and retail sales.
Though the more economically sensitive cyclical stocks underperformed last week, they have trounced staples since the beginning of the year. This market action in 2023 points to fewer worries about the recession currently being priced into the market.
Headline earnings improved last week but remained below estimates at the end of the quarter. Still, stocks have focused more on macroeconomic factors like higher bond yields and the rising odds that the U.S. might avoid recession.
Companies will remain particularly sensitive to forward guidance from companies while the threat of recession in 2023 remains. This week’s consumer inflation (CPI) and retail sales reports will be crucial as markets try to divine the path of interest rates and the economy.
The global market in government bonds has been bleeding red lately. “Bond market screams for help but no one answers”, says Bloomberg. It is “the worst start to a year in bonds since 2015”, according to the Financial Times.Though bonds have been declining since last summer, the sell-off became a lot more violent in February.
This meant that the yield on ten-year US Treasury bonds, which is inversely related to the price, rose by around 60% to peak at over 1.6% a couple of days ago, before falling back to 1.5% at the time of writing.The US ten-year strongly influences the price of everything from mortgages to business loans in the US, and by extension around the world, so such a sharp rise has the potential to reduce borrowing and weaken the economic recovery from COVID –especially when there is so much debt in the global system.
The world’s rampant stock markets responded by going into reverse in February as they factored in higher interest rates, as well as higher production costs because of surging commodity prices.
Bond prices can fall for several reasons. It can mean that the market thinks that economic growth is going to pick up (meaning investors shift their money into riskier investments). But it can also reflect fears that inflation is on the way without much accompanying economic growth, meaning that interest rates need to go higher so that lending is still profitable.
In the present case, it is a bit of both: the rollout of the vaccination programmes has made many observers more optimistic about the prospects of a recovery. But the rise in the price of commodities like oil, copper and coffee is more about pandemic-related supply issues than because this optimism has prompted a step-change in demand.
When Fed Reserve Chairman Jay Powell failed to announce any immediate intervention to put a floor under the sell-off in bonds during a public appearance in early March, it appeared to trigger more selling – a sign that falling bond prices have been more a reflection of fears than optimism.
Interestingly, in the hours since the new US$1.9 trillion (£1.4 trillion) US stimulus package has been agreed by Congress, the bond market and stock market have both been rising. Though there have been fears that sending US$1,400 stimulus cheques to most Americans will cause a further surge in inflation, the extra consumer demand will also prop up the economy. On balance, then, this appears to have been received as a net positive by the markets.
QE and perverse consequences
Any attempt to explain what is happening in the markets needs to be in the context of quantitative easing (QE). Shortly after the first wave of lockdowns in early 2020, central banks stepped in to help their national economies. They announced huge new QE plans in which they would create new money with which to buy government bonds and other financial assets. This drove up bond prices and hence kept yields (and interest rates) at very low levels to encourage as much borrowing from consumers and businesses as possible.
Most central banks originally began QE programmes after the 2007-09 financial crisis (besides the Bank of Japan, which began a few years earlier). This was primarily to help companies get access to capital to boost their business, in the hope that they would then hire staff, which would help to reduce unemployment rates that had been sent soaring after the crisis.
However, some companies took advantage of these low interest rates in another way: they borrowed cheaply and invested it in the stock market. With investors doing likewise, this has helped to drive the relentless rise in global stock markets over the past decade. It also helps to explain why these markets have been mainly climbing ever since the COVID panic sell-off of March 2020.
In the coming months, economies are going to reopen, but interest rates are to stay low. Fed Reserve Chairman Jay Powell may have declined to announce any new interventions to date, but it is fairly clear that he will only let yields rise so far.
This gives investors a great opportunity to continue taking advantage of the situation. So long as the gain from your investment in stocks is greater than the interest rate you have to pay on your borrowings, you are a winner. Better still, buy stocks in a company such as Apple whose bonds central banks have been buying as part of their QE activities. Apple is still trading at over double the lows of March 2020, even after the February correction.
But if you are not in a position to take advantage of this one-way bet, you are a loser. The central banks have already created a situation where major institutions like the biggest hedge funds and investment banks are achieving record earnings while many families are sinking into poverty on the back of the pandemic.
