WEBVTT - Getting Paid to Own Stocks 0:00:03.680 --> 0:00:07.120 Strap on your parachute. It's time for What Goes Up 0:00:07.400 --> 0:00:15.000 with Sarah Ponza and Mike Reagan. Hello and welcome to 0:00:15.120 --> 0:00:19.400 What goes Up at Bloomberg Weekly Markets Podcast. I'm Mike Reagan, 0:00:19.520 --> 0:00:23.160 a senior editor at Bloomberg. I'm Katie Greifeld, a reporter 0:00:23.200 --> 0:00:26.200 at Bloomberg, filling in for Sarah. Peck was off this week. 0:00:27.120 --> 0:00:29.360 So this week on the show, after a few weeks 0:00:29.360 --> 0:00:31.440 in which it seemed like the market was under the 0:00:31.480 --> 0:00:35.479 control of day traders and Robin Hood and Reddit, things 0:00:35.560 --> 0:00:37.800 seem like they're starting to get back to normal. We 0:00:37.880 --> 0:00:39.960 don't want to jinx it, but they're starting to seem 0:00:40.040 --> 0:00:42.600 like the market's getting back to normal. So we're gonna 0:00:42.640 --> 0:00:46.159 get back to talking about fundamentals, and this episode is 0:00:46.200 --> 0:00:48.400 going to be all about one of the most important 0:00:48.440 --> 0:00:52.120 elements of the stock market, which is dividends. Our guest 0:00:52.200 --> 0:00:54.760 is a portfolio manager who helps run a strategy that 0:00:54.840 --> 0:00:59.760 focuses on earning income from stocks with high dividends, and 0:01:00.040 --> 0:01:02.760 as always, will close out this episode with our tradition, 0:01:03.080 --> 0:01:06.520 the craziest thing I saw in markets this week, And remember, 0:01:06.560 --> 0:01:08.560 if you saw something crazy, give us a call on 0:01:08.600 --> 0:01:11.960 the What goes up hotline at six or six three 0:01:12.000 --> 0:01:15.880 two four three four nine zero, leave us a voicemail 0:01:15.959 --> 0:01:18.280 and maybe we'll play it on the show, and Katy 0:01:18.319 --> 0:01:21.680 before we get started. One programming note, Um, for some 0:01:21.760 --> 0:01:25.319 strange reason, there's a lot of interest among our listeners 0:01:26.000 --> 0:01:28.840 as to what my nickname in high school was. I 0:01:29.120 --> 0:01:30.880 let it slip that I had a couple of nicknames 0:01:30.920 --> 0:01:34.679 in high school, and I said, we had about a 0:01:34.720 --> 0:01:37.880 hundred and forty seven ratings on Apple Podcasts at the time. 0:01:38.400 --> 0:01:39.959 I said, if we get ten more, if we get 0:01:39.959 --> 0:01:43.760 to one fifty seven, I would reveal one of two nicknames. Obviously, 0:01:43.800 --> 0:01:46.840 the more flattering one would be revealed first, and if 0:01:46.840 --> 0:01:50.080 we got to two hundred, I'd reveal the really embarrassing nickname. 0:01:51.040 --> 0:01:53.880 Sure enough, the listeners have weighed in. We're now to 0:01:53.920 --> 0:01:57.880 about a hundred and sixty three ratings, a little more 0:01:57.920 --> 0:02:02.400 than I bargained for. So I do o listeners a nickname, however, 0:02:02.840 --> 0:02:06.120 uh with Sarah Off. Sarah insists that she'd be around 0:02:06.160 --> 0:02:08.120 when I for the big reveal for the for the 0:02:08.120 --> 0:02:11.200 big reveal of the nickname. So I hate to disappoint 0:02:11.320 --> 0:02:13.760 the listeners. Um, So I think you know what this 0:02:13.840 --> 0:02:16.360 means is that you're on the hook to cough up 0:02:16.480 --> 0:02:18.720 a nickname this week. You know, you really got my 0:02:18.800 --> 0:02:21.160 hopes up. I thought this was the big moment and 0:02:21.440 --> 0:02:25.000 it's not. I know, I know there's they're they're there's 0:02:25.000 --> 0:02:27.760 gonna be outrage among the listeners. But can you come 0:02:27.760 --> 0:02:29.799 on give them something? I know you must have had 0:02:29.880 --> 0:02:33.200 some some horsey nickname. I'm guessing in high school. No 0:02:33.200 --> 0:02:36.679 one called me horse girl. There's nothing like that. No, 0:02:36.840 --> 0:02:39.760 My nin name was really boring. I mean, my name 0:02:39.840 --> 0:02:43.320 is Katie Greifelt. They just called me KG because there's 0:02:43.360 --> 0:02:46.440 another Katie on the cross country