Motley Fool Money Podcast Episode Summary: "Introducing the Dividend Seven"
Release Date: December 8, 2024
Hosts:
- Dylan Lewis
- Ricky Mulvey
- Mary Long
Featuring:
- Matt Argesinger – Senior Analyst, Motley Fool
- Anthony Chavon – Investment Analyst, Motley Fool
Introduction to the Dividend Seven
In the December 8, 2024 episode of Motley Fool Money, hosts Dylan Lewis, Ricky Mulvey, and Mary Long delve into the concept of the "Dividend Seven" (Div 7), a curated group of seven powerhouse companies distinguished by their consistent dividend growth and robust financial health. Inspired by the existing "Magnificent Seven" of dominant tech giants, Matt Argesinger and Anthony Chavon sought to create a parallel in the dividend investing realm.
Ricky Mulvey opens the discussion by highlighting the transition from tech dominance to dividend strength:
"Dominant tech companies have their own category, the Magnificent Seven... on today's show, Matt Argesinger and Anthony Chavon unveil their own Group of 7, the Dividend 7. Powerful companies that pay investors income." (01:09)
Defining the Dividend Seven
Mary Long inquires about the criteria used to select the Dividend Seven:
"What exactly is the criteria for making it into this group and how did you land on these requirements?" (01:31)
Matt Argesinger outlines the seven stringent criteria that form the foundation of the Dividend Seven:
- Dominance: Companies must exhibit market leadership and significant scale within their respective industries.
- Dividend Growth: Each company should have doubled its dividend over the past decade.
- Dividend Commitment: A substantial payout ratio, indicating prioritization of dividends in capital allocation.
- Dividend Yield: Yields should be at least 50% higher than the S&P 500's current yield (~1.2%), setting a minimum benchmark of approximately 2%.
- Growth Potential: Assurance of ongoing business growth in revenue, earnings, and cash flow.
- Financial Strength: Robust balance sheets capable of withstanding economic fluctuations and unexpected challenges.
- Distinctiveness: Unique attributes that make the company stand out in investors' minds beyond mere recognition.
"These seven criteria... dominance, dividend growth, commitment, yield, growth, financial strength, and distinctiveness." (03:59)
Spotlight on the Dividend Seven Companies
The episode systematically examines each member of the Dividend Seven, providing insights into their business models, dividend histories, and future prospects.
1. Prologis
Overview: As the world's largest Real Estate Investment Trust (REIT), Prologis specializes in logistics real estate, managing over $200 billion in assets.
Key Discussion Points:
- Dominance in Logistics: Prologis manages 5,600 buildings across four continents, serving as the backbone of global commerce.
- Dividend Performance: The company has grown its dividend by over 190% in the past decade.
- Financial Resilience: Despite a 14% stock price decline year-to-date, Prologis maintains a strong 3.5% dividend yield.
Notable Quote:
"Prologis is the real estate backbone of global commerce... it's a wonderful dividend company." – Matt Argesinger (06:36)
Additional Insights:
- Interest Rate Impact: CEO Hamed Mogradam predicted a short-term stock price drop of 10-15% due to rising interest rates, which has materialized.
"The short term impact of higher interest rates on our business will be a 10 to 15% drop in our stock price." – Anthony Chavon (08:12)
2. J.P. Morgan
Overview: The world's largest bank by market capitalization, J.P. Morgan boasts $10.7 trillion in assets under management.
Key Discussion Points:
- Dividend Growth: Over 200% dividend increase in the past ten years with a yield exceeding 2%.
- Market Leadership: Despite competitive pressures and regulatory challenges, J.P. Morgan remains a dominant force in banking.
Notable Quote:
"Even J.P. Morgan has competition from Bank of America, Citibank, Goldman Sachs... but it's still a dominant company we had to have." – Matt Argesinger (13:40)
Bear Case Considerations:
- Potential decline in net interest margins if the Federal Reserve lowers interest rates.
- Emergence of decentralized finance and non-bank lenders as competitive threats.
3. PepsiCo
Overview: A global leader in the consumer goods sector, PepsiCo is renowned for its diversified product portfolio and consistent dividend growth.
Key Discussion Points:
- Dividend Payout Ratio: Maintains a high payout ratio of 70%, underpinned by stable revenue and strong balance sheets.
- Total Returns: While Pepsi outperforms Coca-Cola, it trails the S&P 500, presenting a compelling case for dividend-focused investors.
Notable Quote:
"A high payout ratio for a quality company like Pepsi can even signal higher earnings growth in the future." – Anthony Chavon (14:10)
Investment Rationale:
- Enhanced diversification away from a tech-heavy market.
- Higher dividend yield compared to the overall market enhances income generation.
4. Home Depot
Overview: The leading home improvement retailer, Home Depot combines robust dividend growth with expansive market presence.
Key Discussion Points:
- Dividend History: Increased dividends by 280% over the past decade, the highest among the Dividend Seven.