The endless stimulus is in danger of creating an ever more divided society. While it is true that the latest US package (and the support measures announced in the UK budget) will temporarily help those struggling during the pandemic, the shot in the arm is also another way of propping up markets that seem too overvalued to fail.
And if they can no longer survive without central bank life-support to keep bond yields low, the question is how to prop up the markets without exacerbating inequality. It’s not clear that anyone has the answer. It might be that a shift to a much more redistributive politics to offset the widening gap between rich and poor is about the best that we can hope for.
Arman Hassanniakalager does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
A comparison of a test area treated with PrairieFood's micro-carbon additive on the left with ... [+]PrairieFood.com
This March, I introduced the term “Nature-Enhancing Solution” to describe technologies based on natural processes that have been capturing and productively using atmospheric carbon for hundreds of millions of years in one of the three interlocking “gears” – the terrestrial, marine, and geological cycles – that make up the full carbon cycle.
My Pi Day article was all about the smallest gear, the terrestrial cycle. One entrepreneur whose work I have featured in this column before – Robert Herrington, co-founder of Kansas-based PrairieFood – believes he and his team have discovered a Nature-Enhancing Solution to draw down excess atmospheric carbon dioxide while simultaneously restoring health to our planet and improving the quality of our food.
Let me underscore that last sentence because its impact is profound: Herrington believes he has found a way to solve the climate crisis while making our land richer and our food healthier. PrairieFood’s reactors pull in biological waste – manure, the slag left over after beer is brewed, and even treated sewage. This waste contains carbons in long, complex chains, which are difficult for soil-based organisms to consume.
The reactors shred those long carbon strands in a matter of seconds to create short carbon strands that are easily digestible by soil organisms. Those short strands, suspended in water, can then be sprayed onto fields using conventional equipment. The reason we put old coffee grounds and banana peels and fallen leaves into a compost pile is to take the long chains of carbon from biological sources and let nature (fungi, insects, worms, etc.) break them down into the black soil that we shovel into our gardens.
This natural process takes many seasons and yields a relatively small volume of short-carbon strands. PrairieFood’s Nature-Enhancing Solution makes the composting process much more efficient in time and volume. In other words, Herrington and his team have invented a device that acts like a composting time machine.When PrairieFood “slurry” is applied to agricultural fields, the organisms within the soil think they have stumbled upon an all-you-can-eat buffet.
They consume the carbon and provide “services” to the crops (e.g., “fixing” nitrogen – taking nitrogen out of the air and providing it to the plants). As the organisms give the plants more of what they need, the plants flourish. In return, the plants photosynthesize more actively – pulling in more carbon dioxide and changing it to sugars, some of which they give back to the soil organisms through their root systems.
This has the same sort of effect agriculturally as someone bringing more food and drink to a party. The soil-borne organisms love the extra food, and their populations swell to eat it all up. This starts a virtuous cycle by which the organisms help the plants, and the plants help the organisms, on and on.
The virtuous cycle creates a truly profound “multiplier effect” by which a little PrairieFood can have enormous impacts on the concentration of what is known as “Soil Organic Matter” (SOM) of which “Soil Organic Carbon” (SOC) forms a large part.
PrairieFood’s Amazing Results
Herrington and his co-founder, Dr. Griffin Roberts, have three years’ worth of field trials and commercial application of PrairieFood onto agricultural acreage. After some trial and error, they have found that applying 40 gallons of PrairieFood on an acre of cropland is sufficient to raise the amount of SOM by one percentage point over a single season.
That is about ten times the rate at which SOM is usually increased using organic fertilizers and other regenerative farming techniques. (Using conventional farming techniques actually decreases SOM concentrations – essentially desertifying croplands… more about that in an upcoming article.)
I started doing some back-of-the-envelope calculations about this multiplier effect and literally had to double and triple check my work. Dr. Roberts and I talked through the calculations and indeed, PrairieFood’s multiplier effect is off the charts – the addition of a very small amount of carbon (in the form of PrairieFood slurry) ends up generating a multiplier effect in the hundreds of thousands!
A comparison of seedling alfalfa plants. The plant on the left was grown with 40 gallons per acre of … [+] PrairieFood slurry; the plant on the right was grown with conventional fertilizer. Note the different in size of not only the above-ground part of the plants, but also the root system.