team, so I had 0:02:46.480 --> 0:02:50.680 to differentiate somehow. Just KG. It's totally vanilla, like Kevin 0:02:50.680 --> 0:02:52.800 gart Like Kevin Garnett. That's pretty good. That's not a 0:02:52.800 --> 0:02:56.040 bad uh, not a bad namestake. All right, Well that's 0:02:56.080 --> 0:02:57.760 the best we can do for nicknames this week. But 0:02:58.160 --> 0:02:59.680 two to next week, and if you get us the two, 0:03:00.040 --> 0:03:02.120 you'll get the embarrassing nickname as well as the the 0:03:02.160 --> 0:03:05.200 flattering nickname. But let's get to our guest here and 0:03:05.280 --> 0:03:07.680 full disclosure. This week's guest is a is a very 0:03:07.680 --> 0:03:12.440 good friend of mine, also one of my favorite musicians. Uh. 0:03:12.480 --> 0:03:16.000 One of the best golfers I know, pretty much, one 0:03:16.000 --> 0:03:19.880 of the nicest guys all around I know, UM, But 0:03:20.000 --> 0:03:21.880 none of that is is the reason why he's on 0:03:21.880 --> 0:03:24.160 the show. He's on the show this week because he's 0:03:24.200 --> 0:03:27.160 also one of my favorite people to talk markets with. 0:03:27.800 --> 0:03:30.840 He is, as we mentioned at the intro there, he 0:03:30.960 --> 0:03:35.520 focuses on stocks with high dividends. UH runs an equity 0:03:35.560 --> 0:03:39.800 income strategy. UH. He's a partner and portfolio manager at 0:03:39.840 --> 0:03:43.280 Hamlin Capital Management UM, which is a firm that has 0:03:43.320 --> 0:03:46.760 about four point eight billion dollars under management in two 0:03:46.800 --> 0:03:50.360 main strategies, once a high yield municipal bond strategy and 0:03:50.400 --> 0:03:54.000 the other is a dividend equity strategy, which is where 0:03:54.040 --> 0:03:57.240 our guests comes in. He helps manage that strategy. His 0:03:57.400 --> 0:04:01.720 name is Chris Dagnus. Chris, welcome to this show. Thanks 0:04:01.760 --> 0:04:04.560 so much, Mike. UH. You've given me a lot to 0:04:04.600 --> 0:04:07.360 live up to there, so I'll do I'll do my best. 0:04:08.480 --> 0:04:11.360 Absolutely absolutely all true, by the way, all true, all 0:04:11.400 --> 0:04:14.720 absolutely true. But Chris, I didn't want to start off 0:04:16.360 --> 0:04:18.600 getting you a little bit out of your wheelhouse and 0:04:18.640 --> 0:04:21.880 talking about some stocks that actually do not pay dividends, 0:04:21.920 --> 0:04:24.600 because I find this fascinating and I want to sound 0:04:24.640 --> 0:04:26.799 like an old man here a little bit, which I guess, 0:04:26.800 --> 0:04:29.359 you know, if if the shoe fits right. But you know, 0:04:29.400 --> 0:04:31.599 it used to be back in the day, if you 0:04:31.640 --> 0:04:33.840 were to become one of the biggest stocks in the 0:04:33.880 --> 0:04:36.040 country or in the world, you pretty much had to 0:04:36.360 --> 0:04:38.640 pay a dividend. I mean there were a few exceptions, 0:04:38.720 --> 0:04:42.200 especially in the dot com era, but you know, paying 0:04:42.200 --> 0:04:45.800 a dividend was was more or less expected of a mature, 0:04:46.200 --> 0:04:49.800 big mega cap company. Now these days, you know, you 0:04:49.880 --> 0:04:52.960 look at the biggest stocks in the SMP five hundred 0:04:53.000 --> 0:04:57.440 and okay, Apple, Microsoft the two biggest, they pay dividends, 0:04:57.480 --> 0:04:59.960 probably not at any yield that that would get you excite. 0:05:00.760 --> 0:05:03.640 But then after that you go, oh for five um, 0:05:03.839 --> 0:05:10.240 you know, with Amazon and alphabet Tesla uh and Facebook, 0:05:10.600 --> 0:05:13.159 not a dividend to be found. Berkshire Hathaway is up 0:05:13.200 --> 0:05:15.719 there too. I mean, that's sort of an outlier. Warren 0:05:15.760 --> 0:05:18.320 Buffett follows his own rules, and I guess one of 0:05:18.320 --> 0:05:20.800 them is he likes to cash dividend checks but not 0:05:20.880 --> 0:05:25.080 write them. But I'm just curious how as a dividend 0:05:25.279 --> 0:05:31.320 oriented investor you look at these big mega cap tech companies. Um, 0:05:31.400 --> 0:05:33.839 it seems to me like they almost are avoid They 0:05:33.880 --> 0:05:35.479 want to be sort of almost in sort of a 0:05:35.520 --> 0:05:38.280 sustained adolescents. You know, they don't want to give up 0:05:38.320 --> 0:05:41.240 that notion of being a growth company that's always reinvesting. 