Durable Dividends

Keeping It Simple During Earnings Season

Nick Ward

56 postsOctober 25, 2021

It’s earnings season. For fundamental, value oriented investors like me, this is one of the most exciting times of the year. Not only do we get to see how well the companies in our portfolios and watch lists have performed during the recent past, but oftentimes, we’re provided with updated forward looking guidance figures from management teams (which I tend to place a lot of weight on, because no one knows these companies and their standing on their given competitive landscapes better than the individuals in charge of them). In short, the fundamental data provided by management members and their commentary provided during the earnings report conference calls are wonderful gifts to those who attempt to use data to drive rational and intelligent decision making in the markets (as opposed to chasing sentiment driven momentum).

However, I also understand that earnings season can be intimidating. I’ve spoken to investors who feel as though there is information overload during these periods. To those who don’t spend their days delving through financial reports, the onslaught of information can induce anxiety, and even fear, which is exactly what we want to avoid (not only for the sake of our peace of mind, but because emotions lead to irrational decision making and mistakes in the markets).

Therefore, I wanted to take some time this week to attempt to boil down the evaluation process, with regard to the figures that I think dividend growth investors should be paying most attention to, down to a relatively simple form.

This certainly isn’t to say that investors who own equities should only pay attention to these metrics and ignore the rest.

Performing in-depth due diligence on one’s holdings is a responsible part of portfolio management and I believe that self-directed investors should take the time to properly understand the businesses that they own as shareholders.

Earnings reports and conference calls are the best way to garner a proper understanding of one’s holdings and the inherent risk exposure that they provide (all equities are risk assets, this is unavoidable).

But, I understand that life can be crazy at times. Everyone is busy. And therefore, hopefully this piece can help to save readers who’re most interested in dividend safety and dividend growth prospects a bit of time during the coming weeks as they analyze the data reported by the companies they own.

First and foremost, when taking a look at the health of my dividend growth stocks, I start with the top-line.

This may seem a bit counter intuitive to some, because dividends are not paid out of revenues, but instead earnings (there are many companies who generate sales but do not generate positive cash flows); however, to me, seeing reliably increasing sales growth is the best way to track demand trends.

It’s true that for a dividend to grow reliably over time, a company must generate reliable earnings growth to support the dividend in a sustainable fashion; however, this all starts with sales.

Companies can use financial engineering to artificially bolster their bottom lines in the short-term. However, eventually the truth will come into the light of day and the consequences can be dire when the market realizes that creative accounting was covering up otherwise poor business operations.

Sales growth, on the other hand, is not something that accountants can manipulate. There is either demand for a company’s products/services driving purchases or there isn’t. And therefore, when tracking the health of my holdings, revenue growth is exactly what I want to see (and if sales aren’t increasing, I immediately dive into the figures/conference call to find out why).

Thankfully, blue chips tend to provide regular and reliable sales growth because of their strong market positions, brand awareness, and wide moats.

From the top-line numbers, I move onto margin trends.

Not only do I want to see rising sales figures, but I want to see steady (or better yet, expanding) margins as well.

Once again, if year-over-year margin growth, I immediately begin to understand why.

Even when we’re talking about the best companies in the world, this can occur because of isolated incidences. That’s okay. No company is perfect; the best management teams turn challenges into opportunities and However, quickly identifying secular headwinds is paramount to success in the market and deteriorating margins is oftentimes one of the first signs of an issue in that regard.

Expanding margins also point towards strong demand for a business’s products and/or services.

Generally speaking, rising sales plus expanding margins means that a company is taking market share from its peers while maintaining pricing power. In terms of generating strong cash flows over time, this is a joyous combination.

Seeing strong margins not only points towards my holdings winning against peers in their respective competitive landscapes, but it also means that more of their top-line results are falling to the bottom-line. This provides more cash for growth oriented capital expenditures such as marketing spend, research and development, mergers and acquisitions, and talent acquisition (all of which help to further expand the width and depth of their competitive moats).

Oh, and most importantly…a bigger bottom-line means a safer dividend.

