The goal is for clients to live off their income, and for that income to grow 6% to 8% a year, so that it doubles within a decade. In two decades, he says, the clients really see that compounding work, and by the third decade, “you’re doing an Irish jig.” As part of that effort, the firm offers needs-based assessment, looking at cash-flow analysis for retirement, education funding, etc., and also makes assessments for what clients will need for trusts and estate planning, long-term care, liability insurance and disability. This analysis of cash flow and long-term needs (for clients whose average age is between 55 and 60) is all put through the prism of the strategy focused on dividends.
“If you’re a client who’s with us for 20 years, you should have at least four times as much income as you had when you started,” says Gaynor. “But for 10 years, it may be a bit difficult.”
“The Midwest is innately conservative,” he says. “Especially, Cincinnati is really one of the epicenters of dividend growth investing, because you have companies such as Procter & Gamble, Cincinnati Financial … that have grown their dividends for extended periods of time, and that becomes ingrained in the culture of the city because lots of people have either made or preserved their fortunes by owning those types of companies.”
Bahl takes a company like Johnson & Johnson as representative of the kind of names the firm owns—well managed, with an ethos to grow its payout. Some investors may get frustrated by its tendency to outperform the market for nearly a decade and then go sideways for the next, but Bahl views it differently. “What’s happened since 1990 is that the dividend on Johnson & Johnson has gone from 16.5 cents a share to $2.60 a share on today’s stock. The stock has gone from $8.50 in 1990, split-adjusted, to $109.” Over time, that yield is huge, he says, and owning a bunch of companies with similar philosophies allow the firm to help clients exceed lifestyle needs.
While it might seem like the dividend strategy would mean ignoring a lot of the S&P 500, Bahl and Gaynor say that more companies have come around to the dividend ethos, so that companies like Cisco and Microsoft that used to be off the radar are now dividend payers.
The tech boom posed probably the biggest challenge to the firm, say the two, since the anti-dividend environment challenged the company’s core philosophy. It was a much more difficult time for the firm than even its first year in business.
“1998, 1999 were years in which we didn’t look very smart,” says Bahl. “These companies that were growing extremely quickly all had good balance sheets but none of them paid a dividend. It was a much more challenging school of thought—that dividends were old-fashioned, were passé, that the focus of investing should be on capital appreciating only. Anybody who focused on income might as well be in the buggy whip business.”
The market return in one of those years was nearly 20%, while the firm scored a limp 2%, says Bahl. But that market return was a lot less rosy if you consider that only a few companies—including Microsoft, Oracle and Cisco—were driving it. The tech boom turned into the tech bust, and many of the companies, like Johnson & Johnson, that hadn’t looked so hot before suddenly looked a lot better.
Making It Pay
January 2, 2015
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