0:05:42.000 --> 0:05:44.440 But walk us through how you would look at companies 0:05:44.480 --> 0:05:47.320 like that. Isn't inevitable that the facebooks of the world, 0:05:47.640 --> 0:05:49.600 that the alphabets of the world will someday have to 0:05:49.640 --> 0:05:52.400 pay a dividend, do you think? Yeah? I think I 0:05:52.400 --> 0:05:55.200 think that's right, Mike, and and you brought up a 0:05:55.200 --> 0:05:59.760 couple of important points. They're one is that Apple inevitably 0:05:59.760 --> 0:06:02.560 and created its dividend in two thousand and ten, and 0:06:03.240 --> 0:06:06.960 Microsoft initiated its dividend in two thousand and three. And 0:06:07.120 --> 0:06:09.200 once a company gets to a point where it has 0:06:09.240 --> 0:06:12.200 a lot of free cash flow and maybe not as 0:06:12.560 --> 0:06:16.040 much to reinvest back into the business, maybe the opportunity 0:06:16.080 --> 0:06:19.960 set is is not as good. You eventually see that 0:06:20.040 --> 0:06:23.400 these these companies will will likely come around and started 0:06:23.400 --> 0:06:26.039 a dividend payment to shareholders. I would not be surprised 0:06:26.080 --> 0:06:30.000 to see that from Facebook or or Google or or 0:06:30.080 --> 0:06:31.560 some of the big ones. As long as they have 0:06:31.640 --> 0:06:34.719 that free cash flow and the wherewithal in capacity to 0:06:34.720 --> 0:06:39.560 to do it. What's interesting is that there's not much 0:06:39.600 --> 0:06:42.080 we're missing out on today. If you can believe it, 0:06:42.120 --> 0:06:44.600 four hundred and twenty of the five companies in the 0:06:44.720 --> 0:06:50.359 SMP actually pay a dividend. Now. Back in that number 0:06:50.480 --> 0:06:53.080 was as high as four hundred and sixty nine companies, 0:06:53.720 --> 0:06:55.800 and in two thousand and one it fell all the 0:06:55.839 --> 0:06:59.520 way to around three hundred and fifty companies. So the 0:06:59.600 --> 0:07:02.240 number of companies has actually been growing over to the 0:07:02.320 --> 0:07:07.160 last ten or twenty years of companies paying paying dividends. 0:07:07.440 --> 0:07:10.000 So I think we're getting back to it a little bit. 0:07:10.080 --> 0:07:12.960 And I think one thing you're gonna see is that 0:07:13.000 --> 0:07:18.239 the demographics of this country, we're aging as a country, 0:07:18.400 --> 0:07:22.440 and we need income. Seniors need income, retirees need income. 0:07:22.480 --> 0:07:27.119 It has gotten very difficult to find income anywhere. So 0:07:27.760 --> 0:07:30.920 why not have those big companies or demand from those 0:07:30.920 --> 0:07:34.160 big companies that they share some of the cash with 0:07:34.480 --> 0:07:36.800 their shareholders. I think you're gonna I think you're gonna 0:07:36.800 --> 0:07:40.480 see that, uh going forward. I think I think the 0:07:40.520 --> 0:07:44.000 demographics are going to really really require it and ask 0:07:44.080 --> 0:07:47.800 for it. Uh. And and just lastly, one one last point. 0:07:47.840 --> 0:07:50.880 You know, the way we think about it actually is 0:07:50.960 --> 0:07:54.680 that the dividend really imposes a lot of discipline on 0:07:54.760 --> 0:07:58.600 the company and the management team, and without it, you 0:07:58.680 --> 0:08:01.760 really can invest in just about about anything you want. 0:08:02.400 --> 0:08:04.800 But if you're committed to a dividend, if you've committed 0:08:04.800 --> 0:08:07.760 to your shareholders you're going to pay that dividend, well, 0:08:07.760 --> 0:08:10.040 you better deliver on it. And you know what, your 0:08:10.040 --> 0:08:12.600 shareholders are gonna want you to grow that dividend over time, 0:08:13.320 --> 0:08:16.600 and so you've got to really operate the business efficiently, 0:08:17.280 --> 