An investment historian and portfolio manager envisions a coming paradigm shift for equity income.
On today’s podcast, we’ll chat with Daniel Peris about his new book, The Ownership Dividend: The Coming Paradigm Shift in the US Stock Market. Daniel oversees dividend-focused portfolios for Federated Hermes and has written several other books about investing, as well as a study of the former Soviet Union. Daniel began his investment career in the late ’90s as a stock analyst at Argus Research.
Background
The Ownership Dividend: The Coming Paradigm Shift in the US Stock Market
Storming the Heavens: The Soviet League of the Militant Godless
The Strategic Dividend Investor
Dividend Investing
“Will Dividend Investing Reign Again?” by Daniel Peris, federatedhermes.com, April 25, 2024.
“There Is Nothing Special About Dividends,” by Larry Swedroe, Morningstar.com, April 10, 2024.
“The Retreat of Dividends and the Changing Nature of the Stock Market,” by Daniel Peris, americanaffairsjournal.org, Fall 2022.
Other
“What Is the Modigliani-Miller Theorem?” by James Chen, Investopedia.com, Aug. 1, 2024.
“Markowitz Efficient Set: Meaning, Implementation, Diversification,” by Will Kenton, Ivestopedia.com, Nov. 21, 2023.
“Fama and French Three Factor Model Definition: Formula and Interpretation,” by Adam Hayes, Investopedia.com, Jan. 29, 2024.
“Tax Differential View of Dividend Policy: Meaning, How It Works,” by Julia Kagan, Investopedia.com, June 14, 2022.
Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, Strategist for Morningstar Indexes.
Christine Benz: And I’m Christine Benz, Director of Personal Finance and Retirement Planning for Morningstar.
Lefkovitz: On today’s podcast, we’ll chat with Daniel Peris about his new book, The Ownership Dividend: The Coming Paradigm Shift in the US Stock Market. Daniel oversees dividend-focused portfolios for Federated Hermes and has written several other books about investing, as well as a study of the former Soviet Union. Daniel began his investment career in the late ’90s as a stock analyst at Argus Research.
Daniel, thanks so much for joining us on The Long View.
Daniel Peris: My pleasure. Thank you for having me.
Lefkovitz: Absolutely. Well, why don’t you start with your background, because you have a bit of an unusual background for a professional investor. You’re a former academic and your focus was the history of the Soviet Union. So, maybe you could talk a little bit about your career journey and how you ended up as a portfolio manager.
Peris: It’s a little bit better in the telling than perhaps it was in the doing. It was a hard transition. I don’t know that I would recommend it to everyone. One project I have, maybe further down the road, is to write up how I went from being basically a Sovietologist to a fund manager. But the common thread that runs through it is—really, there are two threads. One is being a historian and understanding when you’re trying to figure out current events, how we got here and what type of implication that has for where we might be going. And that applies equally to dealing with Russia as it does with investments.
And the second one is communication, writing and spoken communication. They are at a premium in the academy, or at least they’re supposed to be. And they’re most certainly at a premium in the investment community, where if you’re a genius and you come up with clever things, that certainly is excellent. But if you can’t communicate that—duplicate it and communicate it—then it’s not quite as effective as it otherwise would be. So, those are the transition element of those two careers as being a historian and being able to discuss what one does.
Benz: You’ve written several books about dividend investing. Can you talk about how you got interested in dividends specifically and why they resonated so much with you?
Peris: The answer to that question is the same as the first question. That is, I did make a career transition. Soviet studies, Russian studies kind of collapsed in the ’90s when the Soviet Union did. And so, I decided to make my way into business. But as soon as I ended up in business, my instincts as a historian kicked in. I’m looking at the stock market. I had an entry-level stock research job. I was stunned by the difference between what was going on in the marketplace and what the training materials were, the CFA. I went through the CFA program. Three miserable springs that we all had to go through as it were. And if you look at any book on finance or investing, it’s all about the cash flows.
But at that time in the late ’90s and early aughts, the cash flows were largely irrelevant. I thought, that’s unusual, I quickly have to memorize these rules and do what I’m told to do to make this transition to function in this new industry. But I’m a little puzzled by why what we’re all told is not actually operating in the stock market. And once I had settled into the new profession as a stock analyst, I very quickly migrated back to chapter one of the finance textbooks and the history of investments associated with tangible cash flows, especially for minority shareholders. It’s basically all they get is the cash flow distributed as a dividend from equities or the coupon payments from bonds.
And yeah, the world had evolved in a different direction, but perhaps I did not. I’m sticking with the basic rules. So, I work for a firm, Federated Hermes, for more than 20 years, that has a variety of investment styles, variety of products—the Morningstar Style Box is well-represented in our suite of products. But I quickly migrated toward the dividend end of the equation because I think as a historian, that made the most sense to me.
Lefkovitz: Well, there’s lots of great history in your book, The Ownership Dividend. And you talk about the tangible cash relationship that companies have maintained throughout the centuries really with their shareholders through regular payouts. You also call it the cash nexus. Maybe you could talk a little bit about this history, the centrality of dividends and the history of financial markets.
