Ep 470: Steady Income in a Shaky Economy: The Power of Dividend Investing
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So it's interesting because a huge amount of my clients aren't actually the kind of people who need dividends or need dividend income, but it makes them feel good. And what they are, are they're risk-averse humans and they don't care that they missed out on a plus 26% return last year in the stock market. That roller coaster makes them queasy. What makes them feel good is seeing income

cash income deposited into their brokerage account on a monthly basis. Hey everyone, thanks so much for joining us today on Her Money. I'm Jean Chatzky. Look, it's no surprise that the markets have been rocky lately. I am not panicking, nor am I panic selling, and I hope that you aren't either. But if you are

freaking out just a little bit. I get it. If you caught my conversation with economist Catherine Edwards a few weeks ago, you know, we might already be in a recession right now and not even realize it. And that may have some of you thinking is now the time to play it safe.

with my money. That's exactly why today we're diving into dividend investing. It's a strategy all about building a portfolio of stocks that can offer dependable, consistent income. Yes, really. And most importantly, stability. Because when markets are uncertain, we like to turn to more

stable investments things like bonds and gold and dividend paying stocks and i couldn't think of a better person to guide us through this than expert investor jenny van lewin harrington she is the longtime ceo

of the boutique investment firm Gilman Hill Asset Management. She is also the author of the new book, Dividend Investing, Dependable Income to Navigate All Market Environments. And of course, you have seen her on CNBC. We'll be right back.

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That's strawberry.me slash her money. We are back. We're talking with Jenny Van Leeuwen-Harrington, author of Dividend Investing. Jenny, welcome. Congratulations. Thank you. And thank you so much for having me. I'm so excited to be here. I also just want to mention you are...

a huge champion of financial literacy, and you're donating all of the proceeds of this book to the National Council for Economic Education, which is amazing. Why'd you decide to do that? So I'm on the board of Council for Economic Education, and I've been involved for pushing 20 years. But when I first joined the board, I said something like, "This has to be really easy to fundraise for." And they looked at me like I had three heads.

And they said, this is very hard to fundraise for because it pulls at no heartstrings. And I thought, that's nuts. This is so important. If people understand economics, they understand decision-making. They understand supply and demand and consequences in a really important way. If people understand financial literacy, they can make much smarter decisions that set not only themselves up, but future generations of their families up for a much more stable economy

healthy, comfortable, and not comfortable in a cushy rich lifestyle, just comfortable in a we're going to be okay and not lose our house way. So I've become very involved. I'm on the board. And I think it's really important. And I think it's underappreciated how important understanding, I mean, no one understands it better than Eugene, but it really is underappreciated broadly. And it's hard to fundraise for. So yeah, all of my profits from the book are going to Council for Economic Education, which I'm thrilled about.

It is a great organization. They do wonderful work. I launched in to this conversation on the topic of dividend investing, which I have to say, we've been doing this show now more than seven years. We have not done a show like this before.

So what is it? Can you just give us a basic definition of dividend investing? Yes, but first I need to bifurcate it. So there's dividend growth investing, and then there's dividend income investing.

And dividend growth investing, which I'm going to explain and then set aside, are companies like Microsoft and Apple who pay a dividend, but it's very, very tiny. So if you were to buy a share of those stocks, your dividend yield would be like 0.01 or 0.02%. It's very, very small.

Then there's dividend income investing, and that's what I focus on. And that's where you can create a portfolio, and the dividend income that the stocks pay out really creates a substantial income stream. So actually in the book, the very first section is saying, what's a dividend? So if you invest in a stock that has a price of $100,000,

and it's got a 5% dividend yield, then it's giving you $5 a year of income. So if you have $100,000 in that one stock, you're getting $5,000 a year of dividend income. That's a lot of money.

And what I think people don't realize is the dividend is consistent. So the share price can go up, down, and sideways, but the dividend is consistent, particularly in U.S. stocks. So if you have $100,000 in one stock and you're getting your $5,000, let's say the market's terrible, and now that stock's worth $75,000, well, you're still getting your $5,000.

And let's say the market's great and now it's $125,000. You're still getting your $5,000. So to me, dividends are a consistent source of income in stocks that are wavy and mercurial and go every which way. Generally, the companies that pay high dividend yields, right, that give you a lot of income for what you're investing, they tend to be mature companies that don't have huge growth prospects ahead that do have a lot of cash flow.

