Keeping Investing Fees Low Matters

Warren Buffett is one of the most successful investors in the world. He is the chairman and controlling shareholder of Berkshire Hathaway, which he acquired in 1965.

The nice thing about Buffett is that he always treated his investors fairly. As a Chairman and CEO of Berkshire Hathaway he has earned an annual salary of $100,000/year. This is nothing, in comparison to high cost mutual fund managers or high cost hedge fund managers. You could have benefitted from the investment success of Warren Buffett for mere peanuts. The reason perhaps is because he had skin in the game, and the majority of his net worth is tied into the success of Berkshire Hathaway. This aligns Buffett’s interest with the interests of ordinary shareholders.

As investors, we can only focus on tools within our control to give us the best edge in success. These factors include our savings rate, selecting the right investing strategy, sticking to this strategy, maintaining a long-term investment horizon, learning constantly and keeping investment costs low.

The more fees you pay each year, the less money you have to compound for you. Unless you are paying for an exceptional investment manager, it is simply not worth it. 

For example, in the hedge fund industry we have the standard formula of 2 and 20. 

This means that if you invest with a hedge fund manager, they will charge you a 2% annual fee and take 20% of any investment gains your portfolio generates. This is highway robbery.

In the words of Terry Smith, Two and Twenty does not work, and is unsupportable.

I am not so much shocked as flabbergasted by the number of people who do not realize the impact of these performance-fee structures. I am not talking here about the fact that such a performance-fee structure clearly led many fund managers to gear up their funds as much as the credit bubble allowed and place bets which many attendees at Las Vegas would regard as outrageous, knowing that they had little or no downside and 20% of the upside.

I have had discussions with numerous professionals in sophisticated jobs in the investment industry who are either unaware of or disbelieve the mathematics of what I am about to demonstrate.

Let’s illustrate with a simple example from Terry Smith’s book “Investing for Growth”

If you had invested $1,000 in Berkshire Hathaway in 1965, your investment would be worth $4.3 million by 2009. Buffett’s company compounded your capital at 20.46%/year. 

If Warren Buffett had set up Berkshire Hathaway as a hedge fund however, he would have charged you 2% per year and gathered 20% of any annual gains. If you had the same performance numbers, your $1,000 would have only grown to $396,000 by 2009. Only $396,000 would belong to you, the investor. This means that of the $4.3 million that you would have earned without fees, $3.9 million would belong to the hedge fund manager. This of course is the result if your hedge fund manager had a performance that is as great as Warren Buffett’s. Most hedge funds do not generate good returns for investors. They only generate good returns for the hedge fund managers, because of their outrageously high fees.

Very few people understand the impact of investment fees on their returns. These fees compound over time, and rob you of a huge chunk of your investment potential. You as the investor are coming up with all the capital, and bearing all the risk. Yet, the hedge fund manager is getting most of the upside.

This is the reason why Warren Buffett made his famous bet with a hedge fund manager in 2007, stating that it won’t beat S&P 500. The reason why the hedge funds did not beat S&P 500 is due to the high impact of fees.

Buffett did run an investment partnership between 1956 and 1969 however, which was essentially a hedge fund. However, it only charged fees if Buffett earned a return that was higher than 6%. In effect, Buffett earned 25% of returns above an annual return of 6%. He definitely understands how fees helps investment managers earn a lot of money, because his partnership like hedge fund managed to turn $100 in 1956 to $20,000,000 by 1970. I discussed this in this article on Buffett Partnership. The whole partnership had approximately $100 million in assets by the time it was dissolved in 1970.

Buffett's net worth would likely be at least a couple hundred billion dollars today if he had structured Berkshire as a hedge fund, and taken a lions share of profits in the form of performance fees.

That being said, Buffett's fees were more fair than the fees imposed by your typical hedge fund today. That's because Buffett generated amazing performance, and he only charged a fee if he earned more than 6%/year. It is still fascinating however to see how fees compound and can eat a large portion of investment returns.

The other fascinating fact is that even if Buffett charged a 2% and 20% to run Berkshire, he would have still done better than S&P 500. A $1,000 investment in S&P 500 in 1965 would have turned to $54,900 by 2009, versus $396,000 for the investor in a Berkshire that was ran as a hedge fund.

The conclusion of this article is that keeping fees low matters. This is where being a do-it-yourself investor is an advantage, because you do not have a high fee mutual fund or hedge fund manager taking money from you each year.

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25 Companies Rewarding Shareholders With a Raise

I review the list of dividend increases as part of my monitoring process. This process helps me review how the companies I own are doing. It also helps me identify companies for further research.