0:08:20.720 make good decisions, make discipline decisions. You just can invest 0:08:20.800 --> 0:08:24.320 in everything. And I think that's a very important concept 0:08:24.360 --> 0:08:27.520 of why this strategy has worked over time. It's the 0:08:27.560 --> 0:08:33.160 governor on the capital allocation process. And eventually, maybe Amazon 0:08:33.360 --> 0:08:38.600 or Google or Tesla, especially maybe Tesla do something shareholders 0:08:38.600 --> 0:08:42.240 are not pleased with, and if they forced the management 0:08:42.240 --> 0:08:44.240 team to implement that dividend, it's gonna be harder for 0:08:44.280 --> 0:08:46.520 them to do that. So that would be that would 0:08:46.559 --> 0:08:48.640 be my my comment on all that. I would say, 0:08:48.880 --> 0:08:51.040 we don't feel we've missed out. There's been plenty of 0:08:51.600 --> 0:08:54.480 really exciting dividend stories out there and companies we've been 0:08:54.520 --> 0:08:57.640 able to own and tech has been a big part 0:08:57.679 --> 0:09:01.000 of that over the last five or ten years because 0:09:01.000 --> 0:09:05.200 a lot of the tech sector has initiated dividends. So 0:09:05.280 --> 0:09:07.640 to your point that you know, you there's actually a 0:09:07.679 --> 0:09:10.240 fair number of companies in the SMP five hundred that 0:09:10.280 --> 0:09:13.280 are paying dividends, it brings some mind. There's this really 0:09:13.320 --> 0:09:16.600 interesting note from Bank of America last week that looked 0:09:16.640 --> 0:09:19.800 at dividend yields in the SMP five hundred. They found 0:09:19.800 --> 0:09:23.360 that over sixt of stocks in the SMP hun five 0:09:23.400 --> 0:09:26.600 hundred have a higher dividend yield than current ten year 0:09:26.600 --> 0:09:28.800 treasury yields. And it might have shifted around a bit 0:09:28.840 --> 0:09:31.839 since then, but their point was that, you know, in 0:09:31.840 --> 0:09:35.360 this rising rate environment, this big reflation trade we're seeing, 0:09:35.679 --> 0:09:39.000 if the ten year reaches their year end target of 0:09:39.080 --> 0:09:41.360 one point seven five by the end of the year, 0:09:41.400 --> 0:09:45.080 then that would kind of diminish the appeal of stocks 0:09:45.120 --> 0:09:47.680 to some extent. And I wanted to hear your thoughts 0:09:47.720 --> 0:09:50.160 on that. You know, if if we truly are in 0:09:50.200 --> 0:09:53.199 a rising rate environment, what does that mean for your strategy? 0:09:53.280 --> 0:09:57.280 Is that a headwind? A lot of a lot of 0:09:57.320 --> 0:10:02.600 good questions in their Katie on the number of companies 0:10:02.640 --> 0:10:05.599 that yield more than than the tenure Mike made a 0:10:06.080 --> 0:10:10.320 funny joke about UM being a senior or an elder 0:10:10.800 --> 0:10:13.880 when we began this call. When when someone talks about 0:10:13.880 --> 0:10:17.000 a one point seven ten year treasury being too high, 0:10:17.160 --> 0:10:22.360 I really feel old. Uh that that that is that 0:10:22.520 --> 0:10:25.120 is not a big number in in my mind. UM, 0:10:25.240 --> 0:10:30.800 And it's it's hard to to recall, but the tenure 0:10:30.920 --> 0:10:36.240 treasury UH in the late nineties during the tech bubble 0:10:37.559 --> 0:10:42.120 was somewhere north of five percent, and the SNP yield 0:10:42.120 --> 0:10:46.520 at the time was one point five percent. In other words, 0:10:46.720 --> 0:10:51.040 it was fine with a much higher treasury yield. Uh. 0:10:51.040 --> 0:10:56.040 It's really all about future earnings growth and and dividend 0:10:56.040 --> 0:11:00.280 growth earning. You that that lower yield and what does 0:11:00.320 --> 0:11:04.760 that look like? Uh? Now you bring up a interesting 0:11:05.360 --> 0:11:10.520 uh point on you know, how does this strategy handle 0:11:11.320 --> 0:11:18.800 higher higher yields. Um. It it's really been a misnomer 0:11:18.880 --> 0:11:23.320 over time that dividend pang stocks don't like higher yields. Uh. 0:11:23.400 --> 0:11:27.360 There are certain groups within our universe, maybe more bond 0:11:27.360 --> 