Investing for Dividends
Trish Regan is one of America’s most recognized financial journalists and digital media hosts. An award-winning reporter, author, television personality, and speaker, Trish is a leading economic and political thought leader who helps viewers to better understand the most critical issues facing the economy and American business today. With extraordinary access to newsmakers and industry sources, as well as a knack for anticipating opportunities and risks in investing, Trish leverages her knowledge of how the mainstream media works to enable subscribers to best understand the information moving markets.
Trish is the Co-Founder and Executive Editor of 76research. She is also the founder, owner, and host of the daily livestreamed Trish Regan Show with more than 16 million views per month. Prior to founding 76research with longtime friend Rob Hordon, Trish anchored some of the most highly rated financial programs at America’s most noted financial networks including CNBC, Bloomberg, and most recently, Fox Business News.
Throughout her career, Trish has interviewed numerous heads of state, including multiple U.S. Presidents, foreign leaders, Fortune 500 CEOs and other institutional, charitable, and government leaders.
Trish credits her start in journalism to her fifth grade position as school correspondent for her local New Hampshire newspaper. But, while Trish showed an early interest in reporting and writing, it wasn’t until years later that she chose to make journalism her career. In fact, she originally intended to pursue a career in finance and worked as an analyst in emerging debt markets at Goldman Sachs while a student at Columbia University. Fluent in Spanish, Trish focused primarily on Latin American sovereign debt markets including Argentina, Mexico, Venezuela, and Brazil, but when Bloomberg Television offered her an opportunity to work as a correspondent, she made the jump into financial media.
Beginning at Bloomberg in 2000, Trish was on the front lines as the dot-com bubble burst. She covered its aftermath from Silicon Valley and San Francisco as a correspondent at MarketWatch before moving back to New York to work as a correspondent for CBS News. In 2006, Trish returned to her financial roots as an anchor on CNBC’s top-rated daily markets program The Call where she reported on the 2008 financial crisis in real time. While an anchor at CNBC, Trish also reported business news for NBC's Nightly News and The Today Show. In addition, she produced and hosted the two most highly rated documentaries in CNBC's history – Marijuana Inc and Marijuana USA, which investigated a massive and fast-developing underground industry. Trish predicted that industry would soon become mainstream in her book Joint Ventures: Inside America's Almost Legal Marijuana Industry, published by Wiley & Co. in 2010.
In 2011, Trish went back to Bloomberg Television to anchor the network's afternoon market close coverage as host of Street Smart with Trish Regan. While at Bloomberg, Trish was the network's main political anchor for all political television coverage of the 2012 election, including both the Republican and Democrat conventions and the election itself. From 2013 through 2016, Trish also worked as a front-page economic columnist for USA Today, writing on the biggest trends in business, markets and the economy.
In 2015, Trish left Bloomberg Television to join Fox News and Fox Business as the anchor of her new program The Intelligence Report with Trish Regan during FBN’s market hours. She would later move to an evening program and become the only woman in cable TV at that time to host a primetime show. Trish Regan Primetime grew 8pm ratings to a level never before seen at Fox Business.
While at Fox, Trish Regan also anchored two Republican Presidential debates – making history as part of the first all-woman team, with colleague Sandra Smith, to anchor a Presidential debate. She also appeared as an economic and markets contributor to all Fox News programming and was also a guest anchor on Cavuto, Fox and Friends, The Five, and primetime programming. In addition, Trish anchored all primetime coverage of the 2016 Democrat and Republican conventions for Fox Business and was a co-host alongside Neil Cavuto, Maria Bartiromo, Lou Dobbs and Stuart Varney for the network's main political events. Trish left Fox in 2020 and began work on the creation of her own digital media enterprise which debuted in August 2020. Her focus now is her own program and 76research, although she still appears regularly on other platforms both in cable news and in digital media.
Trish graduated with honors from Phillips Exeter Academy before going on to study opera at New England Conservatory and graduate cum laude with a degree in history from Columbia University. While at Exeter, Trish was the first-place winner of the Harvard Musical Association’s Competition for Excellence in Music, becoming the first singer to win the top prize since the organization was founded in 1837. She later studied opera and German at The American Institute for Musical Studies in Graz, Austria. Her operatic singing skills enabled her to represent her home state as Miss New Hampshire in The Miss America Pageant, where she won the talent competition and the first B. Wayne Award for the contestant with the most promise in the performing arts.
