In this episode, we're diving back into the world of dividend investing with Motley Fool co-founder David Gardner and Motley Fool analysts Buck Hartzell and Matt Argersinger.

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David Gardner: Dividends are cash payments that companies make to shareholders as a reward for owning the stock. Dividend investing is not necessarily why you're tuning in here each week. Getting smarter, happier, richer are goals for sure, but smarter, happier, richer about dividend stocks. But then again, on the other hand, some great Rule Breaker stock picks have over the years paid dividends. Not only that, some are just now starting. Did you see this? Facebook, Meta Platforms, and Google, Alphabet, have both announced their first ever regular dividends in just the past couple of months. Four years ago, this very month as the world was shutting down for the pandemic and the stock market had shut down to the tune of a 25% one-month drop, we dedicated that whole week's episode to dividend investing. The timing was purely coincidental as it is this week, but every few years I think it makes sense to touch base here again. It's our next episode of Dividend Fools, rejoined by The Motley Fool's Buck Hartzell, and also this time by one of our in-house dividend investing experts. I think you know them, I love him. Matt Argersinger. You're ready to talk about free money that comes your way just by owning stocks? Dividend Fools, Volume 2, only on this week's Rule Breaker Investing.

Welcome back to Rule Breaker Investing. Matt Argersinger works on the Dividend Investor and Real Estate Winners services here at the Motley Fool, aiming to identify and recommend compelling income oriented opportunities for our members. You can also catch Matt on the dividend show on Motley Fool Live and as a regular guest on the Motley Fool Money podcast and radio show. Matt, welcome back to Rule Breaker Investing.

Matt Argersinger: Hey, David, it is great to be back.

David Gardner: Buck Hartzell is an advisor on Fintech Fortunes and also works on the Fools Canadian investing services and can be regularly seen or heard on the Canadian Power Hour on Fool Live and it should be noted, buck helped me kick off this series, as I mentioned earlier, four years ago this month, Dividend, Fools Buck, welcome back.

Buck Hartzell: Thank you very much. It's great to be back here. I did review that. People can go back and listen to the older podcasts and we recommended a few stocks back there. I actually like all the ones that I recommended back then and I think they've all done fairly well.

David Gardner: We'll talk about that a little bit later. In fact, we're going to make some new fresh picks. I think you guys have some dividend stocks and investments in mind that we'll do a little bit later this week, but thank you. It's great to have Buck and Matt here talking about companies that make cash payments to you to own their stock. I think gentlemen, it makes sense to define our terms. Not every listener spends a lot of time thinking about dividends and some of our listeners are probably completely new to the subject. I'm going to turn to you, Matt. Could you briefly define dividends? Maybe throw in what the yield is. I'm asking you to go not just high level but one level down.

Matt Argersinger: Sure. A company pays cash out of its earnings or from its balance sheet directly to shareholders, that's called a dividend. Most companies do that on a regular basis, whether its quarterly, semi-annually, sometimes even monthly. There are some companies out there that pay monthly dividends. You can often look, when you're looking at a stock, you'll see a dividend yield, which is simply the annual dividend that stock is the company's paying out divided by its stock price. That gives you a sense of what you can earn if you bought the stock today based on its dividend.

David Gardner: For example, if a stock were at $50 a share, and it paid $1 annual dividend, and let's just call it $0.25 a quarter; most of these are quarterly. Then, that would be a 2% dividend yield. Did I get my math right, Matt?

Matt Argersinger: I think you did.

David Gardner: Okay, good. That's a good example of dividend yield using round numbers, which makes it easy to explain. In a sense, Buck, that's the interest rate in one sense, that you get paid for holding the stock. That assumes the stock doesn't move up or down. We generally liked them to go up a little bit over time, of course. But you can compare a dividend yield to T-bills or any other interest rate that you might be looking to get in income investing in the rest of your life?

Buck Hartzell: Sure. You can compare it to bonds. I did a video long time ago. I think it's on the full site somewhere. Microsoft, at the time interest rates were dropping. And Microsoft did the first bond issuance that was below a percent. You can essentially buy a five-year bond at Microsoft and earn 0.97%, I think it was. The video that I did was why in the world would anyone buy this bond? They're basically locking in less than a percent return for five years when they could buy the stock, I think at the time it yielded almost 2.3%. You also got all the growing earnings which Microsoft's done for a long time. That's a good comparison to compare the interest rate not only to what you'd get from a CD or whatever else, but also a bond. It's good comparison.

David Gardner: Matt, you mentioned that companies typically pay their dividends out of cash flow, if they have it and many do, usually the companies that are paying dividends can afford to do so and maybe they didn't have a good year for cash flow, but they have a balance sheet where that company has cash in the bank. In some cases, they borrow to pay their dividends, which can we define one more term, go a little bit deeper, the payout ratio.

Matt Argersinger: Sure.

David Gardner: You just let listeners know exactly what that is and why that matters.

Matt Argersinger: Sure, the most traditional way to calculate the payout ratio is take a company's earnings per share and divide it by the annual dividend per share. That'll give you the percentage of the earnings of the company's paying out as a dividend. Now, sometimes now that number can jump around a lot, of course, as David alluded to. If the earnings were to fall, but the dividend isn't cut, then you're going to see that payout ratio rise. You could start to get a little worried about if the company can continue paying its dividend if the earnings are falling. But yes, a company that has a balance sheet and maybe a short-term cash-flow earnings problem can still pay dividend. Of course these comes right out of cash on the account.

David Gardner: Guys, we've defined our terms. I'm about to play a game of word association with you both. I'll let you mentally prepare for that. Before I do, I just want to convey ahead of time the five chapters that we're going to cover in this podcast. Here they are for our listeners. This is where we're headed in our time this week. Chapter 1 is, I'm going to call it the shift in dividend investing out-of-favor. For decades. In some ways there has been a shift. We're going to speak to that why it is, and maybe a little bit of why is Meta platforms and wire Alphabet, all of a sudden paying dividends. That's Chapter 1. Chapter 2 the practical value of dividends. Buck, you're going to tell a story about your family, among other things; why we're doing an episode on dividends? Why dividends still matter. Chapter 3, the challenges and misconceptions. A lot of people talk about double taxation. Warren Buffett traditionally has not said to be a big fan of dividends. We're going to talk about the challenges of them and some misconceptions. Chapter 4, stock buybacks versus dividends. Companies have a choice when they have cash flow or money in the balance sheet that rather than pay it out directly to shareholders as a reward for holding the stock, they could reinvest it in their business. In some cases, they could just buy back their own shares and make holding an individual share dearer as a consequence of that. We're going to talk about stock buybacks versus dividends. Chapter 5, our closer, a spotlight on some picks and some strategies. Those are the five chapters of this podcast. Now I did mention a game of word association. Matt, I'm going to turn to you first. Have you played word association games before?

Matt Argersinger: I think I have, dude, with you several times. Yeah. I tend to do this. I don't know why.

David Gardner: It's not really a game. If it is a game, it doesn't really have clear rules and it's lame as a game, but let's do it anyway. Matt Argersinger, are you reading? I'm going to flash a word out. I want you to give me your gut level response with a word or a phrase back. You ready?

Matt Argersinger: Yes.

David Gardner: Dividend.

Matt Argersinger: Real, cash, tangible.

David Gardner: I like it. Buck. I know you were in a sound proof chamber. You did not hear what Matt just said. You'd have no idea what I'm about to ask you. Let me ask you, Buck Hartzell, are you ready for word association?

Buck Hartzell: Yes.

David Gardner: Dividend.

Buck Hartzell: Eureka. It's Eureka to me because if there weren't dividends, I probably wouldn't be doing the job that I'm doing today. I wouldn't love investing as much as I do.

David Gardner: Nice.

Buck Hartzell: That's what got me originally interested in investing.

David Gardner: That's why I'm delighted to have you back for Dividend Fools Volume 2, it makes so much sense. Let me complicate the game slightly more. Let's extend the game a little bit. Matt and then Buck, I'm going to ask you this question looking for your answer here beyond that gut level response. What does the word or phrases, Matt Argersinger, that you can titillate our listeners with a nuanced reaction to when I say this word and you react slightly more intelligently and reflectively and provocatively. Are you ready?

Matt Argersinger: I'm ready.

David Gardner: Here's the word, dividend.

Matt Argersinger: A high dividend yield does not always mean the end of growth.