Peris: And again, I don’t want to diminish the role of speculation in a healthy sense of, and the fact that there are always people willing to wager something, whether it’s the ballgame in the evening or the price of cocoa beans or the value of gold or a particular wrist watch—I collect vintage wrist watches that go up and down in price—I don’t want to dismiss that. But most business ownership in most instances over the last 5,000 years, and we have the stock market history for the last couple of hundred years, Will Goetzmann at Yale covers the prior 4,700 years. It’s about the cash that you can get for some investment. You lay out some money and over time you get some cash back. It’s not simply the price of the asset.
The example I use, which I think is closest in many ways, and people can understand, is rental real estate. Yes, you purchase real estate, you hope for a deep and liquid market and a good price when you purchase it. Twenty years later, you hope for a deep and liquid market when you sell it for a good price, but in the interim, you’re not checking Zillow for the price of that real estate between 9:30 and 4:00 every day. Instead, what you’re looking at are the cash flows that you derive from that real estate, same with any private business.
So, when I bring that sensibility—business-ownership sensibility—in the last 5,000 years of recorded financial history, and then I parachute myself into the US stock market circa 2000 and nothing holds. So, either the market is entirely speculative or something’s not quite right here. So, I write three prior books on why, hey folks, look at chapter one, why aren’t you investing in this way? Those three books went nowhere. So, the Ownership Dividend, which I came out earlier this year, was basically addressing why are people ignoring this, why have the first three books been wrong?
And so, it raises the question not what you should do, it’s what’s happened to the US stock market. And so basically, it’s where did dividends go? This is the normal manner of investing, nonspeculative investment in most business environments on this planet. It just is. The math is very simple about investing in the expectation of a cash flow from whatever you invest in. Why is the US stock market not this way? And that’s how the Ownership Dividend took shape. It’s addressing where the dividends go. And the overarching theme is the 40 years of declining interest rates.
It’s pretty obvious, but if you think about a trend occurring for 40 years, that’s two generations, a generation and a half of professional employment, lots of textbooks, lots of training programs, lots of careers made, lots of dollars made in a different paradigm. As interest rates continue to go down, the cash hurdle for both fixed income and equity investments continued to go down. The risk tolerances went up. The expectation of a cash nexus diminished.
The second theme, which is interestingly very coincidental with the declining interest rates, was the rise of buybacks, very controversial hot-button topic. Also, enjoys a 40-year run starting in 1982. The third reason as to where the dividends went was the rise, the wonderful rise. I’m not casting any doubts on it or shade on it is the rise of Silicon Valley and Nasdaq as an engine of innovation and wealth creation. No problem there. That also is roughly coincidental with this period.
And finally, the politics of the period were very supportive of the DCash phenomenon. That is, you had the rise of global neoliberalism, the rise of globalization. Deng Xiaoping comes to power in ’79. Margaret Thatcher comes to power in ’79. Ronald Reagan in 1980. Interest rates peak in 1981. Share buybacks get a lot easier in 1982 and we’re off to the races.
And the book simply points out that, while all four of those phenomena had great runs from 1980 or so and then came to a crashing halt starting around 2020. Interest rates stopped going down, the 10-year that most equity investors looked at, bottomed in September of 2020.
Buybacks remain very, very popular. I’m sure with many of your guests and many of your listeners, we’re heading toward a $1 trillion in buybacks, but the bloom is off the rose there. They’re increasingly controversial. Nasdaq and Silicon Valley, again, continues to be the engine of innovation globally, but those companies have matured. They’re very large. They’ve started paying dividends ironically this year, very much this year.
Lefkovitz: Yeah.
Peris: And then, politically, the world changed dramatically in the last five years and the global neoliberal paradigm has crashed and burned.
Lefkovitz: Just to follow up on the tech companies—the Nasdaq, Silicon Valley companies, I remember reading in the book that it used to be that IPOs did pay dividends. Why did dividends fall out of fashion with newer tech companies?
Peris: Well, I think there’s the intermediation and then disintermediation, but the intermediation of private equity and venture capital has been a profoundly important phenomenon. The process has just changed, but you are getting companies that are coming to the market. It may be earlier in the internet bubble, coming to the market much earlier than they otherwise should have. When I make a big deal about Coke paying a dividend one year after its IPO, but the company had been around for 30 years beforehand.
Small companies getting startup capital and then immediately trying to cash out in the stock market when they’re not in a position to pay dividends, it’s fine. It is what it is. I have no judgment against it. I’m just pointing out those are less-mature companies, so they’re not in a position to pay a dividend nor should they. Also, you do legitimately in a very Miller-and-Modigliani moment have companies that legitimately have substantial growth opportunities greater than their current cash flow, and they’re either going to be raising equity or they can’t afford to pay a dividend, nor should they.