And so why would you buy a stock like Chevron or Exxon when you could buy a high growth stock like Nvidia or Apple? They mint cash, right? And they've said, look, you know, we need to give the shareholder something if they're going to invest in us. And in this case, we're going to give them the promise of consistent growth.

income as a big part of their return. So it's a philosophical decision that the management teams and boards make to return to shareholders in the form of kind of promised consistent income versus just, hey, let's hope the share price goes up. If I am a regular investor, I've been putting money in my 401k, maybe through a target date fund, maybe through ETFs, you know, boring investor. Right.

Would I likely already have these investments in my portfolio and not know it? Not really. So the average yield of the S&P 500 is about 1.6%, 1.7%. What's interesting is if you were to go back to prior to the mid-1990s,

the dividend yield on the S&P was always about 3.5% for years and years and years. So it used to be that dividend income was a bigger part of just the general market return. But what happened in the 90s was you may remember if you're... As one of my tour guides in Italy this past summer said, aged. If you're aged like me. If you're aged like me, you may remember the 90s when it was the first round of the tech stock boom. And...

the terms old economy and new economy popped up. And old economy was very frowned upon. New economy was companies that were growing like crazy. And it was frowned upon to take your cash and pay it out to investors because that meant you were old economy. New economy was like, take that cash and invest in your growth, invest in your growth, buy other companies. So this really kind of sentiment changed. And at that point in the 90s, you saw there were

the return broadly of the S&P 500 dividend, you'll drop from 3.5% to about 1.5%. And it never has really recovered because we've been in a really big growth boom for a few decades now. When we're talking about those different kind of investments, there tend to be different kind of investors, right? There are growth investors and value investors and dividend income investors.

How do you know what you are? How do you know like what is the right type of investment at the right point in your life? That's the best question. No one's ever asked that and it's such a hard thing. And I think the only way you get there is kind of by trying and doing and talking to people and fleshing it out and seeing what feels right for you. So it's interesting because a huge amount of my clients are

aren't actually the kind of people who need dividends or need dividend income, but it makes them feel good. And what they are are they're risk-averse humans, and they don't care that they missed out on a plus 26% return last year in the stock market. That roller coaster makes them queasy. What makes them feel good is seeing income

cash, income deposited into their brokerage account on a monthly basis. All the different stocks pay out quarterly, but collectively you get a little bit of income each month from lots of different companies. And that makes them feel good.

And when they feel good, they can exhibit good investment behavior by not freaking out when the market's down or getting really nervous when the market's up too high. And I think you only get there by trial and error. A lot of my clients have come to me because they couldn't stomach the highs and lows that they've experienced in the past.

Some of them are ex-real estate investors or current real estate investors or realtors. Some are retired, but they liked the monthly income that real estate rental income provided, and they wanted to replace that. A lot of my clients are entrepreneurs, and entrepreneurs...

have a kind of cash is king mindset and it makes them feel good and they're distrusting of the stock market. So you need to flesh it out. And I really think, Jean, the only way to do it is learn and educate yourself and see what feels right. It's so interesting that you find that entrepreneurs gravitate to you because I've always sort of felt like you need to figure out if your career is a stock or a bond and then invest in

in the other thing, right? So if you have a very risky career and if you're an entrepreneur, your career is inherently risky, it's important to have some safety in the other parts of your life.

The other time I think a lot of people start thinking about dividend paying investing is when we're trying to build income in retirement, when we're looking at maybe our salaries starting to wane a little bit and we're thinking, okay, I need to have a consistent stream of income. Can you talk about that use case?

Right, so that is the most common use case. And what's interesting there too is some people want to set that up years in advance.