David Gardner: I hear you and we'll get there. Thank you. Buck Hartzell, I know you didn't hear Matt's response. We're going to bring you back from outside the studio and I'm going to just try word out on you with a nuanced answer. You ready? Dividend.

Buck Hartzell: Discipline. I think when when a company pays a dividend, introduces a different level of consistent discipline in that company because it's an obligation. I think you operate a little differently when you pay dividend.

David Gardner: Well, I think we're going to return to some of the things you just said over the course of our five chapters here. So feel free to go back there, but guys, thanks. Thanks for playing the game. Let's go from a silly game to a slightly more serious topic. Chapter 1, the shift in dividend investing. Matt Argersinger. What has been the shift?

Matt Argersinger: Well, if you look at the dividend yield of the S&P 500 today, it's right around 1.4%. That is the lowest yield on record outside of early 2000, which we all know is the kind of the height of the dot-com boom. So the dividend yield in the S&P 500 really has never been lower. If you look at a long-term chart of the S&P 500 yield, it's gone nowhere but down for about 40 years. It's been remarkable. And the shift is, if you go back before that, if you go back in the 1970s, go back even not just 100 years, but go back 500 years to when we were investing in the East Dutch East India's company on the Amsterdam Stock Exchange, investors invested to get a dividend. That was the whole point. It was a cash relationship with your investments. That lasted, that went for centuries. I mean, if you think about the railroad investments, the industrial investments, the post-war investments, it was all about investing to get a dividend.

Buck Hartzell: Robert Brokamp joined us for Episode 1 of this series. Robert really sad, I remember this. He said, if you go back as far as the 170s anyway, maybe not the Dutch East India's coming because it's still in business up through the 1950s, I remember him saying stocks. Stocks are always yielded more than bonds.

Matt Argersinger: Yes.

David Gardner: People felt you needed to get that higher dividend yield to make stocks worthwhile because they were riskier.

Matt Argersinger: That's right. Roughly 150 years, even including this last decade, the average dividend yield of the market was North of 4.5%. It was significant. It was about triple what it, where it is today. There's a new book out by Daniel Paris. It's called The Ownership Dividend. He talks about three main reasons why there's been a shift away from dividends over the last, say, 3-4 years. The first reason is probably obvious. We've had almost 40-year decline in interest rates. If you look from the early '80s to roughly 2021, '22, interest rates really went down; in fact, in the last 15 years or so they are close to zero since the global financial crisis.

David Gardner: Amazing.

Matt Argersinger: When the cost of capital in the market goes down, when interest rates are super low, management teams can do a lot of things and look smart even when they're making bad decisions. You can always roll over debt, refinance debt at lower rates. You can invest in most projects because the discount rate is so low, it looks like it's going to win. The value of assets and real estate are high, so you always have it more access to capital. So there was just a lot of momentum behind the idea of, well, I'm kind of retain this capital, invest in these longer-term, longer-duration ideas and projects because the rate, the capital costs were so low at that time. So that's the big first reason that Paris goes into. The second reason I think this is more interesting and much less heralded reason. A little known SEC rule in 1982, Rule 10b-18. You can probably get what I'm getting at. In 1982, it allowed more liberal share buybacks. Before 1982, is actually difficult for companies to do buybacks. A lot of regulators thought it was akin to market manipulation. If companies were buying back their own stock, they often had to register and do shelf buys, they had to do tender offers. It was a lot more cumbersome to buy back stock. After 1982, a board can simply decide and authorize a share buyback. A company like an investor can buy stocks in the open market anytime they want outside of a few blackout periods around earnings or special events. So that was a big shift in the way managers start to allocate capital more toward buybacks, less toward dividends beginning in 1982. The third reason, Paris gives and I think it's a great one, is look, there was an undeniable rise in the success and the value of Silicon Valley companies, and the idea of the high-tech companies where there was a different culture about how to reward and retain employees more toward stock-based compensation, more toward ownership in these businesses he's venture type style businesses away from short-term dividends. Those companies, as they took off, became the fulcrum of the stock market boom that we had in '80s, '90s, and beyond. That also took away a lot of the shine on dividends.

David Gardner: I know you have a fourth reason you're going to provide in a sec. I don't know what it is, but I wanted to react and see what Buck thinks about this, wanted to react to that third point, Matt, because part of what I think happened that Paris may be speaking to is that an amazing new technology was developed and deployed and it was the Internet. When you think about the growth rates associated with that, the opportunity all of a sudden speak the entire world, which most companies didn't have anything like that platform or opportunity. Free information, social media, etc, e-commerce. It was such a powerful development for our society that in a lot of ways, I don't think it made sense if you were if you were driving it, if you were AOL to start with or more recently, Amazon.com, it didn't make sense necessarily to pay your dear cash flow that you're looking to reinvest in your business at, historically, amazing rates. I don't think it made sense for those companies. That's what they pay out dividends do you agree?

Buck Hartzell: I agree. That's a great point.

Matt Argersinger: I generally agree with that point, but I would say this. There's a lot of misconceptions about dividends. I think one of those is that once you start paying a dividend, you're no longer a grower. We've known, I know, we all know a lot of really innovative high-growth companies that in the early, sometimes, early on in their lifestyles. I think that's actually a lifespan. They start paying a dividend and that means a couple of things they're profitable, and they have, even though they can reinvest, they can also afford to pay some of MercadoLibre is one of those companies that did it. Obviously, it's been a high-growth company for a very long time. There are others, but I think you're generally right, but there are some exceptions, obviously all the time.

David Gardner: So Daniel Paris' book, The Ownership dividend, dividend, and he covered his three main reasons you've summarized in very aptly, Matt, is there a fourth?

Matt Argersinger: So this is fourth reason. This is me. There's no, I don't have the academic rigor study behind this that Paris apply. Don't need that on the show.

David Gardner: We love you for who you are. What do you got for us?

Matt Argersinger: We're going to discuss him later in the show. I know this, but I think Warren Buffett has a little bit of influence on this. Now, Buffett didn't become a household name until the mid-late '90s. But I think the fact that Buffett has never paid a dividend out of Berkshire Hathaway. Hence a such extraordinary success, widely considered the Grace investor of all-time. I think a lot of CEOs, investment managers look to Buff and say, "Well he, he doesn't pay a dividend. He's done incredibly well. He's reinvested capital at high rates of returns forever. Why should we, why should we pay a dividend?" So I think there's a little bit of a cold, a Buffett that has some influence on this as well. I would also say one of them is misconceptions about Buffett will also get into this, I think is he actually has a bit of a dividend investor himself. If you look at the investments he makes, he absolutely loves getting dividends and he loves companies that grow dividends over time and Coca-Cola, American Express, even Apple. But, of course, he doesn't pay a dividend himself, and so I think that has had some influence on investor psychology.

David Gardner: Thank you for that, Matt, and as we start to close Chapter 1, "The Shift in Dividend Investing." Buck, offline, you were sharing just a little bit of how dividends jump started your investment journey, your initial fascination with them. Can you speak to that? Yeah.

Buck Hartzell: I was five and I had my first job. I grew up in a family business which was a restaurant, and it was a large restaurant and Pennsylvania Dutch country and I earned a paycheck. I was the pot drier.

David Gardner: You were five?

Buck Hartzell: I was five years old.

David Gardner: Did you have a 401K?

Buck Hartzell: I did not have a 401K, but it's funny ran into some folks that I haven't seen for decades. I went to school with them when I was younger. And they said oh, i just remember you like where the hardest working people and they were feeling sorry for me but I didn't realize that was friends with those folks. But the reality was it wasn't work for us. It was what we did and we were together as a family. But anyhow, I earned a paycheck. At the end of every week, I would get a check and Mrs. Bricker, who was a lifelong eagles fan, would come over and she'd do our book or could you do all the payroll for everyone. And I would get the first check it was usually $2.38 or $5.28. I'd run to my dad, who always had money in his pocket, and I'd say cashless, I'd sign it, and I put all my money in my sock drawer. So that was the safest spot that I knew, because it didn't just open like a regular drawer. You had to go up underneath and open it.

David Gardner: You had a couple of brothers, you had to protect that money.

Buck Hartzell: You had to keep it safe, yes. And so that's what I had. So after about two or three years, one day my mother came to me and she said, "Buck, come on, we're going to the bank." and that was fun for me. Back in those days, you got to lollipop every time we went to the bank. And besides, there was this mystery machine that you put stuff in it, like zoom things out of space, and this little tube came back to you. Kids don't know about that today.