Trish's journalism awards have included multiple Emmy nominations for her documentary and investigative reporting. Trish was also recognized with a George Polk nomination for her long-form reporting covering the aftermath of Hurricane Katrina with a team from CNBC. While at MarketWatch in San Francisco, Trish was named SF’s Society for Professional Journalists most promising broadcast journalist.
Trish Regan was born and raised in New Hampshire. She now makes her home outside New York City with her husband and three young children.
A successful fund manager and stock picker, Rob Hordon has extensive experience investing across asset classes, sectors, geographies and strategies. With consistent emphasis on ways to preserve and grow assets and manage risk, Rob has offered guidance to thousands of financial advisors and wealth management professionals in the United States and abroad over the course of a multi-decade Wall Street career.
Rob’s professional investment career began in the late 1990s as an associate in the Equity Research department of Credit Suisse First Boston, where he covered wireless telecommunications stocks at the dawn of the mobile phone era. As a recent college graduate, Rob had a front row seat at one of the epicenters of the tech bubble. He witnessed for the first time the stock market’s potential to deliver immense value creation through innovation but also its characteristic tendency towards excess.
Rob went on to obtain his MBA from Columbia Business School, where he focused on security analysis and through his course work learned from some of the top investment practitioners in the country. Upon graduation from Columbia, he took an analyst role in the Risk Arbitrage department of a firm then called Arnhold and S. Bleichroeder Advisers, which would later be renamed First Eagle Investment Management.
For approximately seven years, Rob worked as a member of a small team that ran a hedge fund strategy focused on identifying mispriced long-short opportunities among companies involved in merger and acquisition activity. Just prior to the 2008 financial crisis, he transitioned over to First Eagle’s Global Value team under the auspices of the legendary international investor Jean-Marie Eveillard.
As an analyst on the team, Rob was responsible for initiating and covering several billion dollars of public equity investments across a wide range of industry sectors and countries. This move also reunited him with renowned Columbia Business School economist and author Bruce Greenwald, who had recently joined as Director of Research. As colleagues and mentors, Bruce and Jean-Marie would become the two most formative influences on Rob's investment career.
In 2011, Rob proposed and worked with the team to develop a new multi-asset investment strategy built around the same long-term value-oriented investment philosophy pioneered by Jean-Marie. As co-portfolio manager of the First Eagle Global Income Builder Fund, Rob was directly responsible for over a billion dollars of assets under management with a particular focus on dividend-paying stocks and credit instruments. Rob and his partner later re-created and managed this strategy at a London-based boutique investment firm, J O Hambro Capital Management, beginning in 2017.
In 2023, Rob teamed up with his longtime friend Trish Regan to form 76research, where he is Co-Founder and Chief Investment Strategist. This entrepreneurial venture merges his passion for investing, research and writing with his desire to help others benefit from the long-term wealth creation potential of the stock market.
The son of an economics professor and elementary school teacher, Rob is a proud husband and father of three whose interests include history, philosophy, sailing and world travel. He was born in New York City and grew up in northern New Jersey, where he attended local public schools.
Rob Hordon is a Chartered Financial Analyst. In addition to his MBA from Columbia Business School, he received his Bachelor’s degree in Politics from Princeton University and was awarded a Certificate in Political Theory. His senior thesis, entitled Justice without Truth: Contingency in American Moral Thought, explores how the philosophical tradition of American Pragmatism offers a roadmap out of the moral and political abyss of postmodern relativism.
Investing for Dividends
How do you live with yourself? – Well-known fund manager
The snarky comment above was allegedly made by well-known fund manager to another fund manager because he specializes in dividend income strategies.
Investing for dividends is actually controversial in the asset management world. This may be somewhat surprising given that dividends are foundational to our current understanding of why stocks have value.
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How do you live with yourself? – Well-known fund manager
The snarky comment above was allegedly made by well-known fund manager to another fund manager because he specializes in dividend income strategies.