So that they can actually see the income deposited into their account three, five, ten years before they retire. Because they're so nervous about saying, hey, I've got a salary of $150,000 a year. What's going to happen to me when I retire? And they'll set it up way in advance. Some people feel differently. And some people say, hey, I need to maximize this.

up until I retire. And then can we talk about when I do retire, how we will at that point shift it into income producing. So again, it's just a conversation, but you hit on something really important too, which is the pockets of your life that have risk and don't have risk. And there's a number of these dividend income clients who have very risky careers or are in private equity, right? And they'll say, well, I feel like I can take risk here.

because of what you have for me. What you have for me with the dividend stocks and with that kind of value-leaning, cash flow-oriented, that's

a different bucket and it allows them to sleep well knowing there's some part that doesn't have a one in 10 chance of not having a return on it. So again, you know, you flesh it out, but the conversation frequently does go with right now I'm 62 years old. I expect to retire by 70. I'm making 125,000 a year now.

How am I going to replace that? Okay, if I'm going to get 60,000 a year or 50,000 a year from Social Security, how much do I need to get the other 70 by the time I get there? And part of that conversation too can be, well, you could do bonds, right? But what you lock in on bond yields, that doesn't grow. Whereas dividend income grows. This is really interesting. The dividend income produced by the S&P 500 is

on average, has grown by 5.7% a year. Coincidentally, the higher dividend yield of the strategy that I manage and other dividend income-oriented strategies also grows by 5.7% a year.

So when you start to think about inflation, which historically has been in the 2, 2.5% range, you can say, okay, I'll have income and it'll also grow to keep up with inflation once I do retire. So that's part of the conversation too. If you need 125 now, what's that 125 really going to be in 5 or 10 or 15 years when you retire? How do you set up for that? What's the nut that you need at the end? And what return do you need off of that nut to be able to generate the income that you're going to need?

That's just math. It's not really that hard. It's just pretty basic math once you start laying it out. Yeah, definitely. But you need the right calculator. Often you need a financial advisor or somebody to help you sort of work your way through those calculations when you're applying an inflation rate that you want to make sure is the right thing. We are in a world right now where it

We don't know if we're headed to a recession, if we're in a recession. Recessions come along every so often. And dividends are paid by companies based on their fortunes. Can you trust them? I mean, how do they typically hold up in good times and bad times? So they typically hold up shockingly well.

It was interesting during the pandemic because Goldman put out a report, I don't know, maybe March of 2020 or April of 2020, essentially declaring the death of dividends because things were so uncertain then. And then maybe six months later, they put out a report saying this is the most dividends that have ever been paid out in a year. And what happens is, and I'll pick on Chevron again, but when a company like Chevron issues their dividend,

It's so sacrosanct in the U.S. that the shareholder is going to get that dividend that they stress test them. And they say, can we pay this dividend if oil trades at $20 a share or if oil pays at $150 a share?

And so there's a lot of stress testing. And in my book, I really explore the, if you're going to try to build a dividend income strategy on your own, explore the research process. You need to be very careful because you can look and say, oh, that company has a 14% dividend yield. And you might find out they've only been paying it for two years and it was a special dividend and it was a one-time event. But there's a lot of companies out there, including the dividend aristocrats, where they've paid.

for years and years and years. And it's a huge part of the corporate strategy. And when you start to research it, the first most important thing to do is understand philosophically why is that company paying it out and how will they pay it out? So a company like Dow, not the Dow Jones Industrial Average, but Dow Chemical, D-O-W,

They said when they came out maybe five years ago as their own company, they said our primary focus is on returning value to shareholders in the form of a dividend. And they have said it quarter after quarter after quarter. And the share price has gone from like 60 to 35. And you know what? They pay that dividend and they pay that dividend. If you're investing in companies where they've stress tested it and it's philosophically sound, you're going to get your income. One other thing on that.

Because this is such an uncertain environment, we did a conference call for our clients a couple weeks ago about the political uncertainty and, you know, what a tough market is. And I started off and I said this. I said, we are not banking regulatory experts, but we got through the great financial crisis with the portfolios intact and the dividend income stream intact. We are not infectious disease experts.

But we got through the pandemic with your dividends intact and your portfolios intact. We are not political experts, but we are investment experts. We will get through this. We will get through this. It's really tough and it's really chaotic. But one of the things that I love about this job is it forces you to look at the numbers. So last night I bumped into a friend who works for the United Nations. And as you can imagine, she's a basket case. Like everyone around her is getting laid off.