David Gardner: I remember one that had little NFL helmets. That was it the safe way. Put your $0.25 in July you get the New Orleans Saints, I hope not.

Buck Hartzell: So, we had that vacuum tube or whatever, and a lollipop came back at the end and that was always great, but this time we had to go into the bank and we set up a checking account. I said, "Why are we doing this?" She's like "I don't have any room to put socks in your drawer anymore. It's filled with money and that's not safe at the house, burns down or whatever else." So, anyhow, long story short is I got a checking account and in a couple of months, she started giving me checks, $2, $5, $7, and after about the fourth or fifth check, I'm like, "What is this?" She's like, "Well, those are stocks your father and I bought for you when you were born. This one's from Hershey Chocolate. That was one of them when I liked Hershey Chocolate. They also pay out a portion of their dividends. Now as somebody who started working at five, when I got a free check for $2.38, that I did not have to work for that was Eureka to me because I'm like, oh my gosh, I don't have to work at all for this. I'm going to get more of that. I was probably seven or eight at that time and that's what really for me, kindled my lifelong interest in investing.

David Gardner: Love that story. Thank you Buck, you're reminding me of one of our former employees who told a great story when I first met him at initial coffee joining the Fool, wonderful guy for several years here. Mark Reagan said my mom said this to me growing up when I was at an impressionable age, son, there are three ways to make money in this world. First is with your strength. Second is with your mind. The third is with your money. Mark said, could you tell me more about that third one? You just shared a story very similarly. Our money makes more money and especially when you're a kid, mind dot blown dot. Let's move on to Chapter 2, The Practical Value of Dividends. Buck, maybe some more storytelling. You brought some stories for this hour together.

Buck Hartzell: I did. I brought some stories.

David Gardner: I think in some senses you just spoke to the practical value of dividends, maybe more the excitement that they would even exist. Speak now; did you bring a story about the practical value of dividends?

Buck Hartzell: Yeah. I'll give one.

David Gardner: Your parents?

Buck Hartzell: Yeah, my parents. My father, as he got older, I helped manage his portfolio and we had a couple of guidelines and one of those, and I think this is something that's attainable if people work for it. One is to have three years living expenses in cash. Because if you get beyond retirement, all that stuff, and one of the great things about that is you don't have to sell anything when the market goes down. For somebody who was in his 80s and he wasn't in great health and he had 0% of his portfolio in bonds, which most people would find crazy, but he did have a decent amount in cash. When 2008 and 2009 came out and the stock market went down about 30% and our stocks went down like everyone else's.

David Gardner: Mine went down more.

Buck Hartzell: What you saw then though in the portfolio was one, didn't need to sell anything. Secondly, dividend stocks hold up better than regular stocks because companies don't like cutting the dividend because their investors don't like it when they cut them, so the dividends hold up better than the stock prices. That kept a constant flow of income coming in throughout his portfolio. Not only did we not have to sell stocks when they were down, we had the dividend income to live off. He did, and he could also reinvest some and buy some more stocks when they were very cheap so that regular ongoing income that comes in. I think at that point in time and it was a decision I made was I'd rather own dividends stocks than I would have 30- or 40% of his portfolio in bonds. I think that worked out very well for him over the long-term.

David Gardner: Wonderful story, and I love that he did it with stocks. Now if Robert Brokamp were here with us and he always is here, he's on our shoulder. There's like there's the angel on one side of your shoulder and then on the other side is Robert Brokamp. He might talk about laddering T-bills at this point or other strategies you can use without using stocks in order to get that guaranteed regular recurring income. We love Bro and I like that about him. A lot of people use strategies like that and they are brilliant and you could do with stocks.

Buck Hartzell: You can do it with stocks. The reason I paraphrase that and said three years living expenses in cash means you have the flexibility that if you don't want to do that, you don't have to but it all comes down to your tolerance. My father had heat. My mother was more of the investor in our house and that's who I talk stocks with my entire life. But he had seen that and she managed our money that way. He had a tolerance that he didn't care about the up and down. It was long-term money that was going to stay invested unless they needed it for something.

Matt Argersinger: If I could just add some historical data to something that Buck said earlier about the fact that when the market declines, dividends, companies tend not to cut. If you look at the, even the great depression, the worst period for the market, 1939 to 1932 where the market declined 83% the dividends in the market only declined 32% in the great financial crisis. October 2007, March 2009, stock market down 57%. The amount of dividends, 0%, decline it credible.

David Gardner: Before we move on Buck, where was that family restaurant?

Buck Hartzell: Lancaster, Pennsylvania.

David Gardner: That is amazing. Last week, Roberts school yet wrote into the mailbag from.

Buck Hartzell: Lancaster, Pennsylvania.

David Gardner: Indeed with me at the microphone, The Motley Fool's Chief Investment Officer. We know and we love them, Andy Cross and any crosses from?

Buck Hartzell: Lancaster, Pennsylvania and he's really from Lancaster. When when I say Lancaster, I'm like actually the town called Lititz, seven miles Northwest Lancaster but Andy link legitimately from Lancaster. That would be like the city. We would say city boy. Big town.

David Gardner: My father and his brother went on to start Gardner investments and they grew up in?

Buck Hartzell: Lancaster, Pennsylvania.

David Gardner: What is going on with this? Enough with the Lancaster, Pennsylvania Chamber of Commerce announcement in the middle of our dividend Fools conversation, but thank you. Lancaster. Matt, these are some of the most resilient companies in the world today that are paying substantial dividends, especially the ones that have done so over a long period of time. We haven't used this phrase yet, but is there a phrase that's used to label the companies that dependably pay rising dividends over long periods of time.

Matt Argersinger: That's right. The Dividend Aristocrats®, which is a S&P 500 global property so give them the trademark there. [Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.] These companies have not only paid a dividend for 25 consecutive years, they've grown their dividend every year for at least 25 consecutive years. It's remarkable set of companies. If you think about what it takes to do that, the type of business that you have to have to have it sustainably grow earnings and exist for that period of time. Tian is extraordinary, so it is absolutely extraordinary set of companies.

David Gardner: Matt, you're working on the Dividend Investor, one of the Motley Fool services, please give a really brief plug for Dividend Investor.

Matt Argersinger: Sure. Its dividend, it's actually about a year old as of this month. We launched it early 2023 and with a focus on dividend growth. Because if you look at companies that are, and we just talked about the Dividend Aristocrats. But if you look at companies that can grow their dividend over time, those tend to be over the very long term, the best-performing part of the market. Companies that initiate and grow dividends compared to really any other sector of companies, non-payers, the worst of all companies that cut their dividend, those other companies to do well. We wanted to really isolate that part of the market focusing on high-quality companies within that space.

David Gardner: Before we move to Chapter 3, we're closing out Chapter 2 here the practical value. Would you speak to the benefits of reinvesting through, let's say, a drip plan dividend reinvestments that investors can make over the course of time benefits thereof.

Matt Argersinger: That's right. One of the things that Bucks said was talking about owning dividend stocks and downturns, which I loved it. Dividend stocks tend to hold up better, but what they also do for you if you're reinvesting those dividends and you have a couple of options to do that. You can get the cash and simply choose what to invest in, choose what to buy more of, or you can do what you said these drip plans, dividend reinvestment plans were most brokerages will allow you. They get the dividend and it's cost free, tax-free. They will just reinvest that dividend into that same-stock so you can buy fractions of the stock over time and build your position naturally. I love doing that, especially during downturns because if you think about, if the stock market down 30%, but the dividends aren't, your dividends are getting reinvested at better prices. You're building these positions over time in these high-quality companies oftentimes still at low valuations, and you're kinda really compound your wealth as years go by.

Buck Hartzell: Interestingly, I'll just add that when you calculate the actual returns on a stock that pays a dividend, you have to make some assumptions about what people do with those dividends. Usually the convention is that you assume that they were reinvested at the time but ironically, almost no one does it. The returns that you see for most of the stocks that they paid a long-term dividend is assuming that they reinvest it in, bought more of that stock when they got the dividend, and most people do not do that.

David Gardner: I know some of our listeners do. I bet we over do the Motley Fool. I bet we over-indexed toward people who do that and yet a lot of people listening right now are probably going wait, check that. We would have Matt say again, how do I sign up for a dividend? How do I get that automatically reinvested? Is this something guys that i would typically do? Let's say I have an account at Schwab. Do I just let Schwab know or do I go to the company or their benefits, let me know.

