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096: Versus “The Gathering Darkness” Part 5 – Support Ownership of Great Businesses by Fully Grasping Growth OF Income

In this episode, I dive deep into the often-misunderstood realm of retirement planning, debunking the myths that might have you believe bonds are the be-all and end-all for a secure financial future. We’ve been told time and again to play it safe as we age, but I’m here to flip the script and show you how equities – those powerful shares in the great publicly traded companies – could be your secret weapon against inflation and the key to a retirement income that doesn’t just last, but grows.

I bring you almost a century of evidence and my personal anecdotes to back up this bold claim, demonstrating the resilience and growth potential of dividends in an uncertain economy. Together, we’ll explore why the ‘bonds are best’ narrative could actually set you up for a slow-motion financial suicide in a world where living costs are relentlessly climbing.

You’ll understand how fostering an income through equity investments in formidable companies isn’t just smart; it’s necessary to outpace inflation and maintain a lifestyle that’s not just comfortable, but financially dynamic. I promise that by the end of our chat, you’ll be armed with the essential tactics to make your golden years truly shine.

So, join me as we step confidently into a discussion that could very well redefine your approach to retirement. Let’s grow that retirement income together!

Key Takeaways

00:00 Owning Shares for Retirement Income

06:33 Importance of Long-Term Equity Investing

Memorable Quotes

“Wealth is created by owning businesses, and the reluctance to invest in such businesses is often due to fear stirred by the ‘Gathering Darkness’—a blend of negative media narratives.”

“Fixing your income in a rising cost world is financial suicide. It’s slow-motion suicide, but suicide nonetheless.”

“The only investments you can passively own that feature an active refusal to lose money any longer than necessary are the shares of the great publicly traded businesses of the US and the world.”

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Episode Transcription

0:00:00 – Jonathan DeYoe
The only investments you can passively own that feature an active refusal to lose money any longer than necessary are the shares of the great publicly traded businesses of the US and the world. For the best investments you can passively own that enable you to benefit from the increasing productivity and exponential innovation, are you guessed it? Shares of the great companies of the US and the world? This is why we own equities, or what we like to call shares of the great businesses of the US and the world.

0:00:33 – Jonathan DeYoe
Do you think money takes up more life space than it should? On this show, we discuss with and share stories from artists, authors, entrepreneurs and advisors about how they mindfully minimize the time and energy spent thinking about money. Join your host, jonathan Dio, and learn how to put money in its place and get more out of life.

0:00:59 – Jonathan DeYoe
Welcome back to Mindful Money. Today I’m going to give you a part five of our Versus the Gathering Darkness program. I’m making kind of a step-by-step case for owning publicly traded shares in the great companies of the US and the world. If you’re just tuning in, five weeks ago I said two things First, that wealth is created by owning businesses and, second, the reason most people decide to not own or not own enough of the great businesses can be summarized as the Gathering Darkness. And then we describe the Gathering Darkness Again. If you’re just joining us, that might be where you want to start. Four weeks ago, we talked about how naming a thing equities or the stock market instead of great businesses can affect how committed we are to owning them. It affects our understanding of the things that we own. Three weeks ago, we discussed the benefits of an adult memory for investors. It’s always an issue of history versus headlines, so it’s really important that you know your history. Two weeks ago, I laid out the first unique characteristic of rational profit seeking businesses. They’re absolute refusal to lose money for any longer than necessary. And last week, sort of as a final thing, as I described the second of their unique characteristics the use of innovation.

This week I want to talk about the most important thing for all retirement income investors. I want to talk about growth of income. The vast majority I’d say over 95% of our clients and members hire us for one reason Retirement income planning. They’re not alone. Whenever I ask an audience, I discover most people lack confidence that they’re on the pace to accumulate enough assets to spin off a stream of income that rises to meet their rising cost of living and last the rest of their lives. This makes perfect sense, because neither the retirement income calculation nor retirement income management is simple. Our culture makes us, moves us to make really bad retirement income planning choices, and the consequences of making those bad choices are dire.

Most people enter our offices with a notion that they should be investing for growth or income, depending on their age. If they’re younger, they believe they should be focused on growth and accumulation. If they’re older, they’re focused on income and distribution. Indeed, there is the ubiquitous, though wrong, rule of thumb stating investors should hold their age as a percentage of their portfolios in bonds or fixed income. In such a world, a 65-year-old retiring individual would hold 65% of their portfolio in bonds or fixed income. This is a horrible message. It’s asking for trouble.

People who follow this advice are asking to run out of money in retirement. Why? Because fixing your income in a rising cost world is financial suicide. It’s slow-motion suicide, but suicide nonetheless. Fixing your income means you will incrementally draw more and more from your principal as your costs rise and you will inevitably run out of money. If the goal is a retirement income that rises with your rising costs and lasts the rest of your life and totally unknown period of time, then fixing your income is a mistake.