0:11:31.600 proxy like groups. Utilities and reats would be the obvious 0:11:31.640 --> 0:11:36.480 ones that over time have not performed as well. Maybe 0:11:36.559 --> 0:11:41.960 during a brief period of rates moving up, but actually 0:11:42.040 --> 0:11:45.040 we really want rates to go higher. We think it 0:11:45.080 --> 0:11:48.760 has been a huge headwind for our strategy. Um it 0:11:48.840 --> 0:11:52.080 has been a big tail wind for growth stocks with 0:11:52.280 --> 0:11:57.400 such a low rate environment. Higher higher rates generally mean 0:11:58.000 --> 0:12:02.560 better growth, more inflation, and dividend paying stocks. Companies that 0:12:02.600 --> 0:12:04.760 are paying out a dividend and want to grow that dividend, 0:12:05.160 --> 0:12:07.599 they want more inflation. They want to be able to 0:12:07.679 --> 0:12:10.679 raise prices on their products and service because then they 0:12:10.679 --> 0:12:14.040 can pass that through in the form of faster earnings growth, 0:12:14.040 --> 0:12:17.160 faster dividend growth. That's good. If they can't raise price 0:12:17.679 --> 0:12:20.800 on their product and service, then and they're trying to 0:12:20.800 --> 0:12:23.280 grow their dividend, you might see a payout ratio start 0:12:23.280 --> 0:12:26.040 to go up and the dividend gets called into question 0:12:26.200 --> 0:12:28.520 and the stock is under pressure. I think we've seen 0:12:28.559 --> 0:12:31.360 more of that over the last UH ten or fifteen 0:12:31.559 --> 0:12:33.920 years now because we've been in this low growth, low 0:12:33.960 --> 0:12:38.360 inflation environment, and that's just been really good for growth 0:12:38.360 --> 0:12:43.800 stocks because because valuations are getting pushed higher and higher. 0:12:43.960 --> 0:12:48.880 Low uh it seems like a strange concept, right. Low 0:12:48.960 --> 0:12:51.240 growth is great for growth, but when there is no 0:12:51.320 --> 0:12:53.360 growth out there, you really are going to pay anything 0:12:53.400 --> 0:12:56.319 for those growth companies that are showing any growth, and 0:12:56.360 --> 0:12:58.400 I think that's what's happening. I think you're seeing very 0:12:58.440 --> 0:13:04.160 high valuations on the great, big large growth companies, the 0:13:05.000 --> 0:13:08.160 Russell one thousand growth you know, those twenty five companies 0:13:08.160 --> 0:13:10.880 in the top twenty five of that index, they're nearly 0:13:10.960 --> 0:13:13.079 forty times earnings. I think they're around thirty nine times 0:13:13.120 --> 0:13:16.280 earnings on average right now. That's that seems to be 0:13:16.320 --> 0:13:19.439 fairly elevated. And I think I think rates going up 0:13:20.280 --> 0:13:23.640 might might pull that valuation back down, so we we 0:13:23.679 --> 0:13:26.920 would love it. We think it would probably level the 0:13:26.920 --> 0:13:29.560 playing field between growth and value a little bit if 0:13:29.600 --> 0:13:32.719 you saw a little more inflation and higher interest rates. 0:13:42.440 --> 0:13:45.040 You know, Chris, it's it's interesting every now. Then I'll 0:13:45.080 --> 0:13:48.080 just do a screen of stocks and I don't know 0:13:48.080 --> 0:13:50.280 either the Russell, say the Russell three thousand or the 0:13:50.360 --> 0:13:53.680 SMP five hundred, and just sort them by dividend yield, 0:13:54.280 --> 0:13:56.920 and it kind of reminds me. You know, my dad 0:13:56.960 --> 0:13:59.360 was in the insurance business and and he was uh 0:14:00.000 --> 0:14:02.600 claims guy early on it. He'd always tell stories about 0:14:02.840 --> 0:14:05.719 having to go out to the whatever the flood or 0:14:05.760 --> 0:14:08.520 a big fire or something blew up somewhere, And whenever 0:14:08.559 --> 0:14:11.320 you do the dividends screen like that, it reminds me 0:14:11.360 --> 0:14:14.480 of that because often that the highest yielders or some 0:14:14.520 --> 0:14:18.520 company something's going wrong, something, something's blowing up. UM. And 0:14:18.720 --> 0:14:23.120 especially last March last spring, in the middle of the 0:14:23.160 --> 0:14:26.560 covid UH craziness and the and the bear market. You know, 0:14:26.600 --> 0:14:30.080 I looked at sort of the highest dividends stocks in 0:14:30.200 --> 0:14:32.760 March of last year, and it's just eye popping some 0:14:32.800 --> 0:14:35.920 of the yields that were on offer at that time. 0:14:36.680 --> 0:14:39.120 But I'm curious how your approach fits in with that 0:14:39.200 --> 0:14:43.560 sort of mentality. Um. You know, picking out a really 0:14:43.680 --> 0:14:48.360 high dividends stock, say temper Center More is obviously risky 0:14:48.440 --> 0:14:51.240 but can be very rewarding. So so what's Hamlin's kind 0:14:51.280 --> 0:14:57.880 of approach for sorting out the disasters from stocks that 0:14:57.920 --> 0:15:00.400 have just been dumped, you know, baby with the water 0:15:00.440 --> 0:15:04.080 type of situation, Especially how you navigated UH last spring. 0:15:04.120 --> 0:15:06.360 I always can only imagine you were working around the 0:15:06.400 --> 0:15:09.640 clock trying to figure out, you know, some of these 0:15:09.640 --> 0:15:13.440 stocks with these humongous double digit yields, you know, what 0:15:13.480 --> 0:15:16.080 were the opportunities and what we're Can you talk to 0:15:16.200 --> 0:15:19.760 us a little bit about your process for sorting through uh, 0:15:19.880 --> 0:15:23.080 you know, high high paying stocks, especially at at a 0:15:23.240 --> 0:15:28.880 chaotic time like that like we saw about a year ago. Yeah, 0:15:28.920 --> 0:15:31.520 my last last March. I don't think I slept for 0:15:31.600 --> 0:15:36.440 three weeks straight and we probably talked during that period 0:15:36.520 --> 0:15:41.120 at some point. I'm sure. I'm sure I sounded like it. Um. Yeah, 0:15:41.280 --> 0:15:44.680 So you what you've brought up is a is a concept, 0:15:45.080 --> 0:15:49.160 uh that we call a yield trap. You don't want 0:15:49.160 --> 0:15:51.000 to be stuck in a yield trap. Some call it 0:15:51.000 --> 0:15:54.400 a value trap. Yield trap is is worse. It's the 0:15:54.440 --> 0:15:57.120 same as a value trap, except you're getting paid while 0:15:57.160 --> 0:15:59.520 you're getting killed, so you feel better about it. But 0:15:59.520 --> 0:16:03.680 it's a problem. So there's that, and then of course 0:16:03.760 --> 0:16:09.000 there's the accidental high yielder, and the accidental high yielder 0:16:09.720 --> 0:16:13.280 you want to own because that yield will compress back 0:16:13.360 --> 0:16:16.160 over time and it's just being thrown out. So how 0:16:16.160 --> 0:16:19.280 do you find that accidental high yielder. There are very 0:16:19.320 --> 0:16:23.440 few episodes in one's career, like last March, where the 0:16:23.680 --> 0:16:28.520 SMP drops in three weeks or four weeks. In fact, 0:16:28.560 --> 0:16:32.320 it's it's never happened. That was the fastest beare market ever. 0:16:32.640 --> 0:16:34.800 So usually you have a lot of time to sift 0:16:35.120 --> 0:16:39.280 through UH and last year was was just different. March 0:16:39.400 --> 0:16:41.800 was just different than anything we've we've ever faced. But 0:16:42.640 --> 0:16:47.320 the process for selecting stocks that doesn't that doesn't change. 0:16:48.000 --> 0:16:50.520 You just have to go through it a little more 0:16:50.640 --> 0:16:54.160 quickly and be a little more active in terms of 0:16:54.160 --> 0:16:59.160 your conversations with companies and management teams and your colleagues 0:16:59.200 --> 0:17:02.880 and figuring it all loud. We we have a process 0:17:02.920 --> 0:17:07.560 to help us avoid the so called yield trap. So 0:17:07.680 --> 0:17:10.480 when we select a stop for this portfolio, we we 0:17:10.560 --> 0:17:13.080 do like a high yield. We we would call a 0:17:13.160 --> 0:17:16.679 high yield two times that of the SNP five, So 0:17:16.760 --> 0:17:21.119 that number moves around today, that's around three. You know, 0:17:21.119 --> 0:17:23.280 we'll look at anything one point five to jute times 0:17:23.280 --> 0:17:26.520 the yield of the SMP or higher. Um. We also 0:17:26.560 --> 0:17:29.679 want a company who is very much committed to dividend growth, 0:17:29.760 --> 0:17:32.959 so that's sort of our starting point. But then the 0:17:33.040 --> 0:17:36.600 key to this entire strategy is that the dividend is sustainable. 