On today’s show, Wes talks about what Warren Buffett called the “rising tide.” Wes feels the bad news about higher interest rates is good news for income investors. By combining the rising stock dividends, the concept of yield at cost over time, and higher interest rates paying more income, Wes has seen the typically diversified growth/income portfolio looking more robust than it has in a long time.
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- Wes Moss [00:00:00]:Today we’re talking about the rising tide for income investors. And it’s not just one thing. It’s the rising tide that Warren Buffett just wrote about in his 2022 letter, something we’ll call yield at cost that we’ll discuss today. And the bad news about higher interest rates in the economy because the Feds raised rates eleven times over the last year and a half. That’s really good news, I think, for income investors. Put both sides of the equation together rising stock dividends, the concept of yield at cost over time, and then just good old fashioned higher interest rates paying you more income. Put it all together, and this is the best the balanced or diversified 60 40 portfolio has looked in a long time. We’ll dive into that on today’s episode. I’m Wes Moss. The prevailing thought in America is that you’ll never have enough money and it’s almost impossible to retire early. Actually, I think the opposite is true. For more than 20 years, I’ve been researching, studying and advising American families, including those who started late, on how to retire sooner and happier. So my mission with the Retire Sooner podcast is to help a million people retire earlier while enjoying the adventure along the way. I’d love for you to be one of them. Let’s get started.So today’s episode is really for anyone who is thinking about retirement or early retirement and is a balanced investor. I know we have a lot of folks on the Retire Sooner podcast that are all stock investors and believe in growth stocks, and that works over time. And then there are folks that are listening that are more income oriented, where they may rely on dividends and reinvest dividends and then look forward to those dividends paying for life in retirement. And those are all great options. And of course, there are balanced investors that if we go back to what Benjamin Graham said in his seminal book called The Intelligent Investor, benjamin Graham, who was again Warren Buffett’s professor at University of Chicago, said that an investor, whether they’re 30 or 80, would do well to have a balanced portfolio, half in stocks, half in bonds. That way, at any given time, you’ve got some stability on the bond side that allows the stock side to be more volatile and grow over time. And there’s still a lot of merit to that today. One of the most popular products ever invented in the mutual fund industry after the invention of the mutual fund, was to start putting stock and bond mutual funds together and calling them balanced funds. And after the proliferation of modern portfolio theory, which essentially says that you can reduce your risk dramatically by combining different asset classes, stocks and bonds and cash, while not really sacrificing a whole lot in your longer term return.So if you can reduce your risk, let’s say by 30%, but only reduce your return by one or 2% hypothetically here, maybe that keeps you on track. You sleep better at night knowing that your portfolio doesn’t look like a bungee core tied to a roller coaster. And then we know if we can stay invested over time. Participation in markets is really the key time, not perfection of when we get in and out of the markets. That’s the variable that leads to long term investment success. So it makes sense that balanced portfolios took off when they were first introduced and over the last call it 30, 40 years make up a big portion of the mutual fund industry, not to mention the proliferation of target based funds that are another version of balanced funds. They’re more aggressive when you’re in your twenty s and thirty s and forty s, and then as you get into your 60s, quote a normal, quote, retirement age, they get much more conservative, and they consist of a higher portion, they consist of a higher portion of bonds. So there’s more steadiness to the overall portfolio. The thinking you have less time to make up for market declines when you’re already in retirement.And on top of that, bond income can be a big chunk of your paycheck. Fast forward to 2022, when we saw interest rates go from effectively zero and had been for many years to where we are now today, five and a half percent, depending on what you’re looking at. But as I sit here today on the precipice of the fall of 2023, the one year treasury yields around 5.4%. So we’ve gone from virtually zero yield to nearly five and a half percent yield on government Treasuries. That’s because the Fed has raised interest rates eleven times in the last year and a half. To put that dramatic change into perspective, imagine this today if you had a million dollars and you put it in a one year treasury bond, provided all goes well, you should receive $54,000. That’s 5.4% in interest income over the course of one year. If we go back to September of 2020, when rates were a fraction of a percent, how much capital would it have taken using a one year treasury to yield $54,000? The answer almost $45 million. Say it another way what $45 million yielded three years ago in Treasuries. Today, $1 million would yield the same thing. Pretty shocking statistic and thought.
