6 Years of Dividend Investing Lessons in 12 Minutes

I was recently interviewed about my investing strategy, and today I will compile six years of investing lessons down to 12 minutes. I would describe my current strategy as more dividend growth focused, but in general, I just think of it as a business. So, there are some businesses that maybe you want to pay a higher multiple for cuz they're growing a lot faster. Everything, it's just it's a case-by-case basis. Like some of my best buys of all time, they're not dividend stocks at all. Like I bought Tesla in 2016. That was like a 2,000% gain on that. And by only put like $1,000 in and I've held it. I still have all those shares. The dividend is really just a signal of profitability, and I think it's a very good retirement strategy if you're planning to live off of your dividends. Like my dad who got me into dividend investing, that's his entire retirement strategy is getting the passive income around dividends. The other benefit of dividends is the income that it just produces on a regular basis, and you can consistently reinvest those dividends to acquire more shares. It just gives you a lot of more capital that you can continue pouring in and reinvesting, and there's a compounding effect to that. We call that the dividend snowball. It was actually like my most popular video of all time in 2020 was the idea of the dividend snowball effect where your dividends are buying shares, increasing your share count, and then you're also having dividend growth at the same time. So, you you're have more income that can buy even more shares in the future, and that continues compounding. And that fundamentally does work quite well, but it's like revealed more on a long time horizon.

horizon. How does looking at a stock like an actual business as opposed to a stock change the game? — It changes the entire way that you look at it where you're thinking of it as a founder, a business owner, and you can really go deep with it whether you like you're thinking like an analyst or researcher or employee at the company trying to make decisions. Like what is the competitive uh environment in this industry? And everything when it comes to investing, you're buying shares of the business. So, the more you just analyze it from that perspective, it's just the most fundamental way to do investing. When you think of it just as prices going up and down, I think people really just get lost when they're looking at it that way, and they just start to not even like have the foundation of what you're even buying. And that's one reason why I always like push back around day trading and that kind of stuff. When you just hyper focus around the price, you're just missing the entire game of business. And investing, it's just buying businesses. That's the whole game. Honestly, like you said, it's the biggest game-changer that if you are interested at all in investing, you have to understand it's no longer about the numbers. It's actually about becoming a business owner. Like the whole your mindset, your frame of reference, everything has to change to become the business owner, and then you start to look at everything very differently cuz it's no longer, you know, numbers and tickers. So, the whole approach, you know, that you have is fantastic.

At one point, you said like uh you know, my investing strategy. But really, for all of us, we're standing on the shoulders of giants. Like I learned a lot of it from Warren Buffett and Charlie Munger. I don't invest in a lot of the same stuff that they do, but it's a different era, and I'm a different person. So, like one of Warren Buffett's big ideas is the circle of competence in that you have to find the areas that you have the most expertise in, and you want to stay inside of that area. And for Warren, he always avoided tech because he didn't have that background. I do come from that tech background. I'm a different generation. I'm 26 turning 27. I studied computer science. I'm so into AI right now. I spend all day thinking about and using it. You have a different set of opportunities. So, I think the big thing is focusing on the lessons and learnings of that generation of investors, building upon it, taking it and implementing it in your own way. Cuz a lot of times, you know, it's fundamental truths, the idea that you know, you're investing in a business. Why is a business valuable? Cuz they produce cash flows that theoretically could be paid back to you as an owner.

There's different subsets of investors. The average person probably should just be heavy in index funds and diversified in that way because it takes a lot of work to productively invest in individual stocks, and there's also a big idea that we could talk about. Investing, you know, there's like the intellectual game of it, but then a lot of it's also just personal finance. We're not on Wall Street, you know, with other people's money. We're investing our own money. A lot of people should probably just focus on their career and increasing their personal income, and they can invest in individual stocks, or just not think about it, buy a couple index funds, stay diversified, and just focus on increasing their personal income so that they have more money to invest. Cuz one big problem, there's a lot of people that spend so much time intellectualizing and thinking about it, but they invest like $100 a month, and you know, they have a portfolio of like a couple thousand dollars. It's not really going to make that big of a difference whether you get a 20% annual return, a 15% annual return, a 10% annual return. You just need to be investing more. Some people need to hear that up like buckle down, try and increase your income, you know, manage your expenses so you have more of that personal cash flow to invest. You know, think of it as like your personal profitability is like you as a if you're a business. You know, your income is your main cash flow for investing.

A big thing with individual stocks also is just the emotional component of you got to be able to hold some of these. Some people a lot of people, they just can't handle when stocks go down. And some can't even do that with ETFs and diversified funds. Like they just sell. They let their emotions get in the way. It's all about the long-term compounding. One thing with ETFs that I think can be a problem for some people is it starts to disconnect again from that idea of you're investing in businesses cuz the more you abstract like different layers on top of it, people just start to talk about different things. They don't know how to think about a ETF or it's like, "Oh, this fund went down 25%. " They don't even necessarily know what is in the fund. What do they own? You might not have the stomach if you don't actually understand what you own to hold through down times.