It's horrible. The stress level is through the roof. And she's saying, you know, this agency was shut down and that agency is shut down and we must be headed for recession. And at this point, none of the recession indicators

are actually firing red. None of them are actually showing recession. I like to talk about the power of yet, which is a big theme in kindergarten. But the power of yet, none of them are indicating recession yet. They might not. It's part of the investment process. You get through it. But what I like is when my friend's freaking out about the UN, I can say to her, we've done the math on this.

And at this point, it looks like there could be 300,000 layoffs of government employees. That's out of 3 million government employees. That's out of 160 million people employed in the United States. Their average salary is $106,000. Some huge component of those will get picked up by the private sector, and we're already seeing that. So once you start doing the numbers, things look at the investment level, things look a lot less scary.

And I always say to my clients, okay, sure, the world's chaotic, but you know what? There's a grocery store across the street and I'm going shopping tonight. And I drove to work. And right now I'm coming to you through, I think, AT&T service. And my kids are still going to school and they're still going to need new clothes because they continue to grow. And you're just constantly reminded that life marches on and marches on. I also have this great greeting card that I send to clients when things get really tricky. And it says, life isn't about avoiding the storm. It's about learning to dance in the rain.

And that's what I think. We're never going to get the timing of avoiding recessions right. We just dance through it. And what I love about the dividend income is it just keeps paying out. It paid out during the pandemic. It paid out during the great financial crisis. If you decide to behave poorly as an investor and sell, you're losing all your income. So it actually encourages very, very good investment behavior because it's providing utility that you need throughout. But it's remarkable how resilient it's been.

I love the dance in the rain card. I actually have a plaque that is in my closet, actually, but it's prominently featured. And it says, it's not what happens to you, it's how you handle it that matters. And it's, you know, very, very much the same token. But I like the

That this strategy for people who know that their stomach is going to get tied up in knots by the chaos gives them just sort of a calming, a calming force. We're going to take a very quick break, Jenny. But when we come back, I want to get tactical and I want to talk about

How do we do this if we're just starting? And maybe what are the must-haves in terms of dividend stocks if this is a portfolio that you're trying to build? We'll be right back.

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We are back. We're talking with Jenny Van Leeuwen-Harrington, author of Dividend Investing. So

Our audience loves hearing about how people retired early and made it work. As we get into this conversation of how you do this, tell me about Steve, who was a client of yours who wanted to retire at 55. How did you use this strategy to make it work for him?

Well, it was simple income replacement. So what happened was this guy Steve called, and it was the end of 2001, and he said, Jen, I'm 55 years old. I'm getting ready to retire. I need income, but I know I'm too young, so I still need growth. So bonds didn't make sense for him. And this was back in the day when if you wanted dividend income and you wanted to buy a fund, you could buy a real estate investment trust fund. You could buy a utility fund.

And there were some midstream energy, they were called MLPs. And then you could maybe buy a real estate and utility fund, but there weren't a lot of options.

And so what I did was I took his kind of plain vanilla U.S. portfolio and I converted it to an all-stock portfolio of 30 to 40 stocks, same as I manage today, all with a high dividend income yield. And it worked really well because it actually did replace that income. And the income actually grew. So it outpaced inflation. It was unique then. It's not as unique now. And

I think one snafu now is because when I say it's not as unique now, if you were to go and say, hey, I want to find an equity income fund, a dividend income fund, you really have to check what the dividend income yield is because a lot of funds are billed as equity income funds.

But they still only have a dividend yield of 1.5% or 1.6%. And they're really more dividend growth. Now, dividend growth is great. And it's a very successful long-term investing strategy. But it does not create the income replacement that many people need. So what you would start to do now is you need to seek it out. We were saying you used to get it from the S&P 500. Now you need to seek it out. But you can Google.

dividend income, exchange trade funds, dividend income mutual funds. And first you look at the dividend yield. And if it's too high, if it's close to 5% or more,

kind of between three and five, you need to say why. You need to be very careful that there's not leverage or derivatives that are used in an inappropriate way. You need to dig into that. You need to look at how long the fund has been around, who's managing it, how consistent the dividends have been over the years. And you know what the beauty of the time that we're in right now is?

is you have two extreme periods in history that you can look to as a guide. You can look at the great financial crisis and say, did that fund exist back then? And did they continue to pay out the dividend during that time period? And if they did, you know what? They're probably going to get through a lot. And you can look at the pandemic and say, did that fund pay out during the pandemic?