The whole idea that we should invest for growth or income is a false dichotomy. It isn’t growth or income. It never was. It is, of course, growth of income. Considering the long-term inflation rate of 3%, it will take $24,000 in your 30th year of retirement to purchase the exact same basket of goods that $10,000 purchased in the first year. This isn’t an it’d be nice if thing.

Retirees must grow their income in retirement. The single best way to do so, as I’m sure you’re coming to expect from me by now, is to hold the preponderance of our portfolios in shares of the great companies of the US and the world. This is why I’ve spent the last five weeks making the case as powerfully as I can make it that we should not fear, and should instead embrace, even love, owning shares in the great businesses of the US and the world. Because, first, the current episode of the Gathering Darkness the stuff that causes our fear is just that. It’s the most recent blend of a negatively biased media narrative and a long, continuous line of narratives we collectively name the Gathering Darknesses. An adult memory enables us to recall prior episodes. Lack of an adult memory forces us to treat this episode as unique and different and horrible in some unprecedented way. It is not. Two, behind the scenes, during every episode of the Gathering Darkness, inconceivable progress is made in terms of both ever more efficient productivity and exponential innovation. Three, the only investments you can passively own that feature an active refusal to lose money any longer than necessary are the shares of the great publicly traded businesses of the US and the world. Four, the best investments you can passively own that enable you to benefit from the increasing productivity and exponential innovation, are you guessed it? Shares of the great companies of the US and the world? This is why we own equities, or what we like to call shares, of the great businesses of the US and the world. Today I wanna complete this series on versus the Gathering Darkness by tying the ownership of the great companies of the US and the world to the very rising income stream we all need in order to meet our rising costs of living in retirement.

There are a few good sources of really long-term data. Jeremy Siegel’s got a good source. Aswath Damaradan has a good source. I’m gonna use one originally produced by Roger Ibertson and Rex Cinquefeld in 1976. It’s currently published by the CFA Institute as the stocks, bonds, bills and inflation data. You can look it up by looking up CFA space, sbbi space data. Sbbi stands for Stock Spons, bills and Inflation, so CFA, sbbi data. Doesn’t matter which data set we use.

The story remains the same. From the period covered by SBBI, that’s, 1926, to the present, dividends for the US stock market have compounded at 5%, while inflation has compounded at 3%. And this is what that looks like in a 52 year olds lifetime that’s my lifetime. A $1 expense the year I was born now requires $4.65 to buy the same thing. Ouch, but my parents’ $1 income from dividends, had they retired the year I was born, has grown to $12.64. At the same time Wow, over a long period of time, the small difference between dividend income growth 5% and inflation 3% compounds, and one’s income derived from the dividends paid by the great companies of the US and the world trounces inflation. So you might ask, jonathan, 52 years is a really long time. How does this look? Or how does this work over a typical 30 year retirement? I’m glad you asked the separation of dividend income versus inflation at the long term averages over a typical 30 year retirement looks something like this A $1 expense for a new retiree in 1994 that’s 30 years ago now requires $2.36 to buy the same thing 30 years later. Uh oh, but the retiree’s $1 of income from dividends has grown to $4.12 at the same time, more than keeping up with her rising cost of goods. Excellent Income in the form of dividends from the great companies of the US and the world is not just keeping up with inflation. It’s on a completely different, higher trajectory. But wait, it actually gets better than this.

The main issue people have against investing high percentages of their portfolios and equities is the volatility associated with stocks as compared to the volatility associated with other investments. People feel the zigs and zags and they don’t like feeling the zigs and zags. But how volatile are dividends? It turns out nowhere near as volatile as the stocks themselves. Remember the dividends are a function of the business operations, not a function of market psychology. Stock prices zig and zag because people get excited for stock good reasons and bad reasons, and then they get scared of a stock for good reasons and bad reasons. Dividends are determined by the operating company’s earnings and their dividend payout ratio. Dividends are a more stable representation of a company’s success as an operating business. There is a big difference between stock price and dividend. Notice there have been five periods of painful stock market declines in the last 30 years. There’scom Great Recession, 2018, 2020 and 2022. But only one period of even noticeable dividend decline, and that was during the Great Recession.

Imagine if, instead of reviewing our portfolio’s value, which is rely upon the feelings of market participants, we all looked at the stability of our portfolio’s operating business, which was measured by dividends. It would entirely change our perception of owning the great companies of the US and the world. We would not see them as volatile at all. If all you ever looked at was your dividend income, you would never think anything was wrong. The growth of dividends are the reliable result of investing in rational, profit-seeking businesses that seek to increase efficiency, employ accelerating innovation and protect our invested capital whenever they hit a speed bump. But wait, it gets even better. So far we’ve been looking at the entire string of data 1926 to the present day and we’ve seen dividends compounding at 5% versus inflation’s 3%. But I want to tighten up the timeline and look again.

