Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and look steeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David Cone, I,
Speaker 1: lead mutual fund on active research at Bloomberg Intelligence. Today
Speaker 1: my co host is Michael Casper, small cap and sector
Speaker 1: strategist at Bloomberg Intelligence. Mike, thank you for joining me
Speaker 1: today as my co host.
Speaker 2: Thanks David.
Speaker 1: So, there was a note published yesterday by Gina and
Speaker 1: Wendy that I wanted to ask you about. You know,
Speaker 1: they mentioned stock buybacks have increased during the summer, you know,
Speaker 1: wild dividends have risen. Why is capital deployment increasing?
Speaker 2: Well, there's two big factors at play. The first is
Speaker 2: that cash is at or near all time highs if
Speaker 2: you include financials, if you take out financial in real estate,
Speaker 2: you actually get a much more muted picture, but still
Speaker 2: compared to the pre pandemic period. We're looking at S
Speaker 2: and P five hundred companies flush with cash right now,
Speaker 2: and they're starting to use that in various ways. Buybacks
Speaker 2: has been the main way they've been deploying capital.
Speaker 3: Recently.
Speaker 2: In the second quarter, buybacks jump thirty four percent from
Speaker 2: a year ago for S and P five hundred companies.
Speaker 2: I think part of that has to do with some
Speaker 2: of the volatility that there wasn't in stocks during the
Speaker 2: second quarter. You know, companies prefer to back cheap or
Speaker 2: buyback stocks when it's cheap, But a lot of that
Speaker 2: does have to do with the high cash positions and
Speaker 2: kind of trying to boost their stocks. Second of all,
Speaker 2: dividends are right about on the pre pandemic norm now
Speaker 2: in terms of payout, and CAPEX has really been surging.
Speaker 2: Capex has been one of the main ways that that
Speaker 2: companies have been deploying capital, and a lot of that,
Speaker 2: of course is coming from tech and their AI spending,
Speaker 2: but in general, it all comes back to how big
Speaker 2: the cash positions are for S and P five hundred
Speaker 2: companies right now.
Speaker 1: Well, as we talk about capital deployment and dividends more specifically,
Speaker 1: i'd like to bring on today's guests. Shannon Radke is
Speaker 1: CEO of Integrity Viking Funds and senior portfolio manager for
Speaker 1: a number of the firm's mutual funds, including the Integrity
Speaker 1: Dividend Harvest Fund, which is a ticker of IDIVX. Also
Speaker 1: joining us is Michael Moriy, chief investment officer Viking Fund
Speaker 1: Management and co portfolio manager on a number of the
Speaker 1: firm's funds. Shannon, Mike, thank you so much for joining
Speaker 1: us today.
Speaker 3: Thank you guys for having us.
Speaker 1: So I'd like to start off hearing more about your backgrounds.
Speaker 1: So we'll start with you, Shannon. How did you get
Speaker 1: your start in the investment industry?
Speaker 3: Sure, I guess my.
Speaker 4: First exposure was an economics class in high school where
Speaker 4: actually each student got to build their own stock portfolio,
Speaker 4: which I thought was pretty cool. That kind of led
Speaker 4: me to pursue a finance degree at the University of Northakota,
Speaker 4: where I fortunately there were more investment classes there economics
Speaker 4: classes and so on, so I continued to enjoy I
Speaker 4: guess that field of interest. I also joined a student
Speaker 4: investment club at und Then, you know, as I was
Speaker 4: approaching graduation, I decided my preference was to be close
Speaker 4: to home in mine at North Dakota, which left my
Speaker 4: options at the time I thought fairly limited. I was
Speaker 4: looking at potentially working for a bank, bank, trust department,
Speaker 4: or brokerage firm, and that's when I heard that Bob
Speaker 4: Wallstead from mine at I had just started up the
Speaker 4: company that would ultimately become Integrity Mitual Funds, so the
Speaker 4: timing could not have been better. On that I was
Speaker 4: able to go back to my hometown and mine not
Speaker 4: go to work for Bob in the fall of nineteen
Speaker 4: eighty eight and start pursuing my investment career there. I
Speaker 4: actually started out in sales, and shortly after we opened
Speaker 4: our first fund, which was actually at North Dakota Tax
Speaker 4: Free Fund, we decided to bring in house the shareholder servicing,
Speaker 4: fund accounting, and fund admin and Bob needed a guy
Speaker 4: to run that, so I became operations manager at the
Speaker 4: time we brought that in house. Eventually he promoted me
Speaker 4: to COO where I worked directly with the various department heads,
Speaker 4: including the PMS, which I very much enjoyed. Then in
Speaker 4: nineteen ninety eight, I left the firm to kind of
Speaker 4: pursue a dream and open my own firm. I was,
Speaker 4: I guess thirty one years old at the time, so
Speaker 4: it was pretty big undertaking for me. That's when I
Speaker 4: got to work on writing the registration statement for Viking
Speaker 4: Mutual Funds, and that really was a big undertaking, big
Speaker 4: process when you register a group of mutual funds with
Speaker 4: the SEC. You know, it's not just the funds that
Speaker 4: you're registering. You need to create and register an investment advisor.
