Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Josh Peters. He is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. His portfolios recently crossed the 10-year mark. We're here to take a look back and see how performance has been and what lessons he's learned. Josh, thanks for joining me.
Josh Peters: Good to be here, Jeremy.
Glaser: Let's start with that performance number.
Now that you have 10 years under your belt in running these portfolios,
what did those numbers look like versus a broad-based index like the
Peters: I don't normally target trying to beat the
market over any short-term interval, like a quarter or a year. I figure
you're going to own a very different group of stocks than the market
average if you're going to target those high yields, so you shouldn't
expect to behave like the market. But having reached the 10-year mark,
it's very gratifying to see that without even trying, so to speak, we
have beaten the S&P 500. Since inception, our annualized total
return is 9.4%, and that compares to 7.7% for the S&P 500.
Glaser: Even though this was a successful strategy,
probably looking back there are things that you maybe wouldn't do again
or mistakes that you've made. What's the biggest one that you saw over
the last decade and that you've tried avoid since?
Peters: When I started, I had very much that
traditional bottom-up type of focus that you'd expect from a value
investor. And it happened that, by 2007, I had found merit from the
bottom up in lots and lots of bank stocks and other financial-services
companies--many of whom had dividend yields of 3%, 4%, or even 5% and
records of raising the dividend every year, dating back 20 or 30 years.
These looked like perfect candidates for the types of total returns I
was looking for.
However, to have owned them heading into the housing and mortgage
crisis--that terrible time from 2008-09--was bad enough. Frankly, I just
loaded up too much; I wasn't thinking top down enough in order to
control my risk. I still believe that it's very, very difficult, if not
impossible, to start your investment process from the top down--[to ask
yourself] how fast is the economy going to grow, how fast is inflation
going to run, where are interest rate is going to go, and then devolve
that down to selections of individual stocks.
I think it's best to start with those fundamentals, looking for those
wide- and narrow-moat companies with good dividend policies that can
provide you with good total returns. But you look to the macro factors
to control your risk. And frankly, housing prices and the state of the
mortgage market, those were risk factors that should have helped me at
least limit my exposure to banks back in that period.
Glaser: On the flip side, what positive lessons have you learned over the last decade and how have you benefited from that?
Peters: It's really been about the dividends
teaching me, which may sound interesting because I started 10 years ago
with the same operating system, the same premise that we have today,
which is that I want a large and secure, reliable and growing stream of
income from my portfolio holdings. That's what the strategy is all
about. But I started out with more of the mindset of a value investor.
And it's hard; a value investor is looking for mispriced assets. They
are looking to buy the proverbial dollar for 50 cents. And within that,
what you hope is that that discounted asset gets marked back up to a
more reasonable price. You capture the gain, and then you look to repeat
with another situation. It puts a lot of the work back on the investor
as opposed to the company to generate the total return. You would expect
more turnover in that type of strategy.
After a number of years managing our strategy for Morningstar DividendInvestor,
I realize this isn't really a value strategy. Our best results have
been from high-quality companies--sometimes where we paid nearly fair
prices, not bargain prices--that have created a tremendous amount of
value for shareholders just because they have good management and good
assets. Let those companies do the work. Let your winners run. It
doesn't mean you take your eye off the ball in terms of valuation; but
the best dividend investing, the best management of a stream of income
for total return turns out to be very much that buy-and-hold strategy
that a lot of people look down on and have some concerns or qualms about
these days. Let the companies do the work.
So, I start off every year thinking, "OK, I can see some buys, some
sells potentially emerging over the course of the year, but I want the
dividends and the companies that pay them to do 99% of the work,
generating the returns in our portfolios." They're going to a tremendous
amount of effort. Why should I add that much more effort on my part
when trading back and forth, especially the shorter your time interval
is likely to be, can easily become counterproductive?