Three weeks ago I described the gathering darkness of 1970 in a series of three overwhelming headline sets. They were the 18-month totally unexpected bear market, kent State and Ohio and the unavoidable elimination of the Bretton Woods Agreement. So let’s see how the dividends have compounded since 1970. Between 1970 and today, dividend growth rates have accelerated. They were compounding at 5%, now they’re compounding at 6%, which is twice the rate of inflation. This makes the difference between dividends and inflation even more extreme, meaning the rise of dividend income exceeds by an even larger degree the rise in expenses.

Today they went reviewing the longer history. So last week we described the inconceivable progress leading up to today as seen through innovation. But let’s look at how that innovation translates into earnings, dividends and price. Between 1970 and today, earnings are up 40 times, which roughly explains why prices are up 45 times and the dividend is up 22 times, versus inflation, which has pushed prices up on the A times.

Because of those twin forces the ever-present push to make productivity more efficient and the accelerating compounding of technologies and technological innovation earnings trend paused positively over time. But of course they do take the occasional step back. There were nine bear markets in this period, but each and every one of them resolved higher. If all you did was sit on your hands, you would have experienced an accumulation of wealth from the price increases and dividend reinvestment and a drastically increased dividend income stream, almost three times the increase of prices over the same period. You’re going to call me crazy when I say this, but I’m going to say but wait, it gets even better. It’s important to note carefully that between 1970 and today, earnings are up 40 times and the dividends are only up 22 times. What this means is that the dividend payout ratio has gone down. The percentage of a company’s earnings which they payout in dividends has declined, which means one of two things Either the dividend is more secure today than it was in 1970 because there are more earnings than necessary to pay it out, or the dividends may be in an early stage of accelerating dividend increases.

Looking at the numbers, in 1970, the S&P earned $5.51 and paid out $3.19 as dividends. $3.19 divided by $5.51 equals 58%. In 1970, the S&P paid out 58% of its earnings as dividends. That’s a nice sum. Today, the S&P is estimated to earn about $220 for the year 2023 and estimated payout 70-ish in dividends for the year also 2023. So 70 divided by 220 equals 33%. If estimates are true and they’re certainly close then the S&P will pay out 33% of its earnings as dividends in 2023. A third a substantial increase in dollar value by a substantial decrease in the dividend payout ratio. So if companies going forward experience a setback, it’s highly unlikely, or we should say less likely, given the low payout ratio, that the dividends will be affected. If, on the other hand, companies continue to perform by increasing their operating revenues and profits, we’re likely to be at the forefront of a series of substantial dividend increases.

The question I hope you’re asking is why don’t we know this? Why is this so foreign to us? And there are a ton of reasons. First, the human mind is biased towards the negative. Second, and this is, I think, the biggest reason, the media profits when we pay attention and they capture our eyes and ears with negative stories. We accept their stories out of fatigue or laziness. We don’t understand what companies do, which is why we spent the last five or six weeks talking about it. We don’t know that they protect our capital. We don’t know how they harness human ingenuity. We focus on the wrong things, looking at the volatility of prices instead of the steadiness of revenues, earnings and dividends.

I am we are long term equity, meaning great companies of the US and the world investors. I am an equity investor because it is the best source of rising income from my own retirement and my children’s inheritance and my own give back to the world. I am an equity investor because I know the companies I invest in will, as rational profit seeking entities, protect my capital when the going is rough and use increasingly efficient productivity and accelerating innovation to grow their revenues, their earnings and my dividends. It’s what they do. It is reliable. That is my story and I’m sticking to it.

I hope you come back to these last six weeks of the gathering darkness and versus the gathering darkness. Whenever the doubt creeps in again, go back and review all six and know that your family’s future is going to be much improved, having done so. So I’ve been doing this for almost 30 years, and not always, but certainly the vast majority of investors that I’ve worked with. When I start talking about the importance of owning equities for all the reasons I’ve mentioned in the last six weeks, I get pushback or pushback from some than others. Next week I want to summarize all of these objections into what I’m going to call the summary objection to owning equities or owning more equities. So look forward to next week. I see you there. Thanks for your attention.

0:16:56 – Jonathan DeYoe
Thanks for listening. All show notes for each episode, which includes a summary, key takeaways, quotes and any resources mentioned, are available at mindfulmoney. Be sure to follow and subscribe wherever you listen to your favorite podcasts and if you’re enjoying the content and getting value from these episodes, please leave us a rating and review at ratethispodcastcom. Forward slash mindfulmoney. We’ll be sure to read those out on future episodes.

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