So, Nasdaq was the convergence of all of these phenomena. Again, casting no shade on it, just pointing out that those very same companies that were in an ideal position to use the stock market as a cashout mechanism or to raise additional capital for genuine investment, it’s 40 years on. Those companies are now quite big and they’re gushing cash. They buy back their shares hand over fist. They spend a lot on stock-based compensation, and they now have the means to pay a dividend. As we saw in 2024, Meta and Google, and Priceline, now called Booking.com, and Salesforce all initiated dividends all within a few weeks of the book coming out. I would like to take credit for that, but I don’t think that Mark Zuckerberg actually read the book and persuaded the Board to issue a dividend.
Benz: So, you alluded to the fact that dividends aren’t universally loved. Some growth investors dismiss companies that pay dividends as lacking in opportunities for reinvestment. There’s also the long-standing theoretical opposition, which you referenced. A recent piece published on Morningstar.com was called, “There Is Nothing Special About Dividends,” and that argued that dividends are not income. They’re just a return of capital. So, can you respond to that? How do you respond to people who say that we shouldn’t be disproportionately focused on whether a company pays a dividend or not?
Peris: I think it comes down to philosophy, not finance. I really take the stance that we’re business owners, not stock owners. The stock owner is very happy to have a green on the screen. It doesn’t matter whether it’s cash in the kitty or not. An unrealized capital gain to a stock market investor in many ways is the same as a realized capital gain, a harvested capital gain, or a dividend payment. But from a business-ownership perspective, they’re dramatically different.
A dividend payment is a business outcome. A harvested or unharvested capital gain is a stock market outcome. So, I think it’s a difference between being—I use the tag phrase of being a dividend investor in a stock market. I think it’s really the difference between those types of people. There’s a clientele effect. That is, if you want to be a business owner through the stock market, you can manifest and manage business-like ownership characteristics. You’re a minority owner—unless you’re Warren Buffett, and so on—you’re a minority owner. So, there are agency costs involved. And so, a dividend is a good way to manage your agency costs.
But if you’re really just interested in share prices, then the dividend may not matter a whole great to do. You don’t really care about ownership of anything. I did have an academic, when I was working on a prior book, say he didn’t want to own anything. He just wanted the stock market. And that’s a perfectly valid point. But for people bringing a business-like sensibility to the stock market, that cash payment is basically all they receive. Again, there are many who do not want a business ownership-like approach to the stock market. And that’s fine. But for those who do, who approach an investment in, I don’t know, Coca-Cola or Verizon, the same way they might approach an investment in real estate or some private business, then a cash payment for their capital is entirely normal. For me, again, it’s quite odd that people wouldn’t, but they are happy to provide capital with no expectation of cash return whatsoever. But it’s a free country, and that stock market structured to serve that community as well.
Lefkovitz: What do you make of the notion that dividends are fine for those who are looking to extract and come from their portfolios maybe in the decumulation phase. But if you’re accumulating, you should be focused on capital appreciation?
Peris: Dividends can be reinvested just as easily. So, total return is not dependent upon dividend reinvestment. I think I used the example in the book. Two sisters, one has 100 shares of Verizon, the other has 100 shares of Verizon. One sister takes the dividends out, the other reinvests them. Ten years later, the amount in the account is very different, but the total return is identical. The shares of Verizon have the exact same total return.
So, if you want to maximize the account value, then you have the option of reinvesting the dividends. It’s a great compounding tool, but it doesn’t affect total return for the underlying investment.
For people who it’s too bothersome to flip that little button that says, “dividend reinvestment,” then total return of a non-dividend-paying stock is just the share price change. I get that, but I’m not persuaded that people who don’t need the income for some reason wouldn’t want to invest in a profitable business and simply get more and more shares over time.
Benz: If we can take a slight diversion, your last book, which was published in 2018, was titled Getting Back to Business: Why Modern Portfolio Theory Fails Investors and How You Can Bring Common Sense to Your Portfolio. Can you talk about why you think MPT fails investors?
Peris: And I appreciate Morningstar bringing that issue up, because it’s certainly not a popular view whether MPT is deeply entrenched in the regulatory environment that we operate in, in the practical environment, in the very important role that Morningstar plays. The basic logic of diversification defined by Harry Markowitz in ’52 and ’59 is absolutely unchanged. It’s absolutely correct.
Owning one or a handful of securities is unwise. You are subjecting yourself to greater volatility and you miss the benefits of diversification, higher return, and lower standard deviation. So, when Harry Markowitz is writing that book, writing the article in ’52 and the book in ’59, he is really dealing with all-the-eggs-in-one-basket sentiment of the stock market at the time and where people would punt on or own one or two securities and hope to maximize their returns that way. He showed the benefit compared with that in 1959 of a portfolio with nine securities plus cash. Even with nine securities plus cash, the benefit of diversification in terms of standard deviation of return, which he defines as risk—obviously not my definition of risk, but it is the industry standard of definition of risk—is a manifest and clear. And by 20 or 30 or 40 securities, you’ve really hit the sweet spot.