Matt Argersinger: I'll speak to Schwab just because I haven't account there. You can simply go to your portfolio page and there's literally a checkbox next to every position and you can say reinvest dividends, check that box. Yes. Going forward, every dividend that receives for that stock will be reinvested in that stock.

Buck Hartzell: A lot of brokerages do that now. It's as easy as Matt said, there used to be a company when a lot didn't offer. It as gas ShareBuilder, which I originally had for my kids and they got bought out by somebody, i think E*Trade boat out ShareBuilder. But they were a unique one in this year.

David Gardner: They did it really well. That was their big focus around the challenges and misconceptions. But let me, let me turn to you. This is an important topic because there are some challenges to being a dividend focused investor. Double taxation might be something you'd like to speak to. But in addition, we're also going to address some misconceptions. Let me kick it. Hartzell's way.

Buck Hartzell: I'll say that the double taxation is real. The company pays taxes on the profits they earn.

David Gardner: That's what companies do have profits in the United States of America. Most of them, I think, if they have an offshore did our figured out some way around the tax man, they're paying taxes on their profits?

Buck Hartzell: Yes. Then when you get a dividend from them, you also have to pay taxes.

David Gardner: Their profits have already been reduced and they're paying you some of what's leftover to you, the poor shareholder, but you poor shareholder, poor only in relative terms. You unfortunate shareholder now also have to pay tax on the dividends and income that you're receiving.

Buck Hartzell: Yes that's right.

David Gardner: Hence the double taxation.

Buck Hartzell: Yes and I think Matt mentioned earlier about Warren Buffett and one of the reasons he's gone publicly and said, several times that Berkshire Hathaway will never pay a dividend as long as he's CEO. That's been true to date. By the way, I'm going up to the Berkshire meeting here in a day or so. Somebody there, I think we've talked about meta and we've talked about Alphabet,.

David Gardner: Alphabet.

Buck Hartzell: Introducing dividends. I'll predict the future and say that Berkshire will actually pay a dividend. I don't think it will come on Warren Buffett's watch, but I think whoever is its predecessor, which is going to be Greg Abel, it's going to relieve some pressure from him and the people that invest Berkshire Hathaway's money. Warren Buffett has also said it's hard to hold $150 billion in cash on the balance sheet and do that. I think they will pay a dividend sometime in the not-too-distant future.

David Gardner: Over his dead body. I'm not meaning anymore of it.

Buck Hartzell: No, I don't know [inaudible] Perhaps they'll make a giant acquisition of 100 billion-dollar company, which I know he loved to do, but I think a dividend is coming to Berkshire Hathaway.

David Gardner: Thank you. Heard it here first or maybe not because is completely original too you Buck, are you that first-person to take risks and say that.

Buck Hartzell: No, I don't think so.

David Gardner: But you might be.

Buck Hartzell: I don't know.

David Gardner: We don't know. We can't know. That was brave.

Buck Hartzell: So yes. The other one I'd say is there's a lot of great businesses and even the best businesses, you probably don't want to pay a dividend. What I mean by that is, if management has demonstrated an ability to take their profits and reinvest them at a high rate of return and earned 20% or 25% or 30%. You want that management team to keep all that money as long as they can and keep earning more money on it. Not many companies can do that, but if you are one of those companies and your growth business and you reinvest that high rate of return. You probably don't want a dividend from.

David Gardner: Matt Argersinger. Agree, disagree, neutral.

Matt Argersinger: I will disagree mostly in the sense that when you say not many companies, I would say very few companies can invest at a high rates of return for very long periods of time.

David Gardner: What do you mean when you say long periods of time because that seems like an important.

Matt Argersinger: I would say i'd say ten plus years feels like a long time. I don't think many companies can even invest at high rates over a decade. I'll give you an example. I mean we talked about Alphabet earlier. Alphabet is, Google's an extraordinary business. I think we'd all agree and say, since its IPO, it's trounced the stock market and I think rightfully so they should not have paid a dividend. But I would argue that if Alphabet had started paying a dividend, say 10 years ago, instead of just recently, I think their returns to shareholders would've been better. I say that because they've made a lot of cap allocation in the last 10 years. I would argue probably wasn't in the best interests of shareholders and had that some of that going to dividends and not to allow their other bets or other parts the business. I don't think at paying, say a 3% dividend yield over the last 10 years would have absolute, would have restricted them at all from allocating capital effectively. Yet I think shareholders would have been better off. So it's not always about, well, a company just invested high rate of return, let them keep all the capital. I think that can go hand in hand with paying a dividend as well.

David Gardner: Let me ask you guys, one of the things I've said about dividends over the years is that they provide a cushion for accompanies, stock price drops. Because if the company can keep paying out, let's go back to our example. We used to kick-off the podcast its stocks at $50 a share company's paying $1 a share in dividends, a 2% dividend yield. Let's just pretend the whole market drops 25% like it did in a single month when we last did this episode for years ago, all of a sudden that $50 shot stock is now down to 37, 50 or something like that. Now the dividend yield, $1 and 3750 is starting to get closer to 3 to 4% and It's almost like if they can keep paying at the stock can't drop much below 20 because at that point it's a 5% dividend yield. You pointed out, Matt, we're at historically low dividend yield for the S&P 500 for 1.4%, 5% is a phenomenal return. Again, assuming this is a rock solid enterprise that can keep paying that dividend. So there's that cushion, there's that Unsinkable Molly Brown factor for the companies that can keep paying these dividends.

Matt Argersinger: That's right. There's an absolute balance that comes with a company that pays a dividend. I would also argue that.

David Gardner: You wouldn't just argue, you are arguing. Don't use the conditional high right over the verb. You are arguing.

Matt Argersinger: I'm arguing that what Buck said about agency risk or the discipline that the dividend exerts on accompany is I think it's really understated point. If a company knows it has to pay a dividend. We talked about companies are paying, I have to pay this dividend. I have to pay 30% of our earnings out or whenever the payout ratio, because that's what I promised and companies hate to cut their dividend and they want to maintain that. I can't exerts a certain amount of pressure on management and say, well, we can't do this other project or this other thing because you know what, 30% of our earnings are growing dividend,30% are going to pay back debt and so that leaves us 40% to allocate to the business, reinvest, whatever have you. I think that is an underrated strength of a lot of companies that have paid dividends over time.

Buck Hartzell: I like one thing that Matt said, when a few companies do this, where they say, we're going to pay out a certain percentage of earnings or above a certain level of earnings, we're going to pay out this much in dividends and it varies year from year. We also haven't talked much about special dividends at all here at all. I'd love companies that pay onetime special dividends and some do it very regularly where they're saying, hey, if we have the optionality to invest in this growth or we're going to make a big acquisition, are going to do whatever else. We're not going to pay a special dividend this year. But if we find ourselves where we can't find good ways to invest, we're going to pay you out a special dividend and return that capital you because that is disciplined in another way that saying, hey, it's, nothing is meeting our hurdle rates, so we're giving it back to our.

Matt Argersinger: I don't know if it's, I don't think irony is the right word, but it's interesting if you look at a lot of international companies, especially European companies, they do exactly that model, which is we're going to make a certain amount of earnings or we think we are and if we make it, we're going to pay a certain percentage of that out to investors and it varies year-to-year based on the earnings?

Buck Hartzell: Yes.

Matt Argersinger: I wish a lot of companies would do that more in the states we tend to, for some reason, the united states, we have adopted the whole, we declare this quarterly dividend and that's what we're going to pay until we raise it and it's going to stay that way. Whereas a lot of international companies like commodity-based companies, Rio Tinto, comes to mind where pays big special dividends based on how their earnings do. That's a cyclical business, so it makes sense, but that to me, always seems like a smarter model.

Buck Hartzell: It's a much better.

Matt Argersinger: It's funny 'cause I'm torn on that, guys. I will mention looking back over the stocks that I picked for the Motley Fool over 28 years. One of them was a great dividend payer and has been a fantastic investment. It's TDG TransDigm ticker symbol TDG TransDigm Group. This company is famous for special dividends, but we're hearing Chapter 3 challenges and misconceptions. I find it challenging to remember what my actual rate of return is because when I look at a stock graph and I look at TDG, it's amazing looking. It's been a it's up 900% if you go back to July 20, 2012 and i picked it for Stock Advisor, 900% on a stock graph today, S&P 500, 300% over that same 12-year period. Tripling the market, awesome stock, that wasn't its return, the actual return of TDG and we have this on our Stock Advisor site because we properly fully account for things. The actual return is 1,900%. It's a 20 bagger. The more the dividends factor into a stock's return, the harder it is, the more opaque it is. Not just to me, the shareholder, but to the world at large, to us on a podcast trying to talk about what your actual returns are. I find that a challenge and about to pass the ball to Matt here, but and at least if you do it regularly, quarterly, I can keep up with that and get that if you start going yeah, $3.79 dividend, this i don't know, January, it becomes very hard to understand what our return was. I find that a challenge. I know you guys are championing the European model and i loved me, my TDG. Shout out to Stock Advisor members who might still be holding that for 12 years ago because it's been phenomenal but it's very hard to really know what's going on.