0:17:36.960 --> 0:17:38.960 This won't work if that dividend has to be cut. 0:17:40.160 --> 0:17:42.280 It's got to be sustainable and it has to be 0:17:42.359 --> 0:17:45.160 able to grow over time. So there were three really 0:17:45.160 --> 0:17:50.440 important factors we consider number sort of. Our third criteria 0:17:50.560 --> 0:17:55.320 is the bound sheet. You need to have a uh 0:17:55.440 --> 0:17:58.919 quality bound sheet. Low debt. Uh. We don't want too 0:17:59.000 --> 0:18:02.920 much leverage. The deadholders need to be paid before the 0:18:02.960 --> 0:18:04.840 equity holders, so you want to keep the debt at 0:18:04.840 --> 0:18:09.639 a manageable level. Are sort of fourth important criteria is 0:18:10.240 --> 0:18:12.800 cash flow coverage of the dividend. There should be enough 0:18:12.800 --> 0:18:15.960 free cash to pay that dividend and then some. And 0:18:16.000 --> 0:18:19.840 then the fifth thing we look for is a quality 0:18:19.880 --> 0:18:23.280 business and we look at returns on capital. There should 0:18:23.320 --> 0:18:26.800 be uh, you know, mid teams are higher returns on 0:18:26.880 --> 0:18:29.600 equity over over time. We think that defines a good business. 0:18:29.640 --> 0:18:33.359 So as long as that's all in place and that's there, 0:18:34.200 --> 0:18:36.000 you've got a really good starting point and really good 0:18:36.000 --> 0:18:40.960 framework we think to avoiding the the yield trap. It 0:18:41.119 --> 0:18:45.200 was a chaotic period, but having that framework, that repeatable 0:18:45.240 --> 0:18:48.160 process that has worked for us over twenty years, that 0:18:48.160 --> 0:19:07.720 that really helped get us through. I feel like I 0:19:07.800 --> 0:19:09.960 have to ask you at least one question about Game 0:19:10.000 --> 0:19:13.760 Stop in the Material East and over. You know, you 0:19:13.800 --> 0:19:17.159 mentioned that you did actually own game Stop in so 0:19:17.200 --> 0:19:20.000 it's kind of amazing about how the world has changed. 0:19:20.119 --> 0:19:23.439 But you know, I gotta ask, are you worried at 0:19:23.440 --> 0:19:25.480 all about you know, you mentioned you have a pretty 0:19:25.480 --> 0:19:29.480 concentrated portfolio. Are you worried about getting, you know, reddited 0:19:29.520 --> 0:19:32.120 and having one of the names you own sort of 0:19:32.280 --> 0:19:38.920 caught up in a similar frenzy? Uh, Kitty's so funny. Um, 0:19:38.920 --> 0:19:41.640 it's so so funny. You brought that up in Uh 0:19:41.840 --> 0:19:44.760 typical value Manager. Right we were we were eight years 0:19:44.760 --> 0:19:51.320 early on Game Stop, always too early. But because this 0:19:51.440 --> 0:19:53.760 was my favorite part of the notes Chris sent over. 0:19:54.200 --> 0:19:56.439 You know, we often get notes from the guests on 0:19:57.160 --> 0:19:59.800 some stuff that's on their mind. This was buried at 0:19:59.840 --> 0:20:03.280 the end number ten of the bullet points. Not necessary 0:20:03.480 --> 0:20:06.480 to discuss unless it somehow fits the conversation. But we 0:20:06.520 --> 0:20:09.960 actually did own Game Stop, Like, not necessarily to discuss. 0:20:10.000 --> 0:20:15.080 Come on, Chris, you yeah, you know where we're gonna 0:20:15.119 --> 0:20:17.359 hit you with that one, but yeah, to talk us 0:20:17.359 --> 0:20:21.600 through it. It was two thirteen. Yeah, I guess I 0:20:21.960 --> 0:20:25.000 should have guessed that that would come out. What what fits? 0:20:25.040 --> 0:20:29.080 What fits a better current event than that? Um, And 0:20:29.200 --> 0:20:31.880 it's funny. I It's something I have literally not thought 0:20:31.920 --> 0:20:34.520 about in in eight years until a couple of weeks ago. 0:20:35.640 --> 0:20:39.200 I didn't think anyone even knew with this company was um. 0:20:39.240 --> 0:20:43.879 But once upon