My objection is not to what Harry Markowitz wrote in ’52, ’59, and what Bill Sharpe, John Linton, and others made more practical in ’64 and ’65. It’s what it’s become 50 years later. The diversification call is now, hey, own thousands of securities; you need that to diversify through index funds and ETFs. I’m sure Morningstar will have some objections to be making this point. But at that point, in the name of diversification, you’re simply owning the market, which ironically is the point that James Tobin made in 1958, just own the entire universe of securities, which was completely undoable at that time. And you lever up or lever down depending on your risk. And that’s basically what the situation has become.
So, we’ve gone past diversification to market ownership, masked as diversification. I think that’s misleading to investors to say, hey, you need 5,000 securities in the form of, I don’t know, 10 different indexes—I’m exaggerating a little bit and feel free to correct me if you wish. But 10 different indexes with 500 securities apiece, you’ve left Markowitz’s diversification of 10 or 20 or 30 or 40 investments long behind. And instead, you have something quite different. You just have the market.
The second objection is that when Harry Markowitz was writing, coming up with MPT, it really was a diversification of stocks driven by dividends, income streams, not just share prices. That has changed as we saw from the ’80s to the present. So, instead of a diversification of income streams, because all material, serious stocks in 1952 or ’59 had dividends, maybe they were lower, maybe they were higher, but they all had them. Instead, now it is just the diversification, the standard deviation of share prices.
In this context, MPT becomes a theory of numbers, not a theory of business ownership, of diversifying business stakes reflected grounded in income streams. So, it’s not really what Markowitz said at the time, it’s what it’s become. You now have, I think, MPT with the notion of extreme diversification that you are focused just on returns generated by share prices and relative movements of share prices, the covariances of share prices as opposed to the income streams. And again, as a businessowner operating through the stock market, that evolution I think is not what the original offering was.
Harry Markowitz just passed away and maybe he would dispute my notion, I’m sure he would, that this is not aged as well or is aged in a different direction. The diversification notion and the last free luncheon economics of diversification, they absolutely hold true to this day. But investors I think are being somewhat misled by the notion that you need a couple of thousand different securities to benefit from diversification. And by the way, what we’re diversifying are share prices not income streams.
Lefkovitz: I think I’ve seen you use the term “physics envy.” Do you feel like MPT is part of the over-quantification of investing?
Peris: There’s a simple yes. Next question, please. Yeah. Absolutely. So, once you get rid of business ownership and you reduce, and this is more phenomenon of the 1980s, so you have the initial work done and Markowitz is very clear in ’52 and ’59. Listen, there’s no way I can make this practical. And Bill Sharpe says, well, I can make it a little more practical, but I need a beta off of the market. We’re going to use the S&P 500 as the measure of the market. Merrill Lynch comes in and creates betas and you get covariance tables, and suddenly you’re off to the races and you can get Fama French from that point and Fama French 3 and Fama French 5.
And if anyone doesn’t know what Fama French 3 is or Fama French 5, you can look it up. But what is occurring is the shift by the 1980s toward factor investing. And again, as a businessowner, I’m saying, I like the Coca-Cola company because they have a product that people want. They can make it profitably and more or less seems to go like that. But I don’t want to come up with the jingles. I’m not musical, and I don’t want to drive the trucks and lift the concentrate containers or the pallets. So, I’m going to just buy shares in the company, but I’m happy to be an owner of that company, albeit a small one.
Instead, with factor investing, you don’t care what the company makes. You don’t care that you’re an owner of the company. You’re buying it for a combination of basket of factors, a momentum here, earnings growth there, a certain beta here, some sort of book/value measure, some sort of change in this, that, or the other. And you are largely indifferent if you’re even aware of what the underlying companies are.
I have to, for our dividend portfolio, to meet all of the requirements of this industry. And the SEC review the portfolio frequently, certainly formally and a quarterly basis of the portfolios that I oversee in terms of all the factors. And we actually review it somewhat on a weekly basis. The factors speak nothing to business ownership or how the businesses are doing. It’s strictly the disembodied nature of the stock prices. I think that’s an extreme manifestation of that physics envy that finance coming of age has tried to emulate the natural sciences.
If you look at the history of finance, it really does come of age in the 20th century after science really had a period, a great run, the natural sciences in the 19th century in universities and such. And they’re trying to, the finance professors, are trying to treat humans as particles moving around Brownian motion, particles of pollen and water.
And human nature, I don’t think human nature is there. That’s what factor investing is. So, I understand the role that factor investing plays. I have to, from a risk management perspective, very much appreciate the insights of factor analysis. But it’s very much different than business ownership or why one would own a particular company. I own it for that we want to own the business, not that we want to own the factors associated with the stock.
Lefkovitz: Right. Do you have a view on yield as a factor? Dividend-paying stocks, do you have a good long-term track record? Some people say, “Well, it’s really the value of factor. Dividend growth investing has a quality tilt to it from a factor perspective.”