Speaker 4: You need to create and register a proper dealer to
Speaker 4: service underator for the funds. And we also decided to
Speaker 4: create and register a transfer agent so that we could
Speaker 4: do the shareholders servicing and fund of coning in house.
Speaker 4: So that took quite a period of time, you know,
Speaker 4: between writing the prospectus, the SAI, which both go in
Speaker 4: the registration statement, the various exhibits, the agreements between the
Speaker 4: funds and the service providers, heck of a lot of
Speaker 4: work in a pretty big document that actually ends up
Speaker 4: getting filed with the SEC. So at Viking we opened
Speaker 4: our first fund in nineteen ninety nine.
Speaker 3: And it was just a tremendous experience for me. I
Speaker 3: think I've worn.
Speaker 4: Every hat you can imagine in the mutual fund industry.
Speaker 4: So I was actually seeing shareholder transactions, calculating net asset
Speaker 4: values for the funds, creating and filing the sem annual
Speaker 4: reports to shareholders, filing various other reports with the SEC,
Speaker 4: monitoring for compliance, doing the portfolio management, and they even
Speaker 4: helped out the wholesalers from time to time. So I
Speaker 4: think that experience at Viking really helped to make me a.
Speaker 3: Better CEO today because I really.
Speaker 4: Understand the inner workings of the entire mutual fund management company.
Speaker 3: So as we move forward.
Speaker 4: In two thousand and nine, came back together with Bob
Speaker 4: Wolstead and we merged Integrity and Viking together to form
Speaker 4: Integrity Viking Funds.
Speaker 3: And that's how we have our name today.
Speaker 4: And then at the time that we came back together,
Speaker 4: I believe our AUM was sitting around two hundred and
Speaker 4: fifty million. Today we are between nine hundred million and
Speaker 4: a billion, so we have grown. We're pretty proud of
Speaker 4: that growth. As you may know, it's pretty difficult in
Speaker 4: the day and age for active managers to grow their
Speaker 4: assets to actually have net inflows.
Speaker 3: Buy and large.
Speaker 4: On average, active managers have had outflows for many years off,
Speaker 4: not decades, with a lot of money going into index
Speaker 4: funds and ETFs.
Speaker 3: So pretty pleased with where we're at.
Speaker 4: You know, we often hear people getting pretty surprised when
Speaker 4: the year we're operating out of North Dakota.
Speaker 3: They're like, what you're where?
Speaker 4: But I always say, why not? We have great people
Speaker 4: in North Dakota. They have a great work ethic. We
Speaker 4: have excellent universities. Und where I went in Grand Forks,
Speaker 4: Minor State University is a great university. It has an
Speaker 4: excellent finance program. Many of our employees have come from
Speaker 4: my state, so we're lucky to have that university here.
Speaker 4: We often take interns from the U. I would say
Speaker 4: about half of them come employees, so happy to be
Speaker 4: here working out of mine at We also.
Speaker 3: Have a lot of employee ownership.
Speaker 4: I think that's important for a company to have your
Speaker 4: employees have skin in the game.
Speaker 1: Nice Mike, How about yourself.