David Gardner: No, I agree. I agree with you and i and right and kind of hurting my original point about the regular dividend is more disciplinary on management in a way. I liked that aspect of it. But your example of TransDigm brings me to the example of Costco, which is a hybrid model, pays regular dividend and the occasional special dividend. But we do a big disservice with most stock charts when we just show price or even because companies that do pay special dividend, or even companies that just pay a high regular dividend. There's a company called EPR Properties, it's a Real Estate Investment Trust. No one's ever heard of it. If you look at the return since its IPO, it's been phenomenal. It's like 1,800%. If you look at just the price return, it's up like 50%.

Matt Argersinger: That's what I'm talking about. It's paid such a huge percentage of its earnings on a dividends being read, it has two that you really under counts the actual total return that shareholders get.

David Gardner: Do you know what EPR stands for, by the way? Experiment? No, I don't. Experientials properties as entertainment properties in the R for EPR, maybe just from properties.

Buck Hartzell: Maybe.

David Gardner: It's an acronym. I wish they'd rebrand themselves. They have an opportunity to.

Matt Argersinger: They do.

David Gardner: Create more love and consumer awareness by not cloning themselves, EPR Properties.

Buck Hartzell: I agree.

David Gardner: Even Matt your lionize in this coming. You don't even know what stands for.

Matt Argersinger: It's terrible. What am I doing here?

David Gardner: Well, thus concludes Chapter 3, the challenges and misconceptions. Sure, there are probably more misconceptions out there and more challenges, but we're not trying to cover everything. This episode, we're just trying to cover the things we think are important Chapter 4. Stock buybacks versus dividends. Now, I have made some hay over the years on Rule Breaker Investing by occasionally dedicated an entire week's podcast to my pet peeves. It's almost embarrassing. I think I'm on volume 8 or 9 and doing like 8 episode like i have put out there into the public, 60-70 things that irk me over the course of time. A lot of them are pedantic language. It's almost sad and self-indulgent that I've done as much as I have with pet peeves because I'm a happy person. I don't think I walk around judging the world in the way you think from my pet peeves and Buck Hartzell, I'm not the only one with pet peeves.

Buck Hartzell: No. You're not. I have many pet peeves, but I haven't done any episodes, so I'd probably got a long list of ones that we needed.

David Gardner: Well, you're on this episode and you got a pet peeve in this area.

Buck Hartzell: I had pet peeve dividends. I've got a bone to pick with a lot of executives. The big one that I have is when companies, at the end of the year ago, we bought back $100 million in stock and paid 30 million in dividends and we returned $130 million to shareholders. You did not return $130 million. When you buyback stock that is not a return of capital to shareholders, dividends, actually are. Stop telling us that you returned capital to us because oftentimes, stock buybacks don't even benefit the shareholders at all. You don't see it. Because technically if and when i get down the technicalities here, but just.

David Gardner: We can.

Buck Hartzell: You take money, and when you take money and you buyback stock, money was on your balance sheet. If it was $100 million, it's now gone.

David Gardner: You didn't give it to me.

Buck Hartzell: If the stock didn't go up, the total stock buy a value of $100 million there's nothing that comes back and typically it's just not a return of capital to shareholders. Don't tell us that one of them is, and that's dividends, that's a return of capital to shareholders.

David Gardner: Matt, our buybacks effective, our dividends effective. Is there a debate to be had here about what we as shareholders should be cheering on.

Matt Argersinger: I think shareholders, we should be cheering on dividends much more than buybacks. I'm with buck, I would say there, and this is an obvious point. I think we all know this, that there are companies that do buybacks more effectively. I think buybacks have a role to play. I wish wasn't dividends really small here in these buybacks here, if you look at even Alphabet's announcement, the answers to this 0.5% dividend yields.

David Gardner: Got a nice day that day, although there was also a buyback and dividend, but then some earnings so I couldn't really tell why stock.

Matt Argersinger: But they announced the dividend in conjunction to this massive, I want to say $70 billion buyback. I think that's what it was, a new buyback anyway.

Buck Hartzell: I think the dividend will cause some $10 billion.

Matt Argersinger: Well, I read that the interests are getting on the cash on their balance sheets can almost cover the dividend if you looked at it, but.

David Gardner: They they got a lot of cash.

Matt Argersinger: But regardless, I think dividends should be more in favor. I think more companies which should do that. I think investment in shareholders we'd better off, but there are certainly good examples of companies that are doing it right. I think eBay is an interesting example of a company that although has not been a market beater by any stretch. If you look at, and I know bucks a little bit fan of eBay, they initiated dividend for the first time, five years ago. They've doubled that dividend over that five-year period. But what's interesting is the cash they're paying out to cover the dividend today, it's only 10% higher than the cash they are paying out five years ago when the first initiated the dividend. That's because they bought back so much stock that the cash obligation to pay out the dividend it's much lower based on the number of shares outstanding. If you can find a company that's growing its earnings, a high-quality business, paying a growing dividend, but that's also doing effective buybacks and we haven't, there's a bunch of companies that do, wow, you can really compound your wealth and in a business like that and you don't have to get a ton of growth in revenue or earnings to really do that.

Buck Hartzell: Unfortunately, I agree with Matt. The statistics tell us that most companies are not good at buyback.

Matt Argersinger: Terrible.

David Gardner: I always hear that.

Buck Hartzell: They don't create a lot of value for folks, but here's why I believe CFOs and CEOs like buybacks because they're not locked into them. Its that discipline they declare a dividend. Something happens that.

David Gardner: Allocate X dollars toward buybacks.

Buck Hartzell: If you see what happens and I did, that's absolutely right. I did research in many years ago where we looked at S&P 500 buybacks and when do you think they peak? If you look at the performance of the stocks and the price.

David Gardner: Is going to be a cynical point, isn't? Says the market peaks.

Buck Hartzell: When the market peaks, that's exactly when buybacks peak. Then what happens when stocks drop in 2008, 30%.

David Gardner: Ain't nobody buying back.

Buck Hartzell: Nobody buying back.

Matt Argersinger: Ten years and 2007 was a record year.

Buck Hartzell: It always hits the record right before so their timing is impeccably terrible. But if you think of it from the mind of a CFO, the first thing that they're going through is, we got to pay our payroll, we got to invest in our growth and we got to do all these things. Then at the end of time, they go. What do we have leftover? On their best years when they're earning the biggest profits and they're really good. Like we have a lot leftover. What do we do? We're going to buy back stock, even though we're paying a very high price for it. Then we'll tell shareholders that it's a return of capital and they'll all be happy.

David Gardner: I don't really follow buybacks per se. It's not something I target hope for in the stocks that I would buy or recommend or follow in the companies that are doing it. You guys probably follow us more than I do and I'm not even saying you follow it, but are there companies that routinely, regularly buyback through all market conditions in the same way that there are dividend aristocrats that regularly pay dividends quarter-after-quarter through all market conditions. Because if there are and I suspect there are, I at least sometimes I'll look over five years of financial results in an annual report, which used to be paper that we used to call the Investor Relations department for and have mailed to us and these days, it's all online. But when I look over the companies there are definitely ones that persistently reduce their share count and those are often good performers. But it would seem to me guys, that if you as a CFO, Chief Financial Officer, simply routinely bought back stock, you would not be one of those companies that always makes the bad calls. The stock market tends to rise over time. If you want to be a hero CFO, just systematically quarterly allocate something to buyback stock if you want to allocate your capital that way, don't time anything, be rigorous. I'm just curious. Is that something that you observe?

Matt Argersinger: That's an amazing point. I haven't seen work on that and I have not observed that necessarily. I will say that a company like Chevron, which I'm maybe he's never come up on the RBI podcasts.

David Gardner: You know what, I can I will search. I have a database.

Matt Argersinger: That's awesome.