Zack, let's say someone out there right now is super interested in individual stocks. Based on your wealth of knowledge, what are a few metrics that you would recommend looking at when you're picking individual stocks? So, first is like a filter of like thinking about what kind of business you're looking at. Is this a company that you think is going to have high growth in the future, or is this a company where they have a very good business that generates a lot of cash, but you know they're not going to be growing at a high rate? Cuz those kind of that's like one filter, and you can actually get good returns with both of those strategies. You just have to know what which category you're in and buy at the right price according to that category. Let's start with the higher growth company. I've been buying a lot of Microsoft, I guess. They trade at a premium. Well, they've come down quite a bit, but uh in general, they trade at like historically around like a 30 P ratio. And the reason that people pay a premium for that is because they feel confident that Microsoft's cloud business, both the like the subscription software historically, which is like a great compounder, reliable revenue, they feel confident that is going to go up over time. Also, their Microsoft Azure, their cloud infrastructure business, the data centers. So, you're willing to pay a higher premium because you think that the company will grow 15% a year. And if you play that out long enough, 5 years from now, you have two stocks. Microsoft's trading at a 30 P ratio. You have Coca-Cola that's trading at a 25 P ratio. If Coca-Cola is growing at 5%, Microsoft's growing at 15%. Even if you're paying a higher multiple today for Microsoft, if you play it out over 5 plus years, Microsoft is going to be significantly cheaper based on today's price for the business they will be 5 years from now. I think if you look at Microsoft's P ratio based on like 2030 earnings estimates right now, it's like a 10. So, like whereas Coca-Cola, they're only going to grow 5% or so a year. So, like you're paying premium valuation cuz they're a good business, they're not going to grow nearly at the same rate. But on the other side of the coin, with the slower growing companies, price matters so much. You cannot overpay for a slower growth business, you're going to get killed. Coca-Cola, the reason they trade at such a premium is cuz they have such a dominant market position that people know they won't be disrupted. You know, you have the discount present value of future cash flows. People are so sure about those future cash flows being there that they're willing to pay a lot for it. But you're not going to make a high total return buying Coca-Cola at the current price, paying 25 times today's earnings. But if you have a business that's growing 5% a year, but it's trading at 10 times earnings, that's looking a little more attractive. That you can find good examples there.

To flip the script actually, are there any glaring red flags that when you see them in certain opportunities, this is like a run the other direction metric? In terms of dividend stocks, if you or want the income, just a payout ratio that's too high consistently. There are different baskets of that as well. Like there's pet cuz payout ratio by default it uses a gap accounting and that income which is uh has some variables that can sometimes make a year look like where the dividend was not sustainable when in terms of the cash flow it was. Because like uh as an example you could take a loss on an investment or something, but it's like an on paper write down. Like you invested the money 5 years ago, but now it's worth like nothing. So you like took a 5 billion dollar loss that year, but you didn't really lose 5 billion dollars that year. You still generated a ton of cash. One thing that I built onto our website is like a free cash flow uh dividend payout ratio. So based on like how much cash the company's generating after capital expenditures. So from the dividend perspective, that's one way we can look at it. By the way, there's even more exceptions. So you can really keep diving into that of like what is a sustainable dividend cuz like the midstream stocks I mentioned free cash flow sometimes the best one for that. Sometimes with some of those stocks we want to do it based on EBITDA.

Other red flags for more growth stocks, it's hard to tell because sometimes CapEx could be a red flag in that it introduces a risk of are they going to get a return on that investment? So then that becomes the judgment of analyzing the business. Cuz there's completely different examples on this. Bill Ackman actually had a really good uh interview recently where he mentioned the difference between maintenance CapEx and growth CapEx. So maintenance CapEx would be something like Verizon or AT& T. That would be maintenance CapEx. Every like 5 to 10 years they have to invest into the new generation of telecom infrastructure. And it's a ton of money and they're constantly, you know, up when they went to 5G it was a ton of money. They're constantly upgrading that. But they don't get any new customers really from that. It's like the same total addressable market. They're not really growing. So they have to spend all this money just to maintain their market position versus something where it's like uh the better example on what Bill Ackman was talking about is the AI data centers right now. How they're outlaying tons of CapEx. But this is, in my opinion, 100% in the growth CapEx category because they already have the revenues and profits they're generating from the data centers they already have built for that AI demand. They have contracts of with the future AI demand. And they're like, "Yeah, we have this visible revenue. We just need to build the supply and it's all going to come. " Um So that's like the two different ways to look at CapEx.