Peris: You’ve been listening into my meetings with the quant team. So, I wrestle with them on exactly that topic. I generally go down to defeat, and they say, no, you’re wrong. Yield is not a primary factor. Yield is a subfactor of some other factor, often value. So, yeah, I’ve lost that battle on many an occasion.
They don’t have an answer for the business-ownership stance, nor can they. But statistically, they’re willing to prove and die on that hill that dividend yield is a factor, but it’s a relatively minor one to explain total return. That’s not surprising to me in a market that yields 1% and is driven by nonyielding stocks. So, it kind of makes sense in that regard.
I think the notion of the dividend yield as part of factor analysis, if done prior to the 1980s, would come up with a different weighting for the dividend yield. But yeah, for the last 40 years, it’s viewed as an insignificant factor. Obviously, from a cash flow perspective, it is the factor. But from a traditional factor-analysis perspective, it just is pretty far down the list.
Benz: This has been a big year for dividends. Alphabet, Meta, Salesforce, all initiated dividend payments. So, why aren’t you popping the champagne cork on this great new era of higher dividends?
Peris: Well, again, I’m delighted to have them come out. The book came out on Jan. 31st, and Meta’s dividend was announced Feb. 1st, Hurrah. But I’m not popping the champagne cork yet because the transition that I’m forecasting in the ownership dividend, that is the return of the cash nexus, driven inexorably by the return of normal rates, interest rates, and the end of the various phenomena I’ve discussed that is buyback’s getting tired, Nasdaq maturing, and the global neoliberalism coming to a crashing end, I think that’s going to take several years. So, I think it’s a little bit premature.
Also, if you look at Meta’s and Google’s dividend announcements, they were combined with much larger share buybacks. So, the yield on Meta and Google is de minimis, but it now is not zero. It’s de minimis. And the ratio of buybacks to the dividend payments, the dollar dividend payments, is still, I think, it’s 6-to-1 for one and 8-to-1 for the other. But it’s a symbol. It’s a movement in the right direction. For a dividend investor in the stock market, they’re still not available as income streams. But I think, over time, we’re going to see more, and they will eventually become available. So, stay tuned.
Lefkovitz: You’ve referenced the paradigm shifts that you anticipate, where share price appreciation alone is insufficient, dividends regain their centrality. Maybe you could really spell out the argument, what factors do you see that are going to cause this shift?
Peris: The return of the cash nexus, again, which is basically mean reversion toward business ownership of any endeavor that you would see, companies are going to have to compete for capital. Again, chapter one of the finance textbook. And they were able to compete for capital with prospects of unlimited growth and declining interest rates, that is declining cash hurdles for decades. And it worked perfectly well.
Retirees, the early baby boomer retirees were able to finance their retirement, not from income, but from harvesting capital gains. It worked because the stock market kept going up and interest rates kept going down. As that comes to an end, I expected to basically reverse that in order to compete for capital from investors with interest rates at a more normal level, and buybacks more controversial, and Nasdaq more mature, and the politics of local rather than global, then companies are going to have to approach it more a cash on the barrel approach that trust in management got to an all-time high. Here’s my money, take it, do whatever you want.
I think that we’re going to be receding from that and going forward through the remainder of this decade into the next, companies in order to enjoy favor with investors are going to have to show cash. So, that means more companies initiating dividends, more companies initiating dividends and companies making the dividends a more prominent part of the ownership proposition, just like any other business that someone might invest in.
So, look for more companies paying dividends, larger companies paying dividends, it’s both good news and bad news. For a dividend investor in a stock market, it means more options, that’s good. For dividend investor in a stock market, it means more options, that’s bad. You have to make more choices, more analysis, determine which of those companies have sustainable income streams, which do not. So, more work ahead of us.
Lefkovitz: You mentioned geopolitics or political economy in the book as contributing to the paradigm shift on dividends. Can you expand on that?
Peris: Dangerously. And I will try to keep my tongue and not getting into trouble. This interview is being taped toward the end of July. It’s been a very dramatic 10 days in this country politically. But really, you could look at the events starting in 2020 with covid and the move toward de-globalization, interest rates hitting the bottom, the political challenges that we’ve faced for the past either eight years or four years, depending on how you view it. But those challenges are obviously extremely severe.
I would characterize them without pointing names, though I’d be happy to, is that we at one point had a consensus about neoliberalism and globalization. It wasn’t at least among policymakers and investors and so forth. It’s fine not to have a consensus, but where I think we’re headed now is not only to not have any consensus, but it appears that most policymakers are content to not ever have a consensus anymore.
We don’t even see the need to agree anymore. It’s not what we agree on or don’t agree on? Do we agree on the return to 18th century mercantilism and tariffs? Do we agree on globalization? Do we agree on subsidies? Do we agree on industrial policy?
Not only do we not agree on any of those issues, we don’t even see the need to come to an agreement on anything anymore. I think that that does pose a tremendous risk to investors. We have a high-trust society and our assets trade at a high-trust multiple. We have called it a 25 multiple in the stock market. That’s a high-trust multiple. You are trusting your cash return, whether it’s a dividend yield or earnings yield, obviously, very low because of the dividend yield, but the 25 multiples in effect, an earnings yield is very low. That’s because people trust the system work and what they make their capital available and get back to them in one form or another.