David Gardner: I will now search to see the number of times Chevron may have been uttered in nine years of this podcast keeping going.

Matt Argersinger: But Chevron is an example, at least one that comes to mind of a company that eight or nine years ago, had a new CEO came in, did a big help HEPA allocation shift. They have dedicated every year. They've said we're going to buy back $4 or $5 billion worth of stock and they actually have done it. Now it's not all, it's not in equal amounts but they've really lived up to their what they've said, they're going to buy back. One company I can think of right now, but I love to do that study, David.

Buck Hartzell: I think Walmart is another company that years ago decided they were going to take about a third of their earnings and buyback stock, and they're going to take another third of their earnings and pay out a dividend. They balance it. I think those are better than the ones that guests and just do it when they have extra leftovers for sure?

David Gardner: Yes.

Buck Hartzell: The ones that i do spend a lot of time on and thinking a lot about are the ones that are very strategic about it. They're saying, basically there's two rules. We have to have extra capital and it has to be below intrinsic value. Then those are companies that when it does go on sale, they buy a lot of it back. Those are the ones that are very strategic, not just the regular.

David Gardner: For 30 years we at the Fool have said to anybody who had listened on our website, our podcasts, etc. Dollar-cost averaging is a great way to approach investing. Save a portion of your salary check every two weeks. Market is high, market slowed, doesn't matter, put it into a company or a fund that you love and respect and think it will be around 10 plus years. Take timing at it. It's time in the market, not timing the market. Dollar cost average. It's got its own acronym, DCA. I think a lot of people hearing us right now are already doing this. Why wouldn't you do this with your capital allocation if you're going to buy back, DCA a baby.

Matt Argersinger: Sounds like a CFO what they should be doing.

David Gardner: Appreciate that Matt and yes, you are the first person to ever bring the word Chevron in podcast. [laughs] Stock has launched in July of 2015. We've had a new fresh episode every single week since. No one until right now, Matt had ever said Chevron's happened. It's ticker CVX by the way. Well, right. I love it. Chapter 5, maybe the spotlight chapter of this entire podcast we'll see based on the clicks and the data usage that I never actually look at. I hope people are still listening. It's spotlight on dividend stocks and strategies. It's picks time. Buck by the way, thank you for your picks four years ago. It's been fun to watch them. You mentioned CNA Financial at the time and insurance company is paying out special dividends, something. But I now know that you really like it had like a 10% yield back then.

Buck Hartzell: Yeah. It still does, still has a high yield, not of the stocks gone up, but they still pay a special dividend, which they did again this year. They've raised a regularly quarterly dividend. People that did buy then are probably getting over at 10% yield.

David Gardner: Pretty happy. Do you know who is the CEO today? Is it still the same gentlemen?

Buck Hartzell: It's a person Dino Robusto.

David Gardner: An amazing names.

Buck Hartzell: Yes which is an awesome name.

David Gardner: Just what could you say that name again?

Buck Hartzell: Dino Robusto. He came over from Chubb, which is a great insurer, and he's done a remarkable job.

David Gardner: Possibly the best CEO name of our time Dino Robusto, baby. Good. Well, let's get into the picks here, guys. Let me go to Matt first, I think you've each brought three, and so we're going to bounce back and forth ping pong a minute or so. Each give us a pitch. Matt Argersinger, pick number 1.

Matt Argersinger: Let's go RPM International ticker RPM. This is a great family run business founded by the current CEO's grandfather in 1947. RPM stands for Republic powdered metals. If that gives you an indication how exciting this company is, then well, there you go. But this is a company that just has a ton of products in the repair, maintenance, DIY, home renovation markets, then think Rust-Oleum, quick sealed Dyna flex. If you've done any home renovations and I've done way too many, you've definitely used RPMs brands, I promise. In 1947 when the company was founded, they had this one product and it sold only united states and their sales reached 90,000. In the most recent fiscal year, they have a portfolio of dozens of products, that encompasses 164 countries and territories and their sales hit 7.3 billion. It's really impressive. What I really love about this business, we recently recommended it for our dividend Investor service, is they have paid now a dividend that's grown for 50 consecutive years. There are very few companies that have done that. The business and CEO, who's also the grandson of the founder, loves to call this out. But if you invested in the business in, after it went public in 1973 and held for all those 50 years, you're $1,000 has turned into $1.1 million. Extraordinary business and a company that has really dedicated to growing the dividend and continued to grow within its market.

David Gardner: I love all these picks. They're all our children. I do know something more about this particular unmatched because I did pick for Motley Fool Stock Advisor. Jackie, and the date was January 16, 2015. We're coming up now on nine years and I was just checking the stock over that period of time. It's been roughly a market tracker. It's right around 150% or so over the last nine years. But I'm pretty sure that doesn't include dividends. It's not showing up on the stock chart appointment made earlier. I think, it's been a very good performer, and Frank Sulvan is actually somebody that i know through the University of North Carolina connections that I have. I didn't know you're bringing that. If there needs to be at a disclaimer for me, there you go. Home team pick. Great company, Buck.

Buck Hartzell: I will break the home team pick and I have a contrarian streak in my picks. But also some important points were, got it, we're going to dispel some myths. My pick is Enghouse Systems. That's EGHS.F. It trades over-the-counter. I'll make one quick point about that. For those United States investors, when you get a dividend from a foreign company, in this case, Canada, usually there'll be a 15% withholding tax. We talked about you have to pay taxes on dividends, this is above that. It's 15%.

David Gardner: This better be good, Buck.

Buck Hartzell: Just a warning for you. But here's why Enghouse Systems is important. It's a small cap company, which typically I think people associate dividends with larger companies. It's about $1.2 billion. It's Canadian, as we mentioned, it's also a technology company. It's a founder-led business that is a serial acquirer of smaller technology companies, and so it's very profitable. One of the things that they've done recently is when interest rates went to zero and the prices for the companies they acquire were very high. They said we're not going to buy anything, we can't find anything. They build up a war chest of $250 million in cash, no debt. Now those prices are starting to turn over because they often buy companies that aren't particularly well-run and then they run them better. We're starting to see a big pickup now in their acquisition activity. It trades for 20 times earnings for a wonderful business. If you look over the last 10 years, the average is about 34 times earnings we mentioned they have zero debt, $250 million in cash on their balance sheet. They recently raised a quarterly dividend by nearly 19%. That's 22 cents a share, that's Canadian. It's the 15th consecutive year that they've hike their dividend by over 10%. So 15 years in a row, not just raising it by over 10%, that beats inflation fellows over that time by a long shot.

David Gardner: Triple taxation.

Buck Hartzell: Triple taxation. He does taxes and current yields about 3.5%, which Matt mentioned, the S&P 500. If you're buying the index fund, you're getting about 1.4%. You can afford to pay that little extra 15% tax, and you're still going to be getting a much higher yield than you will be from the S&P 500. I think you're getting a better quality company as well.

David Gardner: Is this company liquid enough? If all of our listeners tried to buy this stock on next week.

Buck Hartzell: Yes. I have checked that.

David Gardner: I sure hope so.

Buck Hartzell: We've wreck that in many services and including in the US. It trades on the OTC and the trading volume is pretty good. If all of our millions of listeners go in and buy at the same time, I would say what I generally recommend for all smaller companies use a limit order and be patient. If everybody's buying today on the first day of the podcasts, then wait until tomorrow or Monday and putting a limit order and it will fill.

David Gardner: That's always been good advice for all of our Motley Fool services, especially our biggest ones where stocks will pop when we say we're buying this one, we've always designed it so that you don't have to get it that minute or that day. Just do it two days later especially if this prices pop just because of demand, that will subside and you'll find yourself with the stock two days later, less dress Matt Argersinger, stock number 2.

Matt Argersinger: I promised this was a complete coincidence, but my number 2 company.

David Gardner: Is Enghouse. That would be a real coincidence. You're not working out the Canadian.

Matt Argersinger: No. Well, it's not Enghouse, but it is a company we talked about earlier. Founded in 1894 by a gentleman named Milton Hershey.

Buck Hartzell: Hershey, Pennsylvania.

David Gardner: Not Lancaster but no.

Buck Hartzell: Sweetest place on earth.

Matt Argersinger: It was founded in Lancaster, Pennsylvania.

Buck Hartzell: Because it was Caramels original. Yeah, it was Caramel.

David Gardner: I didn't know that.

Matt Argersinger: There you go. Lancaster has come up. That's like the fifth time it's come up.

David Gardner: That in Chevron and we're done.