For this weekly review, I tend to focus my attention on companies with at least a ten year history of annual dividend increases, which also raised dividends last week. I provide a quick overview of each company that includes the amount of the most recent dividend increase, and compares it to its recent historical record. I also review the streak of annual dividend increases, and review earnings and valuation information.

There were 68 companies that increased dividends last week. Twenty five of these companies that raised dividends also have a ten year history of annual dividend increases. The companies include:

This list is not a recommendation to buy or sell any securities. It is just a list of companies for further research. It is also a list to update my existing observations on companies I own or plan to own at the right price. I analyze companies before buying the,

If I were to evaluate the companies on this list, I would leverage my screening criteria, which I first outlined in 2010.

Notably I would look for the following:

1) Ten years of annual dividend increases
2) Earnings per share that are increasing over the past decade
3) Dividend Payout Ratio below 60% ( however I am willing to make exceptions for REITs, MLPs, Utilities and Tobacco companies)
4) Dividend growth rate that exceeds the rate of inflation ( however this also needs to take into account the rate of earnings and dividend growth)
5) A P/E ratio below 20

Since I have some experience evaluating dividend companies, I also modify my criteria based on the environment we are in and the availability of quality companies. If I see a company with a strong business model and certain characteristics that I like, I may require a dividend streak that is lower than a decade. I have also found success in looking beyond screening criteria by purchasing stocks a little above the borders contained in a screen.

It is important to be flexible, without being too lenient.

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How to reach your dividend goals

Successful people identify their goals, break them down into small actionable steps, and take action towards achieving them.

Unsuccessful people identify their goals, get discouraged and give up.

For example, assume that you need $12,000 in annual dividend income for your retirement. In theory, given todays environment, someone needs about $400,000 invested at a 3% yield to get to $12,000 in annual dividend income.

The ones that never make it would get discouraged, because having $400,000 looks like a big and insurmountable amount of money. They get discouraged, and give up.

The investors that make it, break this goal down to small manageable steps. They know that Rome was not built in a day. In other words, by regularly saving and investing, and holding patiently over a period of time, they can reach their goals and objectives. Good things take time.

I try to be in the second group of investors by investing with the end goal in mind. My goal has always been to reach a certain level of dividend income that covers expenses. This is the coveted dividend crossover point.

Getting to the dividend crossover point, where dividends cover expenses, is a function of:

1. Savings rate

2. Dividend Yield + Dividend Growth

3. Time you invest for

To put it into actionable steps, let's assume that this investor can save and invest $1,000/month. They can find reasonably priced dividend growth stocks that yield 3% today, which can also grow annualized dividends by 6%/year. Their process helps them identify such companies on a consistent basis.

A program of regular investments over a period of time can yield good results for patient investors after 10 - 15 years.

My basic rule of thumb is that by investing $1,000/month for 15 years, I can generate $1,000 in monthly dividend income in 15 years.

Once they invest the first $1,000, they have about $30 in annual dividend income. The next month, they invest another $1,000, and annual dividend income doubles to $60. 

After an year of saving and investing, their annualized dividend income would surely be over $360. That's because most companies would have raised dividends by an average of 6% and they would also have reinvested that annual dividend income into more dividend growth stocks.

Slowly, but surely, the investor would be able to monitor and measure their progress towards their goals and objectives. Once you start measuring your progress based on your inputs, your outputs will naturally line up with it.

The investor also keeps costs low by investing directly, using a commission free brokerage and not paying a mutual fund manager or a financial advisor. They invest through retirement and other tax-deferred accounts first, in order to minimize tax costs too.

This is of course just a projection, using a set of inputs such as amounts saved and invested, estimates for dividend yield and dividend growth, as well as amount of time to invest for. It presumes no transaction costs, no advisor fees and no taxes. In todays environment, US investors have a ton of tax-deferred/retirement accounts to choose from, which can help them defer or eliminate taxes on dividends and capital gains.

You can play around with the estimates using this spreadsheet. Check this post for more detail.

This is the model I use in my premium Dividend Growth Investor Newsletter in general.

Thank you for reading!

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23 Dividend Growth Companies Raising Dividends Last Week

Dividend growth investing involves the selection of companies based on a set of criteria such as valuation, strong brands, strong competitive advantages and long histories of annual dividend increases. 

It is not about chasing high yielders today, but more about finding the right stock that would grow distributions over time, and thus provide investors with inflation protection in their income. Only companies with strong business models are able to increase dividends every year for long stretches of time. Dividend investors should take the time to study these success stories as they unfold in front of their eyes and even consider adding some to their dividend portfolios.

I tend to review the list of dividend increases every week, in an effort to monitor existing holdings. It is also an effort to identify promising companies for further research. February and March tend to be busy times for dividend increases. 