I think the risk is that we are veering in the direction, descending into the direction of a low-trust society, and low trust societies don’t have 25 multiples. Not to take us down a dark path, but you asked.
Benz: Dan, I wanted to follow up on your point about retirement, which is such an interesting dimension of this—how retirees are extracting cash flows from their portfolio. I think you’re absolutely right that, that long period of very low rates taught retirees that they needed to subsist off of something other than yield if they wanted to have a decent cash flow. So, doesn’t it seem like that’ll take a while to reverse itself, that you have many advisors and many retirees who are very much inculcated in this total return approach, where periodically they sell chunks of their portfolio rather than even paying any attention to dividend yield? So, do you think it’ll be a slow process to get them to favor dividends again for their cash flows?
Peris: Yes, and I hope so. And ironically, you’d think that I’d want a stronger argument if I could give you the day and the date when it appears. Unless the stock market sells off sharply, in which case the harvest to capital gain approach doesn’t work any well, and there’ll be a sharp demand for immediate demands for income. The method of harvesting capital gains to fund consumption, it’s probably going to continue to work for a while, since the stock market yields relatively still very low numbers. But the bond market and cash market now have, we’ll call them, good numbers. And so, you can get a material income stream from them. But for the stock market, I think it’s still going to be a while before investors move in that direction. That’s why I can’t give you day or date.
The dividends need to move up. There are two ways to get that. Dividends move up. Naturally, payouts move up, companies move in this direction and return to the cash nexus. Or there’s another way to get there—much less pleasant way—in which the yield of the market increases the hard way. I hope that does not happen.
But one way or another, I think it’s reasonable to expect what I consider mean reversion of the business practices exercised through the stock market. The last 30 years from starting in 1980s, early 1980s, but really taking off in the ’90s and continuing until the early 2020s was a historical anomaly, a cashless investment platform. I just don’t see that being sustained.
Lefkovitz: So, Daniel, you’re an active dividend manager. I’m curious with the rise of passive dividend investing, dividend indexes, why you think an active approach is preferable?
Peris: Some of the indexes that we see or saw, I should say, the dividend indexes are getting better. The first generation were peculiar and were reflected the time of their—they had 1.5% to 2% yields. They were really not much in the way of dividend-oriented.
Again, the SEC is fairly liberal in terms of its naming rule. You just have to have, a dividend doesn’t indicate how much. So, we see lots of products, whether they’re active or passive, with very low yields that have a role in the market and have enjoyed good success. We see fewer products at—what I would call our end of the spectrum—where midyear dividends that I consider material and count from a net present value perspective and help clients pay their bills. But the growth of passive is undeniable.
The one thing is, it certainly is not passive. It’s just rules-based. It’s just you have the choice and investors have a choice between a person making the decisions versus a person that you see and is named on the prospectus making the decisions about which income streams to tap into versus a rules-based income stream, which is fine. But there’s a committee there that determines those rules. The person is invisible. I think that far too few investors look under the hood of their index and can tell you how the dividend index is created and maintained and what steps are taken to remove or include securities.
If I met such an investor and they said, I’ve looked under the hood at the following index fund or ETF and I’ve looked at your prospectus and your deck and I prefer the one over the other, I would say, great, you’ve made a good choice. There’s a fee differential, there’s a rule differential, there’s a selection differential if you’ve chosen one.
But the one thing that passive is not is passive. I’ll be very clear on that. Those rules-based choices, particularly when we saw crises the last couple years where lots of companies are cutting dividends, during a crisis or in Europe, frankly, it’s fairly frequent to have companies cut dividends with lesser hookups because they have higher payout ratios. That, if a passive investor is OK with that and knows the rule as to what they’re getting and why they’re getting it, then that’s fine. But obviously, we’re making choices about future income streams. We use five-year dividend growth forecast for our companies and trying to mix and match income streams that are likely to be sustained and to deliver a high and rising income stream.
The passive rules are mostly backward looking and that’s fine. And they imply something about the future, but they don’t, they’re not explicitly forecasting it. So, I acknowledge the challenge of so-called passive, but I would put “passive” in quotation marks because they’re really not passive. They are under various circumstances quite active indeed, particularly during crises.
Lefkovitz: Got it. You referenced dividend cuts being higher overseas. I believe yields are also higher. Curious for the global perspective. Has the decline in yields that we’ve seen in the US market, to what extent has that been paralleled overseas? Do you think the paradigm shift will be global in nature?
Peris: The US really stood out. So, even though the global markets all saw declines in interest rates for the European markets, they did not see the rise of the buyback. It’s not so dominant outside the United States. And of course, Nasdaq, Silicon Valley is a US phenomenon, much to the dismay of the Europeans. Whenever I am in Europe, they bemoan the fact that they don’t have a Silicon Valley to drive share prices and innovation.