Buck Hartzell: We're done.

Matt Argersinger: Yeah.

Buck Hartzell: No, we don't we didn't. We all know Hershey Hershey's, Reese's kisses, Jolly Ranchers, icebreaker, Hershey, but these days, Pirate's Booty, SkinnyPop popcorn dots, Home-style pretzels as well. They've gotten to the salty snack business, wonderful business. If you just bought Hershey and nothing else would last 30 years, you've more than doubled the stock market. It pays, of course, it's paid dividends, raise its dividend for 14 consecutive years. Stock has been hit lately though, because cocoa prices guys, I don't know if you follow the news, but cocoa prices have just been unbelievable. They've risen, they've tripled in the last five months, they recently traded over $10,000 a ton more than the price of copper. That's what's happened to cocoa prices. So that is, put a little bit of a cloud on Hershey stock. It hurts their margins.

Matt Argersinger: I promised you cocoa prices are going to come down. Hershey's margins going to soar within next year and you get the stock today at a very nice valuation, almost 3% dividend yield. Great opportunity to buy great long-term business.

Buck Hartzell: I believe the most unique ownership structure, probably of just about any publicly traded company.

Matt Argersinger: Yes, there is. It is controlled by a family trust that doesn't own majority of the shares, but controls the voting power.

Buck Hartzell: That's controlled by the Milton Hershey School.

Matt Argersinger: That's right.

Buck Hartzell: For orphans.

Matt Argersinger: Orphans.

Buck Hartzell: Yeah, that's right.

Matt Argersinger: Phenomenal story. Milton and his wife did not have kids. I don't think it's so yeah. I did not know the Lancaster Caramels company. You say caramel because you're you're actually from Lancaster. I'm not but I love that. I didn't know that that's how Hershey started.

Buck Hartzell: Yes. Right. That was his first success. By the way, Milton Hershey, I think he went bankrupt several times.

Matt Argersinger: That was his first successor. He was the predecessor company to Hershey's company. Got it. You got it.

Buck Hartzell: Just so many things. What a wonderful person, first of all, but a great story and a success story of capitalism's doing well.

Matt Argersinger: In doing good.

Buck Hartzell: He built, he built Hershey Park, which a lot of people know is an amusement thing. It's entertainment for the people that worked in his factories to give that. If you go to Hershey, it's a beautiful quaint town with wonderful long streets, with just a beautiful place. And he is an example of not only now that school. By the way, a couple of years ago, I think the school tried to sell the stock, so they wanted to spin it off and diversify. The Governor put an injunction. It was a whole battle over that. By the way, you think about this and this happens a lot where very wealthy people give their stock to certain causes and in the first thing you do is sell it off and diversify it. You're typically much better off keeping the stock that was given to you from the place that was originally here. That little high school can do very well with the amount of money they have.

Buck Hartzell: Dividends and loan.

Buck Hartzell: Right. There was no reason to diversify, but I think there probably the things going on.

Matt Argersinger: The Hershey family, Pennsylvania Mennonite. Milton grew up speaking Pennsylvania Dutch. That was like what he was rocking. Cool [inaudible]. Let's pull ourselves back to pick Number 4. Buck, your pick number 2.

Buck Hartzell: I'm going to Canada. Again, this is Brookfield Infrastructure and there's two tickers. I want to make something clear about this. BIP is one and the other one is BIPC. The important thing for US investors if you want to avoid that foreign tax withholding and filing a K1, you buy BIPC. That is a corporation and it's not a limited partnership.

Matt Argersinger: What you're sharing with this right now could take one of two flavors. If people are buying, definitely buy BIPC, we're not going to even to say the one don't to buy. If you're in the US, we're just going to say the ticker that you want to remember, the BIPC.

Buck Hartzell: That's correct. What do you get? This is a company that's much larger than the last one we mentioned, about $12 billion. What they do is they own a remarkable stable of infrastructure assets. We're talking about ports, we're talking about railroads and Australia. We're talking about data centers. We're talking about cellphone towers in India. This is worldwide and one of the things that makes Brookfield so unique is that their parent company, Brookfield Corporation, invests money alongside their investors in every project they do. It's resulted in wonderful performance. If you buy Brookfield right now, you're getting about a 5.18% dividend. They've recently raised that distribution, which they have a long history of doing, another 6%. The reason the stock is down a little bit, it's just because interest rates went up. Interest rates went up and so high dividend payers when a little bit out-of-favor. But this is a wonderful company and most of their revenues that they earn are inflation-protected or contracted, so you don't have to worry about this company in an inflationary time frame doing bad or cutting the dividend. Wonderful company, over a 5% yield, BIPC, Brookfield Infrastructure.

Matt Argersinger: It's going to have to keep moving, Buck. But earlier you did when I asked you playing word association for that more nuanced non-gut level term, you spoke to high dividend yields and maybe alluded a little bit to dividend traps. You just shared with us a 5% yield or that's definitely a high yield in today's market. Without spending too much time because we're running out of time, can you briefly speak to high dividend yields and traps?

Buck Hartzell: Yes. The big trap for me is when you have a business that's not performing very well and you can see that either revenues and or profits are declining.

Matt Argersinger: Dropping.

Buck Hartzell: Year over year, and the stock price has declined significantly, such that there's a very high dividend yield. Maybe it's 10% in today's world, or 9% or whatever else it is, and you say, well, that's a high yield, but there's a good chance that that dividend could be cut 50% or 60% or go away altogether. I'm very careful of looking at the company and how they're doing, not just picking a stock based on whether it has a high or low dividend yield.

Matt Argersinger: Correct. We're looking at the whole stock here. We're not just aiming our browsers at a certain level of dividend yield, saying those are the ones from me.

Buck Hartzell: Correct. Absolutely correct. I know we're talking about Matt and they focus on dividend growers. Those are ones that are growing over time and all the ones I'm recommending have as well. These are companies that are growing in strength and paying more and they might not have a real high dividend yield to start with. But if you get in now.

Matt Argersinger: They keep growing.

Buck Hartzell: Over 10 years from now, you're at a stock that has that high yield based on your original cost basis

Matt Argersinger: Chapter 5, near its end, one more pick from each of my guests, Matthew Argersinger.

Buck Hartzell: Starbucks. Two of us here at this table or drinking Starbucks coffee.

Matt Argersinger: Good on you. Love the coffee.

Buck Hartzell: Portion of the market just doesn't like Starbucks stock right now it's trading at a five-year low. Lot of reasons we won't get into, but I would just say Starbucks looks really compelling in today's price. I think there's still tons of international growth ahead for this business. The relatively new CEO thinks they can still grow store count by 10% a year for the foreseeable future. They're have less than 400 stores in India. They think India could be as big as China for them in the future. But the dividend, they initiated dividend and believe in 2010, they've grown their dividend at an almost 20% annual rate. Wow, that since then, they've also been buying back a ton of stock lately. They bought back more stock in the last quarter than they did in the previous fiscal year. I think that's management being really smart with the stock where it is today. I just think Starbucks looks really good right now.

Matt Argersinger: Buck Hartzell, Number 3.

Buck Hartzell: I'm going to go with MTY Food Group. That's the one most of you are probably going, what is MTY?

David Gardner: I am going to ask you what MTY stands for. Are you prepared to answer that?

Buck Hartzell: No.

Buck Hartzell: Boy.

Matt Argersinger: Nor would I be, but I have the Internet at my fingertips. We're going to know shortly. Go ahead, Matt.

Buck Hartzell: But I would say we're heading into May here. It's going on summertime. This is an operator of multiple franchise units. A lot of you may think we're in the malls and the 1980s or '90s and been brands that you've lost.

Buck Hartzell: Just Orange Julius. That's exactly.

David Gardner: Is it really?

Buck Hartzell: I don't know, but TCBY frozen.

David Gardner: That was one of my first great stock picks. Cinnabons.

Buck Hartzell: There you go. We have Famous Dave's barbecue, which is a recent acquisition on wet sauce pretzels, and as we mentioned, going into summer time Cold Stone Creamery. If you like mixings with your ice cream, Pinkberry froyo, if you like that, or Planet Smoothie, or sweetFrog frozen yogurt, tasty delight. They have a bunch of different brands spread across Canada, and the United States. As you know, franchise operations, they use other people's capital to grow, and they take a percentage of revenues, and they generate a lot of cash. Well, the two recent acquisitions that were rather large were Wetzel's Pretzels, and Famous Dave's barbecue left them without $700 million in debt. What they're doing is they're paying that down very quickly, and they have a history, their serial acquirer, and they pay down their debt. What I'm thinking is going to happen, and what is trading at a very low multiple relative to what it typically does. We're seeing them deleverage now. What that's going to mean in the future is, certainly more acquisitions, but also it's going to mean higher dividends. They've also are one that'll pay a special dividend every now and then. So MTY Food Group, and then when you go out the sweetFrog, or you go to Pinkberry, or you go to TCBY, or you go to Planet Smoothie.