Investing for dividends is actually controversial in the asset management world. This may be somewhat surprising given that dividends are foundational to our current understanding of why stocks have value.
In 1937, John Burr Williams, a Harvard Ph.D. candidate in Economics, submitted a doctoral dissertation on the topic of the “intrinsic value” of a business. The choice of this topic, interestingly, was prompted by the legendary economist and Harvard professor Joseph Schumpeter, who popularized the idea of “creative destruction” to describe how capitalism fuels innovation through disruption.
A year later, John Burr Williams published The Theory of Investment Value. Within this investment classic, Williams laid out the basic framework for understanding the true or intrinsic value of any security. Referring to Williams, Warren Buffett summarized his ideas in Berkshire Hathaway’s 1992 Annual Report.
The value of any stock, bond, or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the asset. - Warren Buffett
Williams pioneered discounted cash flow analysis and proposed the “dividend discount model,” which is still used today. The basic premise of the dividend discount model is relatively straightforward.
If we think about the value of a bond as being a function of all the future cash flows it will send back to the owner, a company is no different. A rational person would pay a price for a company (or a portion of a company, i.e. a share of stock) that appropriately reflects the future cash flows that are expected to be received.
Valuation in the dividend discount model is based on the idea of cash distributions that are literally going to be sent to shareholders. Discounted cash flow (DCF) analysis, the primary tool for business and asset valuation today, is a little more abstract.
Rather than dividends, DCF valuation relies on the concept of “free cash flow.” Free cash flow has a few variations, but in essence it is the cash generated by a business after taking into account expenses and other drags to the cash flow of a business (such as working capital increases and capital expenditures). Free cash flow represents the funds generated during a given period that are theoretically available to distribute as dividends without increasing the company’s debt load.
Conceptually, dividends and free cash flow are very similar. Dividends are the actual distributions a company makes, whereas free cash flow measures the potential of a business to support dividends without incurring additional debt.
So, given the central role of dividends in corporate valuation, why is dividend investing at all controversial? Critics of dividend funds and dividend strategies usually make the following points.
5 Common Criticisms of Dividend Investing
"What actually matters is total return (income received plus capital appreciation). It doesn’t matter what form it takes. In fact, receiving dividends is often bad because you may have to pay taxes on them whereas unrealized capital gains are untaxed."
"Companies that give money back to you are doing so because they have no good way of investing it for you. You want to invest in businesses that can take the cash they generate and reinvest it for higher returns, not just return it to you. Dividends are in fact a sign of weakness, not strength."
"The board obviously doesn’t think its shares are a good value. Otherwise, they would buy back stock with their extra cash instead of paying dividends."
"You don’t need the companies to give you the cash. If you want to monetize some of your investment, you can sell down your position and 'synthetically' create income."
"Investors who are chasing dividends are behaving irrationally and just responding psychologically to the positive feeling associated with receiving a dividend check."
In our view, there are elements of truth in these criticisms but also flaws. We address these below as we explain why it may make sense for investors to prioritize stocks that offer steady and rising dividends as they assemble a long-term portfolio.
5 Reasons to Follow a Dividend Strategy
Actual income versus paper profits
As contributors to total return, income and capital appreciation are the same in theory, but we invest in reality. Successful investors tend to have long holding periods, if only to defer realizing capital gains. A stream of dividends as a component of total return alleviates some of the pressure on exit timing as a driver of actual cash on cash investment performance.
Many investors operate with some degree of personal leverage (even if indirectly, by having a home mortgage, for example). Many investors also rely (or want to be able to rely in the future) on investment returns as a source of personal income. In practice, consistent dividend streams represent a valuable source of cash flow that is either needed or potentially needed. By providing actual cash flow, dividend stocks give an investor leeway to have more capital allocated to higher growth equities as opposed to fixed income investments.
Dividends signal capital discipline
Rather than indicate an inability to deploy capital effectively, companies that operate with a clear and meaningful dividend policy demonstrate a disciplined attitude towards capital allocation. Profits are not horded but rather partially returned to shareholders, while only the most promising growth investments (capital projects or acquisitions) are authorized.