a time, game Stop yielded four percent, 0:20:44.640 --> 0:20:47.120 had no debt on its bound sheet, had a ton 0:20:47.160 --> 0:20:51.000 of free cash flow, and it covered that dividend. Vine. 0:20:51.040 --> 0:20:55.760 Now we owned game Stop in for a short period 0:20:55.800 --> 0:20:58.800 in two thousand and thirteen. At the time, it was 0:20:59.520 --> 0:21:03.520 literally treading at seven or eight times earnings, and it 0:21:03.600 --> 0:21:06.400 was at a big discount because everyone was worried that 0:21:06.480 --> 0:21:10.760 the business would eventually be disrupted. Uh So here we 0:21:10.800 --> 0:21:14.600 are eight years later, still talking about the same thing. Um. 0:21:14.640 --> 0:21:18.439 But it's a great example of what you were asking 0:21:18.480 --> 0:21:20.800 a little bit about earlier. Mike. You know, how do 0:21:20.840 --> 0:21:23.440 you how do you know? How do you know? You're 0:21:23.480 --> 0:21:26.679 dealing with a value trap or or a yield trap. 0:21:26.760 --> 0:21:30.080 And every so often we get these opportunities where we 0:21:30.160 --> 0:21:32.160 have to think that we have to think that through 0:21:32.720 --> 0:21:35.399 and through our discussions with the company at the time, 0:21:36.440 --> 0:21:40.080 we thought, for one that this disruption was was going 0:21:40.119 --> 0:21:43.960 to be years out. Um, It's it's pretty much happening now. 0:21:44.080 --> 0:21:46.679 So it took it took a number of years, But 0:21:46.960 --> 0:21:49.120 we also thought there would be a slight reprieve because 0:21:49.160 --> 0:21:52.680 eight years ago they were going through the uh previous 0:21:52.760 --> 0:21:55.560 video game console cycle that they're now going through the 0:21:55.560 --> 0:21:59.520 next one. But that one was PlayStation four and Xbox one, 0:21:59.600 --> 0:22:02.159 and they were just gonna have an enormous amount of 0:22:02.200 --> 0:22:05.840 equipment to sell over the next twelve to eighteen months. 0:22:05.880 --> 0:22:07.800 And we thought that would be good for them. So, 0:22:08.400 --> 0:22:11.960 um that that was a shortholding for us. We uh 0:22:12.040 --> 0:22:15.560 an unusual short period for a Hamlin stock and um 0:22:15.800 --> 0:22:17.920 we we did okay by it, but there are plenty 0:22:18.000 --> 0:22:21.000 we don't uh so uh, you know you have to 0:22:21.760 --> 0:22:24.600 you have to keep that in mind, now, Katie. There's 0:22:24.600 --> 0:22:27.000 just nothing we can do if those Reddit boards come 0:22:27.040 --> 0:22:33.280 after our names. I guess we have decisions to to make, um, 0:22:33.320 --> 0:22:37.320 but I'm not sure any um. You know, teen sitting 0:22:37.320 --> 0:22:39.760 on a couch playing video games is going to be 0:22:39.760 --> 0:22:45.679 that excited. And what's in our portfolio today? They're not 0:22:45.720 --> 0:22:52.880 coming after corpor Uh, we're target Well there's I guess 0:22:53.080 --> 0:22:57.160 there's a couple they could Well, well we'll see what happens. Well, 0:22:57.200 --> 0:22:59.479 it's it's an all cap strategy. So there, you know, 0:22:59.560 --> 0:23:03.400 it's uh, it's all over the map. I I don't 0:23:03.440 --> 0:23:06.120 think there's a better seguay into the crazy thing segue, 0:23:06.560 --> 0:23:09.800 uh than game stop talk. But before we do, Chris, 0:23:09.880 --> 0:23:12.040 let me just see if if you can remember, and 0:23:12.080 --> 0:23:15.199 if not, as close as you can get, what's the 0:23:15.280 --> 0:23:22.439 highest yielding stock you've ever entered a position into. Um, 0:23:22.640 --> 0:23:30.440 we own a company today called Enterprise Products. Enterprise Products 0:23:30.600 --> 0:23:35.000 has had a high single digit yield over the over 0:23:35.040 --> 0:23:38.520 the time period of of of ownership, so that would 0:23:38.560 --> 0:23:42.639 probably that would probably be the highest yielding stock at 0:23:42.720 --> 0:23:47.119 least in in my recollection. Yeah, it's something tells me 0:23:47.160 --> 0:23:51.119 a double digit yielding stock is is uh, almost always 0:23:51.160 --> 0:23:52.440