The Cruel Myth