David Gardner: I'll think of you.

Buck Hartzell: You know that, a little bit of what you spend there is coming back to you in the form of a dividend, and that's MTY Food Group.

David Gardner: Well, that's accompany that I've I've not heard before, but MTY Food Group makes me wonder what is the MTY stand for? We've talked about acronyms here. MTY Food Group, I once met Famous Dave.

Buck Hartzell: I know. By the way, he sold it before they bought it.

David Gardner: I understand.

Buck Hartzell: Yes.

David Gardner: He's ended up not being that famous, in my opinion.[laughs] But I will note you brought three Canadian investors because that's where you're specializing.

Buck Hartzell: Sometimes. I did it for like it's a big world out there, and I think we have some friends to the North of us, about one-tenth the size of our country.

David Gardner: They are friends too. I love Canada.

Buck Hartzell: They are friends. Everybody's friendly in Canada. There's some wonderful businesses up there that people generally here in the united states don't tend to look abroad.

David Gardner: We do look at Shopify and we appreciate that a lot of Motley Fool members every day, even though it's been a volatile stock last few years, that's a Canadian dynamo.

Buck Hartzell: Constellation Software is probably the best business that no one has ever thought of.

David Gardner: By the way, MTY Food Group. It is unclear what MTY stands for. They haven't really put an official explanation out. They changed their name a few times. It does remind me of what are my earliest worst stock picks. What am I earliest best was TCBY. That's why i have warm and fuzzy feeling as you talked about TCBY here, and Famous Dave, I have a different feeling about him, but specifically NBI, which was an early stage back in the day micro-computers, where a thing was the 80's and they were making them, maybe it was the chips for I think it was the computers. I remember that they were based in Colorado. I think the CEO's name was Ts Cavanaugh. This is back when you would just read that on the annual report, there was no YouTube where you could watch the CEO Doc. Just a name on paper to me, I may have it wrong. But one thing I have right, NBI stood for nothing but initials, for real and I loved it. That's why I bought the stock. It ended up being a not-great investment, but any company that had that kind of sense of humor, very fluid. By the way, foolishness doesn't always win sometimes we live. Well, I want to thank Matt Argersinger and Buck Hartzell for their expertise and their time shared with us this week on Rule Breaker Investing. We don't talk about dividends as a thing very often on this podcast. But I'm glad we do sometimes, and I think everybody should be aware of it. I think we laid some track and some scaffolding, especially for newer investors this week that might not think too much. I certainly don't think too much about dividends, but you guys brought a lot of terms, nuances, and additional thoughts in the end, dividend is one aspect of what a CFO can allocate. In the end. Dividend is one aspect of what an investor might target in his, or her investments. I think we really flashed that went out this week. In fact, I'm going to ask you guys to provide some quick summary points to close the podcast before I do that, one quick plug for the next two podcasts here on Rule Breaker Investing next week. It's going to be Blast From The Past Volume 9, that's right. I will be bringing back five points that our favorites that I just don't want people to forget, because this podcast has been around nine years. So I'll say something in 2016 that I thought was really good, but no one remembers it in 2024. So we bring it back Blast From The Past next week. Then my annual birthday gift to me, you as our listeners rbi@fool.com is the email address. It's what have you learned from me? What have you learned from David Gardner, which we do somewhere around May 16. Every year we're going to do it again this year. So would love emails, RBI at fool.com, you can tweet us out at RBI podcast. What have you learned from me either over the course of time or in the last year. It's always a fun way to share back a summary of a lot of Rule Breakery thinking that we put out here from one week to the next. So RBI fool.com for what have you learned from David Gardner two weeks from today. Okay, guys, let's summarize. I'm going to ask you used to bring three summary points and we're going to bounce back in reverse order this time bucker are you ready? Summary point Number 1, we will keep these quick.

Buck Hartzell: Point Number 1 dividend companies don't have to be stodgy and they don't have to be big. Often, the best companies early on in a life-stage are very profitable and so they can pay an early dividend. I think we have some small companies that are on there that are growth companies and also pay a dividend.

David Gardner: Summary point Number 2.

Matt Argersinger: Well, I gave some reasons why dividends have become out of favor last 30-40 years, a shift maybe coming. I think dividends could be in favor, for the next several decades or so.

David Gardner: Meta platforms, Alphabets, some people would say hey, Amazon is next.

Matt Argersinger: The trend is the dividend,.

David Gardner:Netflix, maybe that would make me happy. Summary point Number 3, Buck Hartzell.

Buck Hartzell: Technology companies generally don't pay dividends. We've already talked about the large ones, whether Meta and Google. I put Enghouse Systems on our list. That's a small technology company that pays a dividend. It's a very good business.

David Gardner: So your point with this one is that's a misconception.

David Gardner: It's a misconception and I think even I'll mention a company it was recommended in FinTech. Nuvei is a company recently got taken private. They announced in the previous call that they were initiating a dividend. They're very profitable company. The stock went down, because they said, you're not a growth company anymore and people didn't want to own it, because you can't, be a growth company and pay a dividend.

David Gardner: That may be yield a little bit sweeter.

Matt Argersinger: But it's ridiculous, and then now they're going private.

David Gardner: Matt Argersinger, summary point Number 4.

Matt Argersinger: I would say favorite companies that emphasize dividends over buybacks. Buybacks are great. I would say if a company is putting dividends on equal footing, or even greater footing, that's when you want to pay attention.

David Gardner: Buck Number 5.

Buck Hartzell: My last point, I would say is pay attention to capital allocation. Not only what people are doing that are managing company where they're allocating the capital, but also this is a little tip what they're doing with their own money. So I'll say if you have a company that has a good history of not only paying dividends, but making good capital allocation decisions, and insiders are buying the stock. That's probably a good place to look.

David Gardner: Close this out, Matt, summary point Number 6.

Matt Argersinger: I think above all from me focused on dividend growth. I think dividend growth will show you will be a good clue as to earnings growth, because they go hand-in-hand. So if you find a company that's growing its dividend, it's probably growing its earnings. It's probably a great business and it's probably going to be an outperforming stock.

David Gardner: It was a delight to be with both of you gentlemen, part of the pleasure of hosting this podcast from one week to the next. It's I get to share my friends and look at these amazing friends that I have and have made over the years. There are a lot more than these, but Buck Hartzell and Matt Argersinger, you guys did a great job. Thank you again buck four years. Again from now or so. Let's let's do it again. I hope we're both still at The Motley Fool, but or maybe more than once every four years. We'll see how people like this episode Volume 2 of Dividend Fools, Buck. Thank you.

Buck Hartzell: Thank you for having that.

Matt Argersinger: Thank you. Thank you, David is pleasure.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Buck Hartzell has positions in Alphabet, Apple, Berkshire Hathaway, Brookfield Infrastructure, Brookfield Infrastructure Partners, CNA Financial, Constellation Software, Enghouse Systems, MTY Food Group, MercadoLibre, and Microsoft. David Gardner has positions in Alphabet, Amazon, Apple, Berkshire Hathaway, Costco Wholesale, MercadoLibre, Microsoft, Netflix, Starbucks, and Walmart. Matthew Argersinger has positions in Alphabet, Amazon, Chevron, Coca-Cola, EPR Properties, Hershey, MercadoLibre, Netflix, RPM International, Shopify, and Starbucks and has the following options: short July 2024 $45 puts on EPR Properties, short June 2024 $150 puts on Chevron, short June 2024 $170 calls on Chevron, short June 2024 $57.50 puts on Coca-Cola, short May 2024 $190 puts on Hershey, and short May 2024 $210 calls on Hershey. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Chevron, Constellation Software, Costco Wholesale, Enghouse Systems, MTY Food Group, MercadoLibre, Meta Platforms, Microsoft, Netflix, Shopify, Starbucks, and Walmart. The Motley Fool recommends Brookfield Infrastructure Partners, CNA Financial, EPR Properties, Hershey, RPM International, and TransDigm Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.