Share buybacks are often mistimed
Over the course of our careers, we have observed a tendency for boards of directors to authorize share buyback programs when the outlook seems sunny (and share prices are high) rather than when the company is experiencing turbulence (and share prices are depressed). There is abundant academic research that suggests corporate boards add no discernible value when repurchasing shares versus the alternative of returning cash to shareholders, who can decide for themselves whether to reinvest in the company or the shares of other companies.
Risks with “synthetic income”
Selling down securities to manufacture an income stream introduces a variety of execution risks and implementation burdens. Mechanically selling down positions exposes investors to the possibility of reducing exposure in periods of market stress when holdings are substantially undervalued.
Dividends give us staying power
It may be theoretically correct to equate paper profits to real cash distributions, since one can always sell a liquid security, but receiving a steady stream of cash flow potentially reinforces our psychological commitment to an investment, especially in periods of stress. A supposedly irrational psychological attachment to dividends might offset other irrational temptations, like abandoning investments after a period of disappointing performance. Dividends not only support our actual financial cash flow needs but also sustain a long-term investment mindset and can help avoid short-term trading temptations.
While investors have many valid reasons to emphasize dividends in their investment program, dividend investing, like all forms of investing, needs to be done very carefully. We have significant experience navigating the universe of income investments and have learned a number of things (sometimes the hard way) that are specifically relevant to dividend-paying stocks. When building a portfolio of dividend stocks, investors should be highly aware of the following risks.
5 Pitfalls of Dividend Investing
Conflating dividends with profits
Dividend yield is not really a valuation metric and doesn’t directly signal whether or not a stock is “cheap.” A dividend is for the most part a voluntary cash distribution, determined by a board of directors. The same exact business could have wildly different dividends, or no dividend at all, based on the decisions of the board.
Concepts like free cash flow or cash earnings are more indicative of business value. A company with a high dividend yield may simply be over-distributing cash relative to what it can sustainably support. To make an assessment of value, one has to take a close look at the specific cash flow dynamics of the company.
Over-reaching for yield
Everyone wants high dividends, but the best dividend opportunities are often not the ones offering the highest yields, which may be unsustainable or lack growth potential. Dividend investing should be done in the context of finding good businesses with attractive valuations that also have attractive dividend potential.
Leverage
One way to goose a dividend is by amplifying the cash flow generation of a business with low interest rate debt (which is naturally more common in low interest rate environments). But the more debt a company has, the riskier the equity becomes. REITs, in particular mortgage REITs, are sometimes highly levered yield plays; proceed with extreme caution.
Dividend cuts
Dividend-hungry investors are often lured into seemingly high yields only to watch the dividend get slashed or even eliminated in short order. A dramatic deterioration in the fundamentals of a business could lead to a false perception that a stock trades at a rich dividend yield. In these scenarios, investors look at the most recently declared dividend in relation to a reduced share price. But when a business is threatened financially, boards have a tendency to cut dividends sharply, especially when they are out of whack with peers.
Missing out on growth
Dividend stocks are often clustered in a few industry sectors. Low multiple value stocks are also typically overrepresented within the dividend universe, as opposed to higher multiple growth stocks. Investors should be mindful of diversification when constructing a dividend-oriented portfolio but also look for exposure to good stocks that may lack dividend attributes. Passive approaches that emphasize growth or low dividend sectors (such as technology) are a good complement to a dividend portfolio.
Conclusion
Prioritizing stocks with an attractive dividend profile is a rational stance for many investors. Like any focused investment strategy, investing with a preference for dividends need to be executed carefully and thoughtfully.
With many of years of experience in income-oriented investing, we believe the key to successful dividend investing is to develop a solid understanding of the underlying business fundamentals. Dividend investors should first and foremost consider buying a stock because they believe the business is strong and the valuation is attractive — and not because the yield is high.
The 76research Income Builder Model Portfolio is intended for income-oriented investors and managed to generate an overall yield that is materially higher than broad equity indices. The portfolio primarily includes stocks with above average dividend yields from a cross section of industries and may also include ETFs that offer exposure to fixed income instruments. While investments are screened for their income and income growth characteristics, specific holdings are chosen based on valuation and general business quality, growth and risk considerations.