The reason I was so surprised is that I’m used to thinking about multiplier effects in the world of economics and finance that are in the single digits at most. But when dealing with microscopic organisms, there can be trillions of microbes in a scoopful of soil. As such, the number of microbes in an acre-foot of agricultural land (an acre-foot is the volume of soil in an acre to a depth of 1 foot) is phenomenally high. It is this astronomical number of organisms in the soil – all of which increase population exponentially given enough food – that creates the astounding multiplier effect.
Not all fields respond [with] such dramatic effect, [and] we have seen a range of responses. At times we have witnessed biological community shifts. This happens when nutrient food sources change in microbial populations. The shifts we see typically include [a] balancing of bacterial and [fungal] populations (most [agricultural] fields are bacterial dominated), and/or a rise in [the populations of small organisms] such as nematodes and Protozoa, etc. These higher [small organism population] levels…consume bacterial and [fungal] populations [and] play another significant role in nutrient cycling, both carbon and nitrogen…
“We have found where [farmers] that have applied manure and/or reduced [the practice of tilling, or turning up the soil] in the past, typically see the highest increase right away. We believe [that in these cases] the soil is primed for biological activity but is still stagnant/dormant, so when PrairieFood is applied, the nutrient cycling gets turned on right away, specifically in building SOM. Other fields which may have been…heavily reliant on [synthetic] mineral fertilizer, have a bit of adjusting at first.”
A Solution to the Climate Crisis
Herrington and Roberts have pulled together a thought experiment to illustrate the amazing potential of increasing SOM by a relatively small amount. “What if,” they ask “20% of agricultural land in our home state of Kansas could increase its SOM by one percentage point each year for 10 years?”
The answer to this question is amazing and offers great hope to the human civilization home team. An increase of SOM means a decrease in atmospheric CO2 levels – PrairieFood is enhancing the normal terrestrial carbon cycle. The increases posited would result in the draw-down of nearly 4 Gigatons of carbon!Widening the scope to a global level, the same increase in SOM in the 12.5 billion acres of land now used for agriculture would result in the draw-down of over 180 Gigatons of carbon.
For the average net addition to atmospheric carbon stores and the sources of change between 2009 and … [+] 2018, look at the graphic on the right. The red bar at the far right of the graph is the amount of carbon that was forced into the atmosphere in excess of what nature could absorb. 0.4 Gigatons on average.
To put this figure in context, according to a study done by the Earth System Science Data team at German-based Copernicus Publications, the average net increase in atmospheric carbon levels from 2009-2018 was 0.4 Gigatons per year. 180 Gigatons of atmospheric carbon drawdown would, in other words, remove 450 years’ worth of excess atmospheric carbon dioxide – enough to bring us back to the pre-Industrial Revolution average of 250 parts per million (and then some).
Other Benefits
If saving civilization from burning up in a furnace of its own making was not enough, applications of PrairieFood slurry to fields creates a lot of other benefits as well.
The PrairieFood-driven SOM increase is important in part because carbon-rich soil stores so much more water than carbon-poor soil does. This will make agricultural regions less dependent on irrigation and much more resilient to flood-producing downpours; it will also give someplace for water absorbed from increasing sea levels to go beside someone’s condo. This is such an important topic that I will take it up in a separate article.
Turning to the benefits to human health, over the last 70 years, there has been a marked trend for vegetables to become less nutritious. The only way that vegetables can become more nutritious is to have healthier soil, so increasing soil health may tie directly to better human health for anyone who eats vegetables or who eats animals that eat vegetables.
I have a lot more to say about the work PrairieFood is doing, so will continue in an upcoming article. For those who want to learn more about this homespun start-up with a mission to do nothing less than save the planet, PrairieFood is sponsoring a conference on November 14-15 in beautiful Pratt, Kansas. I attended last year and credit a quantum shift in my thinking about multiple issues facing humanity—climate change, biodiversity collapse, water management, agricultural productivity, and human health—to my conversation with farmers and ranchers at that event.
Herrington and Roberts know, as I know, that the Goldilocks environmental conditions that have allowed humans to build complex societies teeter on a knife’s edge. Our carbon emissions are pushing us over that edge and threatening the stability of our civilization, which is literally built on agricultural advances. PrairieFood offers a way to right that balance and pull us back from the edge.
Human hands exchanging money - closeup shot..getty