There were 56 companies that increased dividends last week. Of those, 23 had managed to increase dividends last week and also increase annual dividends for at least ten years in a row. These companies have a dividend culture which encourages sharing profits with shareholders. 

The companies include:

This list is not a recommendation to buy or sell stocks. It is simply a list of companies that raised dividends last week. The companies listed have managed to grow dividends for at least ten years in a row.

The next step in the process would be to review trends in earnings per share, in order to determine if the dividend growth is on strong ground. Rising earnings per share provide the fuel behind future dividend increases.

This should be followed by reviewing the trends in dividend payout ratios, in order to check the health of dividend payments. A rising payout ratio over time shows that future dividend growth may be in jeopardy. There is a natural limit to dividends increasing if earnings are stagnant or if dividends grow faster than earnings.

Obtaining an understanding behind the company’s business is helpful, in order to determine how defensible the dividend will be during the next recession. Certain companies are more immune to any downside, while others follow very closely the rise and fall in the economic cycle.

Of course, valuation is important, but it is more art than science. P/E ratios are not created equal. A stock with a P/E of 10 may turn out to be more expensive than a stock with a P/E of 30, if the latter is growing earnings and the former isn’t. Plus, the low P/E stock may be in a cyclical industry whose earnings will decline during the next recession, increasing the odds of a dividend cut. The high P/E company may be in an industry where earnings are somewhat recession resistant, which means that the likelihood of dividend cuts during the next recession is lower.

For a sample analysis of Cisco from 2020 click here.

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Dividend Growth Companies in the News

As part of my monitoring process, I monitor dividend increases each month. This helps me monitor existing holdings, and also to identify companies for further research.

I usually focus my attention on companies that have managed to increase dividends for at least 10 years in a row. Of course, this is just the first step in the process. A long streak of dividend increases put a company on my list for further research. If the company can show promising fundamentals, and is available at a good price, only then would I consider buying its shares in the first place.

Over the past week, there were 58 companies in the US which increased dividends to shareholders. I reviewed the list, and narrowed it down to the companies with a 10 year track record of annual dividend increases. You can view the list of the 21 companies that both increased dividends last week and have a ten year track record of annual dividend increases:

Sadly, last week we witnessed a dividend cut from former dividend king V.F. Corporation (VFC). The company cut dividends by 41% to $0.30/share, which was the lowest dividend payment since 2014. Ironically, the company increased dividends in October 2022. 

This dividend cut is an automatic sell signal for me. I sold VFC right after the announcement.

Earnings per share had been largely flat over the past decade for V.F. Corporation. This is why I had not found this position attractive enough to buy for over 6 years or so.

As a result, the number of Dividend Kings drops from 45 to 44 and the Dividend Aristocrats from 67 to 66.

While the occasional dividend cut will happen, it should not be a big deal for a diversified portfolio.

Imagine having a portfolio of 40 dividend kings. Each of them pays $100/year in dividend income, for a total of $4,000. 

One company cuts dividends by 40%. That means dividend income from this company is cut to $60/year. This brings total dividend income for the portfolio to $3960.

While that 40% dividend cut looks big on the surface, it is barely noticeable at the portfolio level. Total portfolio income drops by only 1%. If the other 39 companies increased dividends by an average of 1.026%, total portfolio income would reach $4,000 again.

On average, annualized dividend growth has tended to exceed inflation. If the companies in the portfolio hiked dividends by an average of 5%, the total dividend income would still grow by about 4% at the portfolio level.

While it may seem obvious in hindsight that someone buying VF Corp in 2022/2023 probably should have seen a dividend cut on the horizon, It was not obvious in 2008/2013/2018. It may not be wise to sell at the first glimpse of "trouble", because that means sitting 100% in cash.

Telling which one is the future winner and which one is the future loser is hard.

Many claim to have forecasted VF Corp's dividend cut, unfortunately after the fact. But many also claimed that Exxon would cut dividends in 2020 as well, and they were wrong.

The lesson is:

This is why it is important to diversify. You don't want one bad apple spoiling the show. Keep mistakes limited, but allow winners to keep winning. With dividend cuts, the most you can lose is amount at stake. But the upside is unlimited in theory.

It's a bigger risk to sell a potential big winner early, than to experience a dividend cut however That's because the most dividends can fall by is 100% - a loss of $100 in this example. But a company growing dividends by 15%/year can take dividends from $100 to $400 in a decade.

Telling which one is the future winner and which one is the future loser is hard. Many claim to have forecasted VF Corp's dividend cut, unfortunately after the fact. But many also claimed that Exxon would cut dividends in 2020 as well, and they were wrong.