This leads me to my next destination during my due diligence journey: earnings-per-share.

This is probably the most obvious metric to track here. Of course, I want to see reliably increasing earnings-per-share. EPS payout ratios are probably the quickest and simplest way to track dividend safety. An acceptable payout ratio will vary from industry to industry when thinking about dividend safety, but at the end of the day, a dividend cannot sustainably grow if a company’s earnings aren’t reliably growing as well.

Once companies mature, their annual dividend increases are typically in-line with their bottom-line growth levels. And therefore, the EPS guidance provided by management teams can play an important role in predicting dividend growth rates.

The relatively predictable nature of the dividends paid by mature blue chips plays a starring role in my stress reduction. I always say that the S.W.A.N. (sleep well at night) nature of a dividend growth portfolio is one of the primary reasons to adhere to this strategy. As I said before, stress and anxiety can lead to mistakes in the market. Predictability, on the other hand, allows investors to better plan out their financial futures. Frankly, life is stressful enough without having excessive portfolio related fears involved. A conservative EPS payout ratio and rising earnings-per-share certainly go a long way towards a good night’s rest, regardless of what sort of volatility is occuring in the market at any given point in time.

Finally, once I track the path that top-line results took while trickling down to the bottom-line, I move onto the balance sheet.

In an ideal world, I’d see cash levels increasing while debt levels fall (or simply don’t exist at all). However, in today’s record low interest rate environment, it’s extraordinarily rare to find a blue chip without debt on its balance sheet. That’s okay…because honestly, not taking on debt when low single digit interest rates are attached to it is likely an irresponsible decision by management teams.

With debt at such low levels, it should be relatively easy for companies to raise capital and then generate strong returns on the investments that they make. Therefore, in today’s interest rate environment, rising debt levels could mean accelerating cash flows.

However, even with all of this being said, I think paying close attention to traditional debt-to-equity ratios and making sure that they do not get out of hand is a good practice to adhere to (once again, an acceptable debt to equity ratios will vary from industry to industry, and even company to company, depending on its cash flow metrics).

Even when rates are low, it’s possible for interest rate expenses on excessive debt loads to put pressure on cash flows which results in lower dividend safety scores. And therefore, if I see a company’s debt balance ballooning, I’m going to quickly find out why and read the management commentary with regard to its justification of the balance sheet deterioration and its plans for repairing that damage (inevitably, in this situation, one of the analysts on the conference call will bring up the concerning debt during the Q&A session).

At the end of the day, I understand that this is all fairly simplistic. I imagine that most investors know that they need to pay attention to sales, margins, earnings, and debt. However, as I said, I know that information overload can lead to analysis paralysis and therefore, fear and mistakes in even the most level headed individual. With that in mind, during earnings season I think it’s good to be reminded of the K.I.S.S. mindset (Keep It Simple, Stupid) so that investors don’t get caught up in the headlines, the noise, and the likely volatility associated with these reports and end up overlooking the data that matters most.

Thankfully, if you’re someone who finds these periods stressful (or portfolio management stressful in general, for that matter), we have a solution. The Intelligent Dividend Investor service provides dividend growth investors with an actively managed portfolio chocked full of blue chips who pay reliably increasing dividends (since the portfolio was launched on March 1st, 2020, IDI has maintained a 100% perfect dividend growth record).

The service provides fair value estimates and margin of safeties. Subscribers receive weekly portfolio updates highlighting the most pertinent headlines associated with its holdings.

And most importantly, IDI subscribers receive a monthly newsletter highlighting the portfolio’s most recent trades and my macro thoughts regarding the health/strength of the market.

The Intelligent Dividend Investor is meant to help reduce stress while augmenting passive income streams and total returns. If that sounds intriguing to you, come check it out!

Nick Ward

56 posts

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Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

Follow the Money… It’s Earnings Time!

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Keeping It Simple During Earnings Season

Nick Ward

56 postsOctober 25, 2021

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Keeping It Simple During Earnings Season

56 postsOctober 25, 2021

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