So, the market there outside the United States, and as a dividend investor, you’re looking mostly at Europe, Canada, Australia, Commonwealth places. Again, another reason to be a historian, why are the dividends where they are? Because that’s where England planted the flag in the 19th century. They did not move away from dividends as much in the ’80s, ‘90s, and aughts as the US did. So, the yields are higher, the payout ratios are higher. That’s why they have more frequent dividend cuts is because the payout ratios are higher. So, it’s definitely a trade-off. You’re getting much more income over time, but you are taking dividend risk in order to generate dividend return in Europe, and it’s much more obvious in that regard. So, yes, higher yields, but lower dividend-growth rates, frankly, and higher risk of dividend cuts.
At the end of the day, the net present value of the higher yields is pretty significant. So, there’s a reason to be there, but it makes it clearer that the US, I think, is historically and geographically anomalous in having a largely dividend-free investment platform, an income-free investment platform known as the US stock market.
Benz: I wanted to follow up on dividend growth strategies, which we’ve touched on very quickly and left during the course of this conversation. I’d like to get your take on them. I know that some of the largest managed products, both passive and active, follow a dividend growth strategy. What’s your take on such an approach?
Peris: We’re close cousins. The question is, where do you draw the line? We are a dividend growth strategy. Again, our team spends 100% of our time on dividend growth, but we’re doing it off of a higher base, and therefore, our expected range of dividend growth is lower.
But it’s so hard off of our higher base, that’s why we spend 100% of our time. So, it’s a matter of what does the dividend manager or the investor consider to be the key issue. Again, at a 2% yield, that’s a choice by a manager. There are lots of aristocrats available at a 2% yield. That’s great. But the net present value of a 2% income stream, even if it’s growing at 6% or 7% or 8% a year, is really challenged because the duration of that portfolio is quite high because the upfront income is lower. It is harder with a 4.5% yield to grow the dividend anywhere near that number, but the duration is lower because so much of the income stream is upfront.
So, it’s been a very successful space to be in, to be a low-yielding, so-called dividend growth manager. I don’t dispute that. It’s been very popular in the marketplace because, again, there you’ve had the last 15 years, the ability to harvest capital gains and benefit from those capital gains, but again, it’s a matter of preference and philosophy as to what is a material income stream. Again, those dividend growth managers, those aristocrats, they have 2% yields, 1.5%, 2.5%, 3%, even 3.5%. That’s fine. There’s nothing wrong with that, but from a net present-value perspective and a duration perspective, they are not the same as what I would consider a more normal-yielding product.
We’ve had the clientele effect very clearly over the last couple of decades. Lots of people are very happy with that space. As you mentioned, there are a lot of managers there, and they’ve done very, very well. From a total return perspective, having a lower yield has benefited them, but it’s, again, it’s just a matter of philosophy as to how much income is income and where you draw the line.
Lefkovitz: Sustainable investing is mentioned in the book. What’s the connection between investing with environmental, social, and governance factors in mind and dividends?
Peris: Sustain. I will make the statement bold that a dividend investor, by definition, 50 years ago, 30 years ago, 10 years ago, was a sustainable dividend. That’s the only math that makes sense for being a dividend investor over the long-term. If the dividends don’t add up, then you don’t have an investment.
A stock market investor can invest for tomorrow, and if they do really well tomorrow, they can be out. The only way to be a dividend investor successfully is to say, I think this company is going to generate a cash flow over the next 10, 20, 30, 40, 50 years that adds up to the price I’m paying now or adds up to a lot more than the price I’m paying now.
So, you have to take into account how society evolves, whether the business model is sustainable based on what you know, what the direction you think management is heading. Society has evolved over the last couple of decades. Our companies have evolved over the last decades. Again, I’ll return to the example of Coca-Cola. They moved from glass to plastic, and now they’re moving from plastic back to glass because society evolved, and they moved from sugar to artificial sweetener to noncarbonated as well because that’s the direction the society moved. They’re not foolish. So, whatever you may think of that particular company, they are not dormant. They are evolving along with society.
So, you put together 30 or 40 types of companies like that where you have evolution in the company, the phone companies are a perfect example. They used to all be copper landline companies. Now the copper landlines are meaningless. They’re all wireless companies. They have evolved.
So, the cash flows on the business, you’re not taking for granted. You’re forecasting that they are sustainable. In case you’re wrong, you have 30 or 40 of them, and over time, you’ve chosen the management teams that you think are a little more forward-looking. It turns out the income streams are sustainable. That includes the more recent evolution over the last decade or so toward a different definition of sustainability involving ESG investing.
I get it. I absolutely understand the concerns there. That is top of mind right now. The climate certainly is and how to manage the climate. But that notion that a business that’s sustainable will evolve to continue to have, as it were, the societal license to operate is embedded, I think, in, oddly enough, in dividend investing because it’s long-term investing, more so than it is in what’s going to happen tomorrow with my hedge fund because all I care about are the share prices tomorrow. There is no concern for sustainability there. You have to have to be a long-term investor to really be on board with any type of sustainability. By its very nature, dividend-focused investing is.