Was the dividend consistent during the pandemic? And has the management been consistent? And if they have been, that's a winning strategy. It's hard because you have more choice, but it's easy because you have fantastic information and intensive stress test periods available to you. If we are going into this as newbies, are we better off trying to pick individual stocks or going with an ETF or a fund?

I have a wonderful friend, Nancy Mayer, who was the state treasurer of Rhode Island and then became a portfolio manager. And she's a great investor. And what she suggests for newbies is a combination of both. And I really like this suggestion of hers. She's like, look, don't risk it. You know, you don't know what you're doing. So she suggests putting something like 80 or 90 percent of your portfolio into funds that are professionally managed, but saving 10 or 20 percent into individual stocks.

And I think she's right about this because she says if you buy individual stocks, you will learn more. It will heighten your sensitivity. It'll heighten your awareness. You'll pay better attention. And I like that idea of combining the two to make sure that you're paying attention and learning, but also not trying to do it all on your own. I think for newbies, it's a lot to buy individual stocks on your own. It's a lot of research and a lot of work.

I like that description. I feel like that's sort of what we're doing in Investing Fix. And Jenny, for the record, has been a guest in Investing Fix and helped us learn about dividend income stocks. It's not that the members of Investing Fix, our investment club for women, are building dividends.

these portfolios that are solely built of individual stocks. But the fact that we're occasionally buying some individual stocks along the way gives us a reason to continue to learn about it and to pay attention. It's kind of like my analogy has always been that Little League Baseball is deadly boring until your kid is on that field. And then ultimately,

Oh my God, it is the World Series. And it's a little bit like that. You need to have a stake in the game. Yeah, that's the perfect analogy, actually, having been the parent of two Little Leaguers. When you talk about dividend aristocrats, what is that? And is that what we should be looking for if we're picking individual stocks?

No. So dividend aristocrats are very clearly defined, defined as companies that have paid and raised their dividend every year for 25 years or more. And raised is a very important part of it because what that is is a signal of a company that has great control over their forecasts, over their business, over projections, over growth. Dividend aristocrats, there's about 60 to 70 of them.

Names like Procter & Gamble and Coca-Cola and Walmart, they're the best of the best. But the problem is because they're the best of the best, the share prices trade with a valuation premium. And therefore, the dividend yields aren't that high. So there's an exchange-traded fund. The ticker is NOBL, and that's the Dividend Aristocrat Fund. And the average yield on that is only 2%.

So if we go back to that $100,000, you'd only get $2,000 a year of income. So if you really need income, it's not that high. The dividend aristocrats are more dividend growth companies. When we're looking for a dividend income fund, you mentioned a few minutes ago a 5% dividend at this point might be too high. Where do you feel comfortable?

So I actually don't invest in exchange-traded funds myself. I keep track of them as a competitive analysis, but I don't know them that well. And this goes a little bit to your conversation of how do you figure out who you are as an investor, whether it's an advisor, whether it's following you, participating in your classes. I think it's extremely important to have a source of conversation.

So you can say to people, I looked it up. I saw these three funds. What do you think? And someone might say, hey, I've used that fund for a long time.

That works for me. And someone might say, ah, there's a tricky little snafu on that one. You might not have noticed. But say, for example, it's heavily concentrated all in mortgage rates to juice the yield. You don't want that concentration. So I think it's very important, whether it's through an advisor, whether it's through an investment club, whatever it is, you have to have people to talk about it with and bounce ideas around. One of the things that you did do recently was add Stanley Black & Decker.

to your portfolio. So what was the screening process that you used to make that decision and to bring it in in-house? So the screen is the same today as it was back in 2001. And it says, show me every stock in the United States with above a 3.5% dividend yield. And for me, not everyone needs this above $150 million market cap because that's big enough that I can start to look.

and Stanley showed up a year and change ago. Oh, and by the way, Stanley is a dividend aristocrat, and it had never been on the screen. But the reason it showed up was because during the pandemic, when everyone became a DIYer and moved out of the cities and went to their houses and bought DeWalt drills and Stanley Black & Decker staple guns and whatever they bought, the stock price just jacked up. It ran way, way up. And the earnings followed, right? The earnings spiked up hugely. But...