But it’s meant to drive home the point that income for income investors, or anyone with just a balanced stock bond portfolio, things have gotten dramatically better over the past year and a half. So to some extent I look at the past year. We don’t know how 2023 will be defined until we can look at it in retrospect, but it may very well be defined as a year where the Fed essentially got what they wanted after eleven interest rate hikes, they’ve brought down inflation pretty darn dramatically and largely kept the job market intact. You could call that a soft landing from an economics perspective. I think of it as the year of the unrecession, the beginning of 2023. The whole world was screaming, we’re going into recession. 70, 80% of economists said, oh, we’re going into recession in 2023. Couldn’t have been more wrong, at least so far. And we’re almost three quarters of the way through the year. So we’ve seen this rising tide.
If you’re looking at income investing in general, part of that rising tide is just the perennial increase in dividends paid out by companies in the S and P 500. The other big chunk of that, of course, would be higher interest rates. We’ve returned rates back to more historical norms, back to the days when bonds actually paid you three, four, 5% a year. Getting 5% from bonds may feel new and almost delightful today, but that’s the way bonds have been for the better part of 50 or 100 years. It just seems a lot better because we’re coming from a place that was close to zero now, from a stock market perspective. And when I say markets, I think of in my head, I’m thinking of multiple markets that encapsulate what I think are the important areas for investors. I think the real estate market, I think the Dow, the S and P 500, I think the aggregate bond index.
So when I say markets, I’m thinking of a lot of different markets that are emblematic of what different sectors of the economy are doing. And 2023 has been good for the broader markets. And when I say that, let’s focus on stocks here for a minute. The Dow going into the fall here up around 5%, SP 500 up around 18%, after being down 25% in 2022 at one point. So even though the stock market headlines have largely been positive since April of this year, the reality is that since the beginning of 2022, because that was a rough year, markets are largely flat or actually even down a little bit when you look at the major quote averages, the Dow, the SP 500. So let’s take a look at the last 20 months. This takes us back to the beginning of 2022. And I think it’s important because we always want to expand our view, our purview of investing. Investing is not about today, tomorrow, next week, next month. It’s really about multi year periods of time. So it’s very important and natural to be looking at, hey, how have things done? Not just this year to date, which is arbitrary, but how have they done over the last couple of years? Even more importantly, how have they done over the past 1020, 30 years? But for the purposes of what we’re talking about today, this rising tide for income investors, you go back to the beginning of 2022, and most of that year was declining. Markets for the Dow and the S and P 500. The Dow fared a little better or a lot better. Last year wasn’t as dramatic of a fall, not nearly as bad as the S and P 500.
And then this year, the S and P 500 is kind of slingshot past the Dow up in the teens, where the Dow is still up in the single, the middle single digits. But guess what? Look, over the course of the last two years, they’re almost at the exact same level. Here we are today. They’re almost at the exact same level. If you’re looking over the last 20 months. Call it a round trip for stocks. Let’s put some numbers to this. And I’m looking from January 1, 2022, till August 31, 2023. And this is just the level. So this doesn’t count dividends. But the S and P 500, over that 20 month period, the level is down just over 5%, down right around 5%. The Dow down right around three and a half percent. Not to mention the aggregate bond index, from a price perspective off about 15%. And that reflects how bad things were last year for the bond market, which has largely been flat so far in 2023. Most of that damage, that down 15%. Nearly all that happened in 2022. So you look back over that longer period of time and maybe you’re looking at your 401K balance and yeah, maybe you’ve been adding to that. And even though you may be adding to that, maybe it doesn’t feel as though things have grown all that much since 2022. Because again, markets are largely flat. And that can test our patience. I know it tests mine.
And I have to continue to remind myself to expand my time horizon and think long, long term. Now, market history in general is always testing you. It’s always testing us. It’s always making it hard to be an investor. The market operates on its timeline, not your timeline. That’s nothing new. It’s always testing us. And I always think back when wes go through longer periods of declines and recoveries, ultimately flatness. I think back to when I was very early in the investment business, and I think back in April of 1999, the Dow Jones Industrial Average clipped for the first time 10,000 10,000 on the Dow, big time. On the news rally, caps were abound. I remember people of the NYSE were putting on hats that said Ten K. And I was thinking, just, things are just going to get better from here. The Internet was starting to really blossom and about to transform our economy, which it did. However, we went into a recession and we had 911 in 2001, and we went into a bear market one and two. And it took more than eleven years for the Dow, which had hit 10,000 early in my career.