Lefkovitz: At times, dividend payments can become a little political or controversial. Companies are getting government assistance or there’s the tax issue. What do you think about policy and regulation when it comes to dividends?
Peris: Less is more. I will say very specifically, there are calls to tax or regulate buybacks. I’m a big opponent of buybacks for a lot of reasons in a lot of different contexts, but I strongly oppose regulation or taxation. I think sunshine is the best disinfectant. We’re coming up on 40 years now of buybacks. People can make their judgments about them as there’s a lot of academic literature for and against as to how effective they are.
Generally speaking, I would prefer less to more regulation about that. The big issue is on taxation, and there were differentials in taxation between capital gains and dividend payments for much of the 20th century when a lot of the academic finance literature was being written in the animus toward dividend payments from the University of Chicago was being put out there. But really starting in 1986 and then from 2003 to the present, the tax rates on qualified dividend income and on long-term capital gains are the same.
The only difference is timing. Dividends occur regularly, generating tax events, harvesting capital gains can be timed. For some investors, that matters a lot. For other investors, it probably matters a little. I do argue or encourage investors to not subordinate investment policy to tax minimization. In this time and this age during an election year, there are plenty of investors who not only want to subordinate investment policy to tax minimization policy, they’ll actually make it the only thing that matters, tax minimization. But that’s a choice.
So, other than the timing issue, and I don’t propose any legislative change to affect that, less is more. Business ownership ultimately becomes clearer within a lighter regulatory environment rather than a heavier regulatory environment. I think that legislation or additional taxation of buybacks would only muddy the waters and make things less clear for investors, not more clear.
Benz: Daniel, you alluded to the fact that dividends are now on par with capital gains from a tax standpoint. But in terms of where people should hold dividend payers, if they have some control and they have different tax buckets in their portfolios, do you generally counsel people to think about using a dividend-focused strategy within a tax-sheltered account where they’re not going to be paying tax on those regular income distributions?
Peris: I will defer to the financial advisor. So, I’m one or two steps back from that as to individual client portfolios and where it makes the most sense to lean in one direction or another. So, the manufacturing that we do and distribution we do is through intermediaries or financial advisors. So, they have the best know-your-client perspective on what is the ideal relationship between investment policy and tax minimization. Obviously, given that there are tax-shielded accounts, it’s a real issue, but it’s client specific. I can’t see all of our clients’ accounts. Nor would I want to, by the way—much too much information.
Lefkovitz: Well, Daniel, by way of closing, we’d be remiss if we didn’t take advantage of your knowledge of Russian history given your focus on the Soviet Union as an academic. Knowing what you know about Russian history, does it make you pessimistic or optimistic about the current situation in Ukraine?
Peris: Sadly, pessimistic. Russia is working out a three-century-long conflict really with the West. It started with Peter the Great. And it is still being felt to this day, the relationship to the West and their standing within the West. There’s been a lot of commentary about NATO expansion and the dissolution of the Soviet Union and the Warsaw Pact and this, that, or the other. But if you step back as a historian, sadly, this is not out of what you might expect given Russia’s ambivalence and ambiguity toward the West, wanting to be part of the West, but being at the, as it were, the adult table. I don’t mean that in a demeaning way toward Russia, but they’ve just struggled to be an equal partner. They were during the Cold War, as it were, and after World War II, but then fell on hard times.
And now the invasion of Ukraine was partially to pick up 40 million Slavs that they had lost with the dissolution of the Soviet Union. They are facing a demographic catastrophe. I think they’re going to have a hard time holding on to Kaliningrad, which was a forward base to former Konigsberg. Crimea is undefendable from Russia’s perspectives, and it’s the cause of, to some extent, this great tragedy. Even the Russian Far East, which was taken from China in the 1850s and ’60s, is problematic given Russia’s population collapse.
So, it’s a very difficult situation. I don’t see an easy answer for it. The world has changed, however, during those three centuries, and levels of brutality that might have been acceptable a century or two ago, or even 50 or 100 years ago, are not anymore. Whether Ukraine is a 300-year-old state, which it is not, but whether it is, has equal legal standing with other European states in some form or another, or just other states, is a point that I’m inclined to lean toward, and in which case Russia’s invasion of it is highly problematic for the West. I’m concerned, continue to be very, very concerned and dismayed by Russia’s invasion of Ukraine.
Lefkovitz: On that happy note, optimistic on dividends, pessimistic on the Russia-Ukraine one. Got it.
Peris: Sadly, yes. Yes.
Lefkovitz: Dan, thanks so much for joining us today on The Long View. This has been great.
Peris: Dan and Christine, thank you for having me.
Benz: Thank you, Daniel.
Lefkovitz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow us on socials at Dan Lefkovitz on LinkedIn.
Benz: And @Christine_Benz on X, or Christine Benz on LinkedIn.
Lefkovitz: George Castady is our engineer for the podcast, and Kari Greczek produces the show notes each week.
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