- Stock Performance: Despite business struggles due to stagnant housing markets, Home Depot's stock is near an all-time high, possibly anticipating future housing market recovery.
Notable Quote:
"The market's anticipating a stronger housing market in 2025 and beyond, leading to a pickup in home renovations." – Matt Argesinger (17:03)
Business Robustness:
- Strong e-commerce presence and a diversified product range mitigate competition from online giants like Amazon.
- Consistent focus on dividend prioritization driven by stable cash flows.
5. AbbVie
Overview: A pharmaceutical titan, AbbVie stands out with its remarkable 52 consecutive years of dividend increases, earning it the status of a dividend king.
Key Discussion Points:
- Dividend Sustainability: Maintains a low capital expenditure (Capex) ratio (<5%), ensuring high free cash flow essential for dividend payments.
- Operational Stability: Differentiates between Capex and research & development (R&D), highlighting efficient capital management.
Notable Quote:
"AbbVie has a Capex ratio of less than 5%, leading to higher free cash flow and more stable dividends." – Mary Long (22:31)
Dividend King Status:
"A dividend king is a rare distinction... AbbVie has raised its dividend every year for 52 years." – Matt Argesinger (21:27)
6. McDonald's
Overview: The global fast-food behemoth, McDonald's continues to expand its footprint while delivering consistent dividends.
Key Discussion Points:
- Dividend Growth: Increased dividends for 48 consecutive years with a payout ratio of approximately 60% and a yield over 2%.
- Franchise Model: Leveraging franchising to fuel rapid expansion with minimal capital investment.
Notable Quote:
"McDonald's can expand more quickly because the capital investment isn't as large compared to opening a company-owned store." – Anthony Chavon (24:10)
Future Prospects:
- GLP1 Drug Impact: Potential changes in consumer eating habits due to weight loss medications pose uncertain effects on sales.
"If GLP1 drugs have a massive impact, what happens to Pepsi's pricing power and weaker competition?" – Anthony Chavon (25:27)
7. BlackRock
Overview: As the world's largest asset manager, BlackRock's inclusion in the Dividend Seven is buoyed by its influential iShares ETF franchise.
Key Discussion Points:
- Asset Management Prowess: Manages a staggering $10.7 trillion in assets, with the iShares brand being a cornerstone of its dominance in the ETF market.
- Innovative Offerings: Launches significant products like the BlackRock Bitcoin ETF, leveraging brand trust to capture market share.
Notable Quote:
"BlackRock seems to me like this monster dominant company that is just going to get more and more dominant as time goes on." – Matt Argesinger (27:14)
Distinctiveness Criterion:
"The iShares ETF brand is probably by far the most recognizable ETF brand in the marketplace." – Matt Argesinger (27:14)
The Intersection of Branding and Dividend Payouts
Mary Long observes a common thread among the Dividend Seven:
"Almost all of the companies... are really big brands... Is there some kind of relationship between really strong brand building and dividend payers?" (20:00)
Matt Argesinger and Anthony Chavon concur, attributing strong branding and financial resilience to the companies' ability to sustain and grow dividends:
"The most dominant companies become so because they have such a brand presence... financial strength is very important." – Matt Argesinger & Anthony Chavon (20:45 & 21:07)
Valuation Strategies for the Dividend Seven
As the Dividend Seven comprises established and dominant companies, traditional growth valuation metrics like the PEG ratio are less applicable. Instead, the analysts prioritize:
- Price-Earnings (P/E) Multiple: Utilized as a foundational valuation metric given the predictability of earnings and dividends.
- Dividend Yield: Emphasized as a critical factor, with a preference for yields at least 50% above market averages.
Anthony Chavon elaborates:
"Yield is something we look at... dividends account for roughly 50% of the market's return over the last 100 or so years." (30:00)
Matt Argesinger offers a nuanced perspective on pricing:
"I would not call any of them cheap... they deserve a premium because they are premium businesses." (30:55)
Notable Quotes:
"If you look at these seven companies, these seven companies are pretty pricey but deserve so... because they are premium businesses." – Matt Argesinger (30:55)
Conclusion
The inaugural Dividend Seven groups together seven robust, financially sound companies that offer a blend of reliable dividend yields and growth potential. Each company exemplifies dominance in its sector, sustained dividend growth, and financial resilience, making them attractive for income-focused investors seeking stability and consistent returns.
Mary Long wraps up the episode by expressing optimism for future iterations of the Dividend Seven:
"Thanks so much for walking us through the first iteration, hopefully the first of many different iterations of the dividend 7." (31:06)
Ricky Mulvey adds a standard disclaimer, reminding listeners to conduct personal research before making investment decisions:
"Don't buy or sell stocks based solely on what you hear... The Motley Fool only picks products that I would personally recommend to friends like you." (31:35)
This episode of Motley Fool Money provides a comprehensive overview of the Dividend Seven, offering valuable insights into selecting high-quality, dividend-paying stocks. Whether you're an experienced investor or new to dividend investing, the strategies and analyses presented offer a robust framework for enhancing your investment portfolio.