Sometimes Value Outweighs Sustainable Growth

02/22/23 • 40 min

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When the goal is to compound wealth for decades, there is a significant difference between dividend growth and sustainable dividend growth. While the difference is obvious enough, they are two distinctly different investments and should be treated as such. Although we believe that sustainable dividend growth is ultimately what builds wealth over time, that doesn't mean that other investment ideas should be ignored altogether. When a stock gets cheap enough, even if its dividend is questionable, sometimes you have to jump on it.
In this episode, Greg builds on the premise of Episode 18 and examines Oaktree Specialty Lending Corporation ($OCSL), a business development company with a 10%+ yield. At the risk of contradicting himself and the case he made against high yield, he argues that there comes a time when value beats dividend sustainability. While the risks of high-yield investments remain, he uses OCSL to compare dividend growth vs. sustainable dividend growth. Later on, Greg provides updates on companies we have covered in past episodes, and where we view them post-Q4 earnings. If you are interested in the original episodes where we went in-depth into each story, they are linked below:
The Clorox Company ($CLX): Ep. 8 - Dirty vs. Clean Opportunities & Ep. 9 - Greater Volatility and More Uncertainty...
Emerson Electric ($EMR): Ep. 17 - The Dilemma With Slow Growth
3M Co ($MMM): Ep. 15 - You Don't Need A "Winner" to 10x Your Income
United Parcel Service ($UPS): Ep. 19 - Do Dividends Care About Recessions?

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Previous Episode

Do Dividends Care About Recessions?

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Heading into 2023, it seems as though the word recession is on the tip of everyone's tongue. At first thought, a recession might make you grimace, but what do they actually mean in real terms for an investor? Truth be told, you never know you're in a recession until after the fact, but it is essential to understand how they affect the economy. If you're a long-time investor, 2008 and 2001 were painful examples of just how fast your portfolio's value can change. So we know recessions are bad for the stock market... are they that bad for dividends?
Good news for the dividend growth investor — dividends are resilient through even the worst of downturns.
In this month's episode, Greg takes a page out of the market history book to dive into just how recessions affect GDP, earnings, the stock market, and especially dividends. He makes the case that dividends are a much more stable, if not the most predictable, factor to focus on when things get rough. Later he examines UPS as a potential dividend growth candidate.

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Next Episode

Dividend Cuts Don’t Have to Cut Your Income

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Most of the time, using the screening criteria that are characteristic of good dividend growth companies weeds out the bad apples. When you buy companies that have low debt, attractive yield, high return on invested capital, etc., it can feel like you’ll be cashing those dividends forever. However, companies inevitably run into challenges, and you might get a surprise. If you invest long enough, you’ll eventually find yourself with a dividend that’s been cut and a once attractive investment that has soured. The good news is if your portfolio is structured properly, not even dividend cuts get in the way of growing your income every year.

On another note, one factor that greatly influences the security of a dividend is debt. Given everything that has happened in the market recently, and with a liquidity crisis in the banking sector, debt has become a hot topic. It is extremely important to understand how debt functions for a company, especially in an environment with rising interest rates.

In this month’s episode, Greg takes you on a deep dive into Intel ($INTC). He looks at why we originally bought it, the problems they ran into, and why they recently cut their dividend. He even lays out why it may do better in a couple of years. Later, He uses a couple of different examples to show how debt can be good, bad, or indifferent.

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The Dividend Mailbox - Sometimes Value Outweighs Sustainable Growth

Transcript

Greg Denewiler 0:07

This is Greg Denewiler and you're listening to another episode of The Dividend Mailbox, a monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks and make each year's check larger than the last.

Greg Denewiler 0:34

Welcome to Episode 20 of The Dividend Mailbox. In this episode, we're going to talk about a BDC or Business Development Corp. and specifically, we're going to talk about Oaktree. This is unique because