Speaker 5: I was excelled in math even from a young age,
Speaker 5: you know, and growing up my father was a commodities broker,
Speaker 5: so I've always found investments intriguing. My first job I
Speaker 5: had in high school was at a bank, so it
Speaker 5: was smaller number of stuff, but still, you know, just
Speaker 5: very intriguing.
Speaker 3: So my mind has always been kind of around numbers.
Speaker 5: When I went to college, you know, I attended my
Speaker 5: first year, I didn't know if I still wanted to,
Speaker 5: you know, pursue finance.
Speaker 3: Geology had really intrigued me.
Speaker 5: So my freshman year I took a couple of different
Speaker 5: classes in each of those respective fields and ultimately decided
Speaker 5: on finance. And that's at minut State University where I
Speaker 5: attended college. I know Shannon did mention their finance program.
Speaker 5: I'd like to give a shout out to Jerry Sti.
Speaker 5: I think he was a professor that really pushed me
Speaker 5: over the edge and got me fully committed to finance.
Speaker 5: Senior year at Minus State University, I did an intern
Speaker 5: at Integrity Viking Funds and began working when I graduated
Speaker 5: in twenty ten at Integrity Biking.
Speaker 1: You know, I think we should, you know, kind of
Speaker 1: really talk about the Integrity Dividend Harvest Fund. I think
Speaker 1: it's an interesting fund. What is the process or the
Speaker 1: investment process that you guys go through to manage this fund?
Speaker 3: Well, you know, the.
Speaker 5: First kind of step of the processes is defining the
Speaker 5: goals of the portfolio. So you know, we have a
Speaker 5: three tiered goal system where we're trying to maximize the
Speaker 5: current income as well as maximize the growth of that
Speaker 5: income to our shareholders, all while minimizing volatility. And we
Speaker 5: feel this recipe and does an exceptional job providing our
Speaker 5: shareholders superior risk adjusted returns you know, throughout the full
Speaker 5: cycle of the market. I think it's something that's kind
Speaker 5: of gotten lost in this era or decade plus, you know,
Speaker 5: period where growth has reigned supreme, you know, where the
Speaker 5: classic value investing you know.
Speaker 3: Still has a place in people's portfolio.
Speaker 5: And on going forward basis, you know, I think it's
Speaker 5: going to fully you know, solidify itself, you know, as
Speaker 5: as you know, a core of a portfolio.
Speaker 3: You know, if you look.
Speaker 5: At history, value has a very strong track record of
Speaker 5: outperforming growth, you know, despite the recent performance of growth.
Speaker 5: So we feel that value is very important and dividend
Speaker 5: investing is a true component component of value. So with
Speaker 5: the defined portfolio goals, you know, we we really have
Speaker 5: size on maintaining our investment style and our discipline regardless
Speaker 5: of market conditions. So we feel that removes a lot
Speaker 5: of emotions from what we do and it's more you know,
Speaker 5: factual and fundamental driven.
Speaker 3: That would be our process. You know.
Speaker 5: From there, we run the equities through our key portfolio
Speaker 5: metrics screen which will ultimately define our universe.
Speaker 3: You know.
Speaker 5: So the metrics that we are looking at in our
Speaker 5: initial screen are beata the current yield of a company
Speaker 5: the number of years a company has consecutively increased its
Speaker 5: dividend and market capitalization.
Speaker 3: So those are our four key.
Speaker 5: Portfolio metrics and those are used to define the dividend universe.
Speaker 5: And once we have our dividend universe, we put it
Speaker 5: into a tiering system. You know, so companies that meet
Speaker 5: all four of the requirements of the metrics that we're
Speaker 5: looking for would be considered a Tier one company. Tier
Speaker 5: two company would meet three out of those four metrics,
Speaker 5: and then a Tier three company would only meet two
Speaker 5: out of the four metrics.
Speaker 3: And by having a blend of Tier one.
Speaker 5: Two, and three companies from our dividend universe provides us
Speaker 5: with ample flexibility to meet the goals of the portfolio. Last,
Speaker 5: once we have our universe defined, we get into security selection,
Speaker 5: and this is completely driven by how each individual company
Speaker 5: contributes to the goals of the overall portfolio. Two great
Speaker 5: examples of how we use our process and how a
Speaker 5: company can get positioned into the portfolio would be Abby.
Speaker 3: You know, we've owned this company almost sense inception.
Speaker 5: It caught our radar because of its extremely attractive dividend yield,
Speaker 5: its impressive growth rate of its dividend, which was largely
Speaker 5: driven by their blockbuster drug heme era, their ability to
Speaker 5: integrate and expand their pipeline, you know, to offset the
Speaker 5: loss of exclusivity.
Speaker 3: But when you look.
Speaker 5: At how it fits into our process, it meets, you know,
Speaker 5: all the different pillars.
Speaker 3: Of our growth.
Speaker 5: It has above average divining neal, above average dividend growth,
Speaker 5: and low volatility. Is a dreamstock for this portfolio. Another example,
Speaker 5: so that would be a Tier one company. Another example
Speaker 5: of a different tier company would be a Broadcome you
Speaker 5: know where when we first bought the name back in
Speaker 5: twenty and eighteen, it was only a Tier three company.
Speaker 3: It only had nine years of dividend increases.
Speaker 5: But we looked at you know, the historical dividend increases
Speaker 5: out of this name, some recent acquisitions they made that
Speaker 5: solidified and smoothed their cash flows because of more recurring
Speaker 5: software sales. It really started to fit and it also
Speaker 5: allowed us to increase our ex closure to the technology sector,
Speaker 5: which you know, with it being a dividend investor, you know,
Speaker 5: the technology sector, it's it's difficult to find quality yield.
Speaker 5: You know, it seems like there's more value traps or
Speaker 5: extremely low dividend yields because they're focused on growth. So
Speaker 5: when Broadcom walked into our universe, we certainly took advantage
Speaker 5: of that and established a decent position because of how
Speaker 5: it was contributing to the yield of the fond as
Speaker 5: well as the growth of income. You know, So we're
Speaker 5: willing to sacrifice taken on a little bit more risk
Speaker 5: because of the excess you know, contribution it gave to
Speaker 5: the yield and growth of yield. You know, So when
Speaker 5: looking at our process and how you know I would
Speaker 5: rate it, you know, when looking at you know, our
Speaker 5: process since inception and the performance you know it has
Speaker 5: delivered absolute superior not only risk adjusted returns, but absolute
Speaker 5: returns versus our our peers, which in a sense is
Speaker 5: returning more than our peers while taking on less risk.
Speaker 2: Now you mentioned how you cheer the companies right by
Speaker 2: dibend yield and so on. Are there any specific metrics
Speaker 2: you like to look at to assess the sustainability of dividends?
Speaker 5: Yeah, dividend history is probably the number one, you know.
Speaker 5: So the average company within our portfolio has raised its
Speaker 5: dividend for twenty four and second years and that gives us,
Speaker 5: you know, pretty good comfort that you know, we're going
Speaker 5: to be able to you know, deliver that that growing
Speaker 5: income stream to our shareholders.
Speaker 3: And we have a.
Speaker 5: Successfully done that since inception. We've grown the dividend every
Speaker 5: single year, never seen a drop. And that's a commitment
Speaker 5: that you know, we have on a going for basis
Speaker 5: is to grow that dividend on a going for basis.
Speaker 5: You know, other metrics that we're going to look at
Speaker 5: would be a company's yield relative to its historic yield.
Speaker 3: You know, it's you know, another valuation metric that kind
Speaker 3: of tells you.
Speaker 5: You, you know, what income you're getting for what I'm paying. Obviously,
Speaker 5: the payout ratio is going to be a metric that.
Speaker 3: We look at.
Speaker 5: A net debt to EBITA is a very important one
Speaker 5: because if that number begins to climb, you're going to
Speaker 5: have to start questioning the you know, ability of the
Speaker 5: company to continue to pay that dividend and they may
Speaker 5: have to put their focus elsewhere, which puts a little
Speaker 5: cloud over the dividend side of things.
Speaker 3: And one can't deny long term, a total return of
Speaker 3: a stock is very important.