The most important factor is to have your own process that you stick to. A streak of annual dividend increases is helpful, but should be only the first part of the process to review companies, not an automatic signal for anything.

There are two British companies that raised dividends over the past week or two. I have discussed them in the past, so I wanted to continue monitoring them here.

British American Tobacco (BTI) increased quarterly dividends by 6% to 57.72 pence/share. This is the 26th consecutive annual dividend increase for this international dividend aristocrat. The stock yields 7.60%.

Diageo (DEO) increased interim dividends by 5% to 30.83 pence/share. It's likely that they'd hike the final dividend by 5% in a few months to 49.16 pence/share as well. Diageo pays dividends twice per year, and has split it in a roughly 40:60 ratio.

This international dividend aristocrat has increased dividends since 1998. The stock yields 2.23%.

Thank you for reading!

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23 Companies Rewarding Shareholders With Raises

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me monitor existing holdings, and review the dividend growth investing universe for potential new ideas.

There were 49 dividend increases in the past week. I reviewed each one. I loved reading through the press releases, in order to gauge what management is saying about their dividend policies. The paragraph below includes a few snippets from companies about their dividend policies.

An increase in regular cash dividends demonstrates the strength of a company's balance sheet and its ongoing commitment to creating value for our shareholders.  It reflects confidence that companies will again deliver on their promises. Companies treasure track record of dividend growth and remain committed to extending it, supported by the strength of capital and cash flows.

Of the companies raising dividends, I narrowed it down to those companies that have managed to boost dividends for at least ten years in a row. This leaves us with 23 companies that increased dividends last week and have a ten year track record of annual dividend increases:

This list is not a recommendation to buy or sell anything. Just a listing of companies that raised dividends last week.

I did go ahead and sort through it for companies I own, like Aflac, Church & Dwight, CME, Intercontinental Exchange or UPS. I do plan to add to at least one of these companies over the next month or two, and would share that with my premium newsletter list. If things go according to plan, I keep adding, provided the valuation is still attractive.

I was disappointed in the small dividend increase from Church & Dwight (CHD). I typically expect higher dividend growth from lower yielding companies that are also overvalued for example. This means that I would refrain from adding to this position for the time being.

This list also put a few companies on my list for research, or continued monitoring. I would love to invest in MSCI if it is ever available at a more attractive valuation.

When I review companies, in general I look for:

1) Track record annual dividend increases

2) Earnings per share growth over the past decade, as well as forward estimates

3) Dividend growth over the past decade, as well as recent dividend increase

4) A defensible dividend payout ratio

5) Qualitative assessments

6) Attractive valuation

I can get a pretty decent picture of whether I like a company or not, by looking at all of those together For a sample analysis of CME Group (CME), you can click this link.

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Essex Property Trust (ESS) Dividend Stock Analysis

Essex Property Trust, Inc (ESS) is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in California and the Pacific Northwest. Essex currently has ownership interests in 253 apartment communities comprising approximately 63,000 apartment homes.

This REIT is a dividend aristocrat, which has managed to increase annual dividends to shareholders since going public in 1994.

The last dividend increase occurred in February 2022, when Essex Property Trust hikedquarterly dividends by 5.26% to $2.20/share.

This REIT has managed to increase dividends by 7.20% annualized over the past decade. The pace of annualized dividend growth has slowed down to 4.90% over the past five years.

 

The REIT has managed to grow FFO/share from $6.71 to $14.24. It’s expected to generate $15.14/share in FFO in 2022.

 

Future growth in FFO/share will be a result of raising rents, buying new properties and keeping debt costs in check. Large portion of the debt is fixed rate with an average life of about 8 years. This bodes well in the current environment of potentially rising long-term rates. Existing properties should be fine, but acquiring new properties may come at higher interest costs. Financing further expansion could come at an increased equity dilution, which should be accretive for as long as yields on apartments is higher than yields on equity/debt.

Apartment rents are cyclical, as is demand. They are dependent in the short-run on job growth and the economic environment. In the long run they are driven by household formation, and economic trends. The west cost is a vibrant economy, and it would likely do great in the future. Owning existing properties may be a nice asset to have, as zoning and red tape may make it harder to build competing apartments nearby. On the other hand, some states like California have tenant friendly laws, which make it harder to evict tenants during downturns and cut into profitability.

Having scale of operations, and specialization into its markets could be a form of competitive advantage in my opinion.

The FFO payout ratio has ranged between 56% and 66% over the past decade. This means that growth in dividends has closely tracked growth in FFO/share over the past decade.

The number of shares outstanding has been largely flat over the past 5 – 7 years.

 

 

I find this REIT to be attractively priced at 15.70 times forward FFO and a dividend yield of 3.90%.

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