#28 - Larry Swedroe - "There is Literally No Logical Reason for Anyone to Have a Preference for Dividends"

61 minutes

As we recorded Episode 28 on Halloween, it starts with Meb referencing his costume from the prior weekend’s festivities. Can you guess what it was? He stayed true to his financial roots, dressing as Sesame Street’s “Count von Count.” (Sorry, no photographs.)

But the guys jump in quickly, beginning with the subject of Larry’s 15th and latest book – “factors.” Larry tells us that the term “factor” is confusing. He defines it as a unique source of risk and expected return. So which factors should an investor use to help him populate his portfolio? Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.

The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.

Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear.

Eventually the conversation drifts back toward market values. Larry tell us that when the PE ratio of the S&P has been around its average of 16, it has about a 7% expected return. So now that the CAPE is roughly 25, and the expected real return is around 4%, some people are shouting “Sell! Huge crash coming!” Larry disagrees and tells us why.

But the guys just can’t leave dividends alone. They swing back toward the topic, with Larry telling us the whole concept of investors focusing on dividends literally makes no sense. If you want a dividend, create your own by selling the commensurate number of shares.

This leads Meb to discuss a research study he did in which he asked if he could replicate a dividend index with companies that don’t pay any dividends. His research revealed that not only could you, but you can do much better. The takeaway was that for a taxable investor, this investing strategy would be far more efficient.

As the conversation progresses, Meb asks Larry about portfolio construction. Specifically, when he’s building a portfolio, does he pick out individual factors and hang with them for a decade, or does he want to review annually and tilt away, or go multi-factor?

Larry tells us to invest only in something you have a strong belief in. Why? Because every factor can have long stretches of underperformance, so you need to be committed. People think 3 years is long… 5 is very long… and 10 years is an eternity. Larry doesn’t agree. And if you chase returns across shorter time periods, you’ll likely get awful returns.

Next, Meb steers toward the momentum and trend factors, asking what Larry thinks. Larry says “put them to the test.” So he walks them through his aforementioned 5 criteria.

There’s far more in this episode that you don’t want to miss: the correlation of value and momentum… trading costs… the use of CDs in your fixed income allocation… corporate bonds and an eroding risk premium… the state of the ETF industry 10 years from now… There’s even a warning – if a former Miss America is pitching you a mutual fund, beware… In what weird context does that advice apply? Find out in Episode 28.

More episodes from The Meb Faber Show

#333 – Startup Series – Rob Forster, Wonderbird Spirits - Making Gin Is Truly An Art

In episode 333, we welcome our guest, Rob Forster, co-founder of Wonderbird Spirits, Mississippi's first grain-to-glass gin distillery. 

 

 

In today’s episode, we hear how Rob stopped …

#332 – Mebisode – Journey to 100X

Episode 332 is a Mebisode. In this episode, you’ll hear Meb talk about his journey investing in over 250 private companies since 2014. He explains why he chose to do so and his framework …

#331 – Phil Nadel, Forefront Venture Partners - The Best Companies Are Founded By Folks Who Personally Feel The Pain Point

In episode 331, we welcome back our guest, Phil Nadel, co-founder of Forefront Venture Partners, one of the largest and most successful syndicates on …

#330 – Guillermo Cornejo, Riders Share - Riders Share Is Like An AirBnB, But For Renting Motorcycles

In episode 330, we welcome our guest, Guillermo Cornejo, founder and CEO of Riders Share, the first & largest motorcycle peer-to-peer rentals platform in the United States.

 

In today’s …

#329 – Samantha McLemore, Miller Value Partners - We're In Optimism With Pockets Of Euphoria

In episode 329, we welcome our guest, Samantha McLemore founder of Patient Capital Management and a Co-Portfolio Manager at Miller Value Partners.   

#328 – Startup Series – Katie Echevarria Rosen Kitchens, FabFitFun - Paying $50 And Getting Over $300 In Full-Size Products Is A Pretty Cool Thing

In episode 328, we welcome our guest, Katie Echevarria Rosen Kitchens, co-founder of FabFitFun, a lifestyle membership that provides a curated …

How you can listen to this podcast

You can listen to episodes right here on the website, or if you prefer, in a podcast app. Listening in an app makes it easier to keep track of what you’ve already heard, listen without using your data plan and many other conveniences.

Recommended apps
Start listening to #125 - Tom Barton - The Biggest Problem Investors Have is Things Change...and They Don't Change
1:24:56
Start listening to #125 - Tom Barton - The Biggest Problem Investors Have is Things Change...and They Don't Change
1:24:56