Speaker 5: You know, if you just simply look at yield in
Speaker 5: particular dividend metrics without looking at how the company is
Speaker 5: actually returned over a longer term period like ten years,
Speaker 5: you can find yourself a value trap.
Speaker 2: And do you care about buybacks at all, you know,
Speaker 2: trying to deliver higher shareholder yield?
Speaker 3: Yeah, definitely we do.
Speaker 4: We do place more emphasis on yield, you know, as
Speaker 4: ours returning capital to shareholders. Because this is a dividend fund,
Speaker 4: we're paying most attention to the regular dividends. Occasionally there's
Speaker 4: a special dividend, but really any form of returning capital
Speaker 4: to shareholders we like to see that, including buybacks. So
Speaker 4: definitely we're looking at that as well.
Speaker 3: And one thing I would add to that is dividends are.
Speaker 5: Definitely more direct to investors, you know, where share purchases
Speaker 5: can be overshadowed by you know, executive compensation or share incentives.
Speaker 1: I do you want to ask a follow up question
Speaker 1: regarding valuations. You mentioned you looked at historic yields, but
Speaker 1: are there other types of valuation metrics or just you know,
Speaker 1: a way you look at valuations and underlying securities.
Speaker 5: Yeah, I think price to earnings would be the predominant
Speaker 5: one that we use for a fund like this because
Speaker 5: of how you know, developed the companies are that we're
Speaker 5: invested in, and you know, the approach that we take,
Speaker 5: We're going to look at individual company price to earnings
Speaker 5: ratio versus its historic range, you know where it is
Speaker 5: at on the range, as well as peer analysis, sector analysis,
Speaker 5: and broad market analysis. You know, so by looking at
Speaker 5: all those different phases, you're able to identify pockets of
Speaker 5: opportunity not just on the individual stock side of things,
Speaker 5: but also sector industry side of things.
Speaker 3: You know, with that by gearing more, you.
Speaker 5: Know, money towards attract evaluation, you know, you get the
Speaker 5: opportunity for a multiple expansion and then vice versa.
Speaker 3: When we begin to see extreme valuation.
Speaker 5: And I say that because you know, I feel selling
Speaker 5: a company if it's a you know, two to three
Speaker 5: turns above its historical range or average range, you know,
Speaker 5: isn't necessarily fit the mantra of long term investing. The
Speaker 5: extreme would be when you're five, six, seven turns above
Speaker 5: its historic average. That's where we're going to start to
Speaker 5: decrease the position. And you know that's largely a function
Speaker 5: of multiple compression in contraction. Over time, you know, these
Speaker 5: companies will revert to their mean. And you know, if
Speaker 5: you're if you're heavily exposed to overvalued companies, you're you're
Speaker 5: you're adding more risk to your portfolio.
Speaker 2: There's been a few companies recently initiating dividends. Meta comes
Speaker 2: to mind. Do you care about those stocks at all?
Speaker 2: Are you willing to go into them as they initiate,
Speaker 2: or do you have to kind of wait for the
Speaker 2: consecutive history of dividends.
Speaker 5: So with our tearing system, we do have flexibility in
Speaker 5: that front. It's pretty rare that we're going to invest
Speaker 5: in a company with less than five years, you know,
Speaker 5: as in the case of Broadcom, we waited until they
Speaker 5: were approaching that ten year mark, and we were highly
Speaker 5: confident that they were going to excel through that tenure,
Speaker 5: so we established a position. You know, but when looking
Speaker 5: at these initiators, it's not very common where a company
Speaker 5: initiates a dividend and it's it's going to fall into
Speaker 5: our universe because you know that the yield is going
Speaker 5: to be so light from the get go. So we
Speaker 5: want the story to mature and for them to prove
Speaker 5: up that they're fully committed to the dividend, and that's
Speaker 5: when they would enter our universe and we would identify
Speaker 5: and decide whether it's an appropriate stock.
Speaker 3: For our fund.
Speaker 1: Do you consider the macro environment at all when you're
Speaker 1: looking at companies, Well, the.
Speaker 5: Macro environment, you know, I think is going to impact
Speaker 5: you know, each sector independently, you know, but we're pretty
Speaker 5: agnostic about the macro environment, you know, by you know,
Speaker 5: following our process in committing to high quality companies with
Speaker 5: wide modes you know, really really drives our long term performance.
Speaker 5: The macro environment does create pockets of opportunity.
Speaker 3: You know.
Speaker 5: A couple of great examples would be back in twenty sixteen,
Speaker 5: you know, when the bond market kind of turned, you know,
Speaker 5: the bond proxies you know, started to come under pressure,
Speaker 5: and we were able to get ahead of that, you know,
Speaker 5: by reducing our exposure to our consumer staples.
Speaker 3: You know, before you know, the.
Speaker 5: Downturn happened, and that was largely a function you know,
Speaker 5: of the macro It was macro driven as well as
Speaker 5: extreme valuation within consumer staples. The same thing happened in
Speaker 5: twenty twenty two, you know, or the macro environment you know,
Speaker 5: pro push down the technology sector and again created opportunities
Speaker 5: as the share price fall yields price and we were
Speaker 5: able to pick up you know, some technology names on
Speaker 5: the cheap with you know, acceptable dividend yields, you know,
Speaker 5: for how the you know, the.
Speaker 3: Companies are going to contribute to the portfolio goals.
Speaker 5: And the most recent one was just late last year,
Speaker 5: we took our utility exposure you know, from eight percent
Speaker 5: to close to fifteen percent just because of the backdrop
Speaker 5: the attract evaluation, the you know, acceleration in capex which
Speaker 5: will lead to further grow both largely driven by the
Speaker 5: speculation of load growth driven by data centers.
Speaker 2: So what do you identify as the biggest risk to
Speaker 2: dividend investing broadly? Is it just kind of higher inflation,
Speaker 2: higher rates persisting for longer making bonds more attractive, or
Speaker 2: is it something else?
Speaker 5: I would probably tend to agree that rates, you know,
Speaker 5: would be you know the biggest you know.
Speaker 4: Threat time to time, I think dividend stocks go out
Speaker 4: of favor, and you know, this has happened numerous times
Speaker 4: since we open the fund, you know, and recently with
Speaker 4: short term interest rates so high and you know where
Speaker 4: people could go out and get a five five and
Speaker 4: a half percent CD or you know the same thing
Speaker 4: in a money market fund that competed pretty pretty hard
Speaker 4: against you know, dividend stocks and you know fun link
Speaker 4: ours that might pay three three and a half percent,
Speaker 4: while individual investors can go and buy a CD at
Speaker 4: five percent risk free.
Speaker 3: Many of them opted for that. You know.
Speaker 4: Hopefully, now that it's pretty evident the fats can start cutting,
Speaker 4: we'll be able to compete dividend stocks dived in equity
Speaker 4: income type mutual funds I think will be much more competitive.
Speaker 4: Probably already are you know, market rates have already fallen significantly,
Speaker 4: So I think that will will.
Speaker 3: Help us moving forward.
Speaker 1: You mentioned the tier system when you're looking to purchase securities.
Speaker 1: Does it work on the the other end, you know,
Speaker 1: does you know if a stock falls from tier you know,
Speaker 1: your top tier to a lower tier, does that you know,
Speaker 1: initiate a sell?
Speaker 3: You know, I think it would. It would.
Speaker 5: There there'd be something going on where the company you know,
Speaker 5: is following a tier. You know, So we're going to
Speaker 5: address again that individual company, how it's contributing to the
Speaker 5: portfolio goals, and if it starts a fall out of favor,
Speaker 5: we're going to begin to reduce the you know, our
Speaker 5: exposure to that name. And a prime example would be
Speaker 5: you know, with such a rapid rise and its share
Speaker 5: price over the last you know, five six years, it's
Speaker 5: pushed its yield. When we initially purchased it, it was
Speaker 5: you know four plus percent dividen yield. Now it's got
Speaker 5: a little one handle, you know, so we've obviously you know,
Speaker 5: reduced our our exposure to that name.
Speaker 3: So yes, it certainly.
Speaker 5: Plays a role in our not only whether we're buying
Speaker 5: or selling, but how how we're positioning it in the portfolio.
Speaker 2: Does it cut automatically force you out of a position
Speaker 2: or do you reassess if you believe in company fundamentals.
Speaker 5: Ninety five percent of the time, it's going to be
Speaker 5: it's going to exit the portfolio. You know, there have
Speaker 5: been cases where you know, there was a corporate restructure
Speaker 5: you know that caused you know, a reduction in the dividend,
Speaker 5: you know, via a spin off of a portion of
Speaker 5: the company's business, which would.
Speaker 3: You know, it's not what we like to see, but.
Speaker 5: You know, it's less of a concern if versus like
Speaker 5: deteriorating fundamentals, you know, causing stress and ultimately the competator
Speaker 5: reducer divid and that's not something we're looking for. And
Speaker 5: there's been so many studies done, you know, on returns
Speaker 5: by dividend policy, that it just should be a simple rule.
Speaker 3: If they cut, it's gone.
Speaker 5: Because of they are at the bottom of the list
Speaker 5: for you know, total return over long period of.
Speaker 3: Time, that would be dividend cutters.
Speaker 5: And on the flip side of things, things dividend initiators
Speaker 5: and razors have drastically outperformed the broader market.
Speaker 3: And that's why we feel this is, you know.
Speaker 5: Such an excellent fund at providing risk adjusted returns.
Speaker 2: And how do you deal with any sector biases that
Speaker 2: might emerge? I mean, high payers can often be pretty clumpy, right.
Speaker 3: I guess what do you mean by sector biases?
Speaker 2: Like, you know, energy has like a pretty high proportion
Speaker 2: of high in yielders for example, Right, do you make
Speaker 2: sure that you have weights pretty close to the benchmark
Speaker 2: or whatever your benchmark might be, or do you just
Speaker 2: let those drift? I went along with the yields and
Speaker 2: so on.
Speaker 4: To answer that one, I would say that given the
Speaker 4: fact we're managing for low volatility, you know, we're generally
Speaker 4: going to be overweight.
Speaker 3: Your staples, utilities, healthcare people.
Speaker 4: Are always going to need toothpaste toilet paper, electricity.
Speaker 3: And medicine. So the companies that deliver those.
Speaker 4: Products are going to have a very reliable, stable cash
Speaker 4: flow and very reliable dividends and typically less volatility of
Speaker 4: their share price. So I would say those are three
Speaker 4: sectors that we typically will overweight. As Mike mentioned, we
Speaker 4: really like the utility sector now and stepping up our
Speaker 4: waiting coming into this year.
Speaker 3: We believe they provide.
Speaker 4: Obviously a degree a defense given their stable cash flows,
Speaker 4: but definitely offense as well with a load growth that's
Speaker 4: going to be occurring over the country in the near years.
Speaker 4: And then you know, depending on the macro environment, we
Speaker 4: look for opportunities in other sectors so that we stay
Speaker 4: fairly diversified across you know, all those sectors in the
Speaker 4: S and P.
Speaker 5: Yeah, to add to that, you know, it's like I
Speaker 5: treat those defensive sectors you know, as the core of
Speaker 5: our portfolio. In the remainder being dynamic, you know, in
Speaker 5: the opportunities present at any given time is going to
Speaker 5: you know, you know, I guess dictate our sector allocation.
Speaker 5: As Shannon mentioned, we're not going to overly stretch our exposure.
Speaker 5: You know, as you mentioned energy and there is incredible
Speaker 5: income opportunities at incredible evaluations with an energy but it
Speaker 5: is very important to not you know, go overboard with
Speaker 5: with with exposure to an extremely volatile sector.
Speaker 2: Yeah, and with some of the megacaps initial dividends, they
Speaker 2: might be creeping into your universe. But are are you
Speaker 2: worried about any concentration risk in the style maybe looking
Speaker 2: out into the future of five five years or so, you.
Speaker 5: Know, from our portfolio standpoint, you know, I think we've
Speaker 5: you know, kept away from, you know, any concentration. We've
Speaker 5: had some strong performers at the top that we've you know,
Speaker 5: kept in check to make sure we don't get overly concentrated,
Speaker 5: you know.
