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  • Writer's pictureBen TeSelle

Dorato News - April 2024

Portfolio Issues - Dividends


For those of you who listen to us as we drone on, you know that we often mention dividends. We tend to like solid, well-run companies that pay dividends. But why?

Dividends have provided a substantial portion of the total return from US stocks over the past hundred years, in the range of 30%. The return on US stocks has been 10% per year; dividends accounted for 3% per year.


Companies that pay dividends tend to keep paying them. And that steady outflow of cash to shareholders tends to focus the minds of management on the steady creation of cash from business operations. Dividends can be cut, as we saw for banks in 2009, and as happens from time to time in any number of companies. But well-run companies tend to make their dividends a priority.


We don’t focus solely on dividends. That path leads to companies with slow growth or questionable finances. We prefer companies that have the potential to grow as well as the potential to increase their dividend payments over time.

In the last decade or so, when stock prices have been rising, and in particular, the stock prices of companies that show fast revenue growth, dividends can become an afterthought for investors. Why worry about dividends when stock prices are soaring?


But stock prices don’t always go up. And when they don’t, investors are reminded that those dividends come in mighty handy.


Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab



“Can we make this our safe space? I won’t eat you, but I may try to sell you inappropriate investment products.”

 

Market View - Avoiding Temptation


Famous behavioral economist Daniel Kahneman passed away recently. He is largely responsible for proving that investors are not rational actors. His work highlighted the emotional and behavioral flaws inherent in humans and how those flaws translate to irrational decisions. He said, “All of us would be better investors, if we just made fewer decisions.” That quote feels especially timely with the amount of hype surrounding AI and other new technology. 

 

Major stories in the market haven’t changed much. If you’re feeling a little bit of fatigue regarding when the Fed will cut rates or how AI is going to transform our world, that would be understandable. There has been exhaustive coverage on both topics, but not much has changed with either. However, the S&P 500 continues to set new records and is approximately 10% higher than it was at the start of the year. One notable difference is that the Magnificent Seven were not the primary driver of returns for the quarter. Every sector rose, signaling that investors have an optimistic view of the future and worries of a recession have faded to the background.

 

There are some signs that optimism has turned to over exuberance. Risky assets like Bitcoin are close to all-time highs. The SEC approving ETFs for the cryptocurrency has certainly helped the rise in price, but the surge in price combined with the S&P 500 reaching all time highs gives reason for pause. There are indications of speculation elsewhere, like movements in stocks that are completely disconnected from their business prospects. Reddit, home to the forums that started the meme-stock mania during the pandemic, had it’s IPO in late March and it’s stock price jumped 48% in a day. The price has come down substantially since then. Large fluctuations like that show that there is still a large amount of gambling and day trading going on in the markets.     

 

Expectations in the bond market shifted incrementally. The ten year yield started the year just below 4%, but climbed steadily throughout the first quarter. Although rate cuts are still the assumption this year, investors are adjusting to the possibility of smaller or slower rate cuts. The downside to long-term rates increasing is that borrowing costs will remain high for consumers, especially on items like mortgages. Higher costs in a variety of areas are weighing on consumer sentiment and it remains to be seen if the Fed can pull off the soft landing. However, if the economy continues to hum along at the current rate, it is unlikely that we are going to see much action from the Fed.

 

Discussions about whether or not we are in a bubble are popping up frequently. On one hand, corporate profits and the economy are strong. On the other hand, there is some evidence of speculative hysteria. Our view is that a bubble is only clear after the burst. They are close to impossible to diagnose when they are happening. The bursting of a bubble can cause widespread pain in the markets or they can be fairly concentrated. Either way, avoiding hasty decisions is likely the best course of action.

 

We think caution is always prudent. Despite the market highs and economic success, we like to prepare for when conditions aren’t as cheery. That is why we still focus on companies with long track records of success through different market cycles. It might not be flashy, but owning proven companies and sticking with them is the key to long-term investing success.

 


Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab

  

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