It took eleven more years to finally get back to 10,000. Think of it this way, 10,000 to 10,000 in over ten years. Talk about a long arduous slog. Now, the good news is that what followed was an incredibly strong wealth building period of time. Now, I still think we’re in that period of time today. But the patient investor was rewarded 10,000 to 10,000 in ten years. Not so good. 10,000 to 35,000. That’s three and a half times. Now, this is where income investing can come in anytime we go through those periods of flatness. As long as I’m getting some income now, maybe I’m just reinvesting it, or maybe I’m living on it in a retire sooner world. But one reason we believe so strongly in income investing is that annual dividends and then bond interest and then cash distributions from your other investments can help us remain patient. We’re all after the same thing total return. We want our money to grow, which is really a third grade math formula. It’s total return equals G plus I growth plus income. But those two variables act very differently.
Income should act, as I think of it, as just a very steady stream from the faucet. Think about when the water is turned on so slightly that it’s dripping, dripping, dripping. But I remember as a kid going through this game of turning the water on just enough so it goes from drip, drip, drip to the steadiest of small streams. Not the full blown turn the faucet on. We’re not washing dishes. Just a steady flow. And that steady flow is a couple of things. One, stock dividends. As long as we’re highly diversified and we’re not relying on a couple of companies to pay us those dividends. Wes know that in aggregate, the S and P 500 has grown its overall dividend in aggregate at a pace of around 6% per year, meaning 6% more stock income, dividend income year after year after year on average. Well, from a steadiness standpoint, bond income or interest should look largely the same. It’s certainly grown from where it was three years ago from my US. Treasury example. But if you’re locking in rates today for ten years at call it 4%, then you should largely get 4% each year for the next ten years. And that’s because, of course, the Federal Reserve has raised rates, really normalized interest rates. Now, a big portion of the bond market is paying in the four to 5% range in annualized interest. So in combination, we’ve got stock dividends, we have bond interest, and they’re now together producing an even more significant stream of income.
So we’ve turned up the faucet just ever so slightly. And that steady stream, at least, is how I think about it can afford us to be more patient and more patient to allow the G part of that total turn equation to grow. Now, couple that with the US. Economy enjoying the army of American productivity, both the G and the I should continue to combine in helping us reach our goals, our long term family goals, our long term financial goals that we’re all working so hard to achieve. As Warren Buffett reminds us, the stock market is a device for transferring money from the impatient to the patient. And I think that’s fitting. In the month of August 2023, buffett turned 93. And if you take a email@example.com, worth around 120,000,000. I came up with this because one of my kids asked me, how much money does Warren Buffett make every day? I thought wait a minute. I know he’s 93. Just turned 93, and he’s worth about 120,000,000,000. If he were to have gotten a paycheck every day of his life and not even invested it at 0% interest, he would have had to collect about three and a half million dollars every single day of his 93 year life to be where he is today. That means just over the past week, called the last seven days, he would have made about 24 and a half million dollars. Not bad for a week’s work.
Is your cash working for you? For years, banks have gotten away with paying next to nothing for the privilege of holding your money. Today, investors have more options, as the Federal Reserve has raised and raised and raised interest rates dramatically. Why not take advantage of it? If you’re interested in finding a higher yielding solution for the safety allocation of your investment portfolio, reach out to my firstname.lastname@example.org. That’s your wealth. Talk about patience. Think about what Buffett often writes about in those annual letters. He’s always highlighting how much cash he’s getting. Where is it coming from? It’s coming from stock dividends. The last letter he wrote, he gave a couple of different examples of companies that he had bought. And again, I’m just giving these as historical examples. And this was in the 2022 Berkshire Hathaway annual letter. And I want to go through just how much he used to receive in dividends and how much he receives today from these two examples. One’s Coca Cola, one’s American Express. And then we’ll calculate what’s called yield at cost on these same investments and how you can take advantage of it, just like Buffett has over over the years. So, back in 1994, they completed a purchase. They say it was around 400 million shares of Coca Cola.