Then what happened is, everyone had all the drills and all the staple guns and everything they needed. And Stanley had gotten too much inventory. And the earnings fell off a cliff. And the share price overreacted. It was down about 60% from its high. So at that point,

It starts showing up on the screen with a 3.5% yield. Shares came down more, a 4% yield. Shares came down more, a 4.5% yield. And we started doing research. And we said, okay, it's distorted because of the pandemic. But this is a fantastic company with a fantastic management team. And once we get past these disruptions,

The business should normalize. And when the business normalizes, it'll have a decent valuation. It'll have a well-covered dividend. It'll be paying out a rich dividend yield. Things will get normal. The reality is it hasn't normalized as quickly as we thought. And the reason that hasn't happened is because we thought that when the Federal Reserve started to cut interest rates, mortgage rates would follow and housing transactions would normalize again.

But they haven't. So as you all know, probably painfully well, mortgage rates are holding in in this kind of high 6% interest rate range. It's really tricky. And we actually own Whirlpool also. And it was almost the same investment thesis. And they're both suffering. And they're just not moving the way they should because the housing market is stuck, because interest rates didn't follow. So there's a lot there. But on Stanley, look, I can hold that for a long time. And you've probably heard this phrase, I'm being paid to wait.

When you're getting a 4.5% dividend yield on something, you are being paid to wait. So fine. It's a great company. They've paid and raised that dividend for, I had it written down yesterday, I think 36 years straight in the case of Stanley. I know they're going to keep paying. And that goes back to your question. When the market's in recession, can you trust it? Yes, they're time-tested. When they set that dividend, they said, come what may, we will be able to pay this. We are not violating this noble status we've worked so hard to achieve.

My parents used to always say, I'm sure your parents had some version of this as well, if it looks too good to be true, it probably is. There are dividend paying companies that pay a very high yield. What do you need to know about them? What are the risks when the dividends are abnormally large?

So that should be the biggest red flag. If it's abnormally large, you need to go in with a much, much, much higher degree of skepticism and you need to see why the dividend's that large. And it's going to be for one of two reasons. There was a dividend in place and the share price just plunged because something went really wrong at the company. So maybe it used to have a 4% yield.

and the stock just got cut in half, and now it has an 8% yield. But if the stock just got cut in half, you might find out that it's okay. In the case of Stanley Black & Decker, you might find out that business is in a lot of trouble. The other reason you could have a very high yield all of the sudden is because maybe they just did a special payout. Maybe something went really, really right. And this is interesting.

And just on my screen, in the last couple weeks, Noble Energy popped up, and they are offshore drilling.

And the stock's down 50%. And they only started the dividend in 2001. And so me being a dividend lover, I'm like, whoa, let's work on this. Right? And I asked my analyst, Jake, I said, can you go back and figure out what the philosophy was when they initiated the dividend and why the stock got cut in half? And he comes in and the laundry list of ugly things he read off to me.

Any normal person running for the hill saying, I'm not touching that with a 10-foot pole. It was just really like...

Tricky thing after tricky thing, including that offshore drilling is in a recessionary environment, one of the first things that can get whacked. Unlike Chevron, there's enormous sensitivity to oil prices where people can turn the rigs on and turn the rigs off. I think it's probably a bad idea to invest in it. Just the dividend's so rich that I feel compelled not to 100% say no on that one. But you really need to be cynical and skeptical when you see a too juicy yield.

What an education, Jenny. This has been so interesting. I've learned a ton. And I think you've probably gotten a lot of people really interested. I hope that they'll go out and pick up the book and support the Council for Economic Education. And the good news is for all of you who have questions,

questions about dividend income investing. Jenny will be back later in the week to answer your mailbag questions. So make sure you keep them coming. Jenny, thanks so much. Thank you so much, Jean. If you love this episode, please give us a five-star review on Apple Podcasts. We always value your feedback. And if you want to keep the financial conversations going, join me for a deeper dive.

Her Money has two incredible programs, Finance Fix, which is designed to give you the ultimate money makeover, and Investing Fix, which is our investing club for women that meets biweekly on Zoom. With both programs, we are leveling the playing fields for women's financial confidence and power. I would love to see you there.

Her Money is produced by Haley Pascalides. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks for joining us and we'll talk soon.