Speaker 3: But from a broad based standpoint, is that kind of
Speaker 3: what you're referring to?
Speaker 2: Yeah, Yeah, just in general. I mean, if you look
Speaker 2: at the S and P for example, right you've got
Speaker 2: thirty to forty in the top seven stocks right now,
Speaker 2: and it's getting a little bit concerning for investors broadly.
Speaker 2: I was just wondering if you were seeing this, Yeah.
Speaker 5: And I think that would probably be a positive, you know,
Speaker 5: for a dividend investor because and we've already seen this
Speaker 5: in the past couple of months as breadth has expanded,
Speaker 5: you know, which is you know, greatly positive for the
Speaker 5: rest of the market, negative for the meg seven.
Speaker 3: You know.
Speaker 5: And when when looking at you know, valuations, I think
Speaker 5: this trend you know, has a lot of potential to continue.
Speaker 5: And it also gets back to you know, my my
Speaker 5: comments of you know, diving and investing in how you know,
Speaker 5: how they are correlated into value and values long term
Speaker 5: history versus growth. There's a study done back in twenty
Speaker 5: nineteen and if I adjust the numbers to twenty twenty three,
Speaker 5: value on a rolling fifteen year basis as outperform growth
Speaker 5: nearly ninety percent of the time going back to nineteen
Speaker 5: twenty seven.
Speaker 3: You know, so value is the true leader, you know
Speaker 3: in the market. It's you know, it's been growth for
Speaker 3: my lifetime, you know.
Speaker 5: But ultimately, you know, we see value gaining its leadership.
Speaker 2: And uh, there's a lot of cash flush companies out there,
Speaker 2: especially I mean tech comes to mind right off the
Speaker 2: top of my head. What do you think is necessary
Speaker 2: to spur some of these make it caps maybe to
Speaker 2: return more capital shareholders. There's a lack of opportunities or yeah, or.
Speaker 3: Both opportunities would have to dry out.
Speaker 5: And that I don't see that happening, I guess anytime
Speaker 5: in the next few years. There's ample opportunities where even
Speaker 5: the massive piles are sitting.
Speaker 3: On aren't enough for what they could realistically spend.
Speaker 2: Yeah, and do you think rate cuts at all will
Speaker 2: will kind of impact that, maybe urge companies to give
Speaker 2: more back to shareholders.
Speaker 5: That's difficult, you know, on the growth companies, because you know,
Speaker 5: in a lower rate environment it does create you know,
Speaker 5: more attractive returns for growth products, So I would say
Speaker 5: they'd be more inclined to, you know, continue on towards that,
Speaker 5: the growth side side of things.
Speaker 3: Yeah.
Speaker 1: Well, I've actually just got one more question actually for
Speaker 1: the both of you. What are your favorite investment books.
Speaker 1: We'll start with you, Shannon.
Speaker 3: No particular one comes to mind. When I have free time,
Speaker 3: I read more research.
Speaker 1: Okay, fair enough.
Speaker 4: Yeah, I just need to read as much research as
Speaker 4: I can and try and keep up with Mike on
Speaker 4: on my research.
Speaker 1: How about you, Mike.
Speaker 5: Yeah, I don't know if it'll ever catch me, but no,
Speaker 5: I would say definitively it's The Automatic Millionaire.
Speaker 3: By David Bach. Received that book when I was a senior.
Speaker 5: Well, graduated high school, read it front to back and
Speaker 5: really changed my perspective on, you know, on investing and
Speaker 5: paying yourself first and just being a little bit more responsible,
Speaker 5: you know, about how you invest. So that's definitively the
Speaker 5: top of my list, even though it's been I don't know,
Speaker 5: probably twenty years since.
Speaker 1: I've read it, so it's nice. Well, you know, this
Speaker 1: was great, Shannon, Mike, thank you so much for joining
Speaker 1: us today.
Speaker 3: Thank you, Dave, and thank you Mike. Yep.
Speaker 1: Thanks guys and Mike, thank you for being my co host.
Speaker 1: Thank you until our next episode. This is David Cohne
Speaker 1: with Inside Active