It cost them $1.3 billion to do so. And I know these are crazy large numbers, so when we start doing some percentages, you can just knock off several zeros, and the percentages stay the same. These are Buffett dollars, so they’re big. There’s a lot of zeros involved. But think about the math here. So, $1.3 billion when they were done, that’s how much they had. So, in 1994, the dividends that they received from Coca Cola were about $75 billion. Do the math 75 divided by 1.3 billion. They were getting about a 5.7% yield. And without even checking what Coca Cola was yielding way back then, that’s how we calculate yield, total dividends divided by how much we have. What’s somewhat mind blowing here is that now, that same investment that he had in 94 last year in 2022, paid him $704,000,000 in dividends. Now, guess what? Coca Cola only yields a little over 3%. So buying it today, its yield today, its current yield is lower than when Buffett bought it. But it’s paying him so much more. It’s because Coca Cola has perennially raised the amount it pays out per share. So Buffett’s yield at cost. So the amount of dividends he’s getting today on the investment he made in 94, 704,000,000 divided by his original 1.3 billion yielded cost is 54%. That’s the yield he’s getting today relative to what he put in each year, it’s 54%. Cut off a bunch of zeros and you and I could do the same thing. He gives another example. 1995, he completed about $1.3 billion total purchases of $1.3 billion. Total purchase of American Express that year, it paid him 41 million.
It’s about 3.1%. Not a crazy high dividend yield. In 2022, it paid him 302,000,000 for a yield at cost. I take our yield or the income I’m getting today divided by what I paid for that originally. So 302,000,000 divided by 1.3 billion. Now we’re talking 23%. That’s how much yield he’s getting on the money he put to work in 1995. Now, yes, the numbers are different for you and me and you’re not plunking down a billion dollars into a stock, by the way. Dividends work. The same percentage change here, the same yield at cost calculation would end up with the same percentage income growth or yield at cost relative to the current yield if you bought one share. There’s no difference from a percentage perspective. And I think that’s the perennial good news for income investors, at least on the stock side, is that we look around and we find our one and a half and two and a half and three and a half percent yielders today, 2023.
And that may not sound like a whole lot, hey, I can get 5% going and buying bonds these days. Well, as important and stable and good, I think bond income is it’s not going to grow. It’s flat, then it matures and then you have to reinvest in whatever the prevailing rate is at the time you get your money back from the bonds that you held. But if you’re a long term dividend stockholder and you’re owning a company that’s every year just ratcheting their dividend a little bit higher, a few cents a year, then today’s two and 3% yielders can be tomorrow’s 5610 percent yielders as long as you hold it long enough. So we’ve come a long way in the last couple of years. Back in 2020, because of the Pandemic and the Fed taking rates to zero, it was hard to find any yield anywhere. The bond market, the interest payments from that important piece of the diversified investment pie just wasn’t doing a lot. The river had run essentially down to a trickle. Today, the water is back flowing. Bond yields, interest rates, they’re back and they’re producing very real income in arguably a much steadier, predictable way than most other income streams. You can find that steady stream of bond interest that’s there to allow you to be more patient while the stock market goes through its inevitable undulations.
But underneath that surface as well is this tide or faucet of dividends. And that faucet is turning to the left, open ever so slightly higher year after year after year, as long as you own dividend, growers, put it all together. We’ve got income flowing now, and that income can either pay for your life and family and income goals in retirement, or if you’re not there yet, it can just be reinvested and reinvested as a reminder of some semblance. Of Steadiness so that we allow the real power in the total return equation, which is equity growth or capital growth or appreciation in addition to increasing income, so that our total return is strong over time. So I think as income investors, we’re in a better place today than we’ve been for a long time. That gives me optimism about the future. We know that the army of American productivity is not going anywhere. The army of American productivity never goes to sleep.
It is operating 24 hours a day, seven days a week, 365 days a year. There is new growing productivity in the United States every single second of every single day. Maybe it slows down a little bit on Christmas, but guess what? Good ideas happen on Christmas. And people are still working on Thanksgiving. And every single holiday, somebody’s coming up with something new, somebody’s working. It just gets a little bit better every single day of our lives. I think that’s pretty cool. And I think that’s the very reason I’m such a believer in staying in this game. Staying invested, harnessing the power of American productivity. Maybe we don’t end up like Warren Buffett’s, but that’s fine. We’re going to be able to do all the things we want to do as long as we put in the work early and often, and we remain patient, just like the big guy, Warren Buffett.
Mallory Boggs [00:26:00]:
Hey, y’all, this is Mallory with the Retire Sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find email@example.com. That’s wesmoss.com. You can also follow us on Instagram and YouTube. You’ll find us under the handle Retire Sooner podcast. And now for our show’s. Disclosure this information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guaranteed offer that investment, return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease, or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here. This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information tier is strictly an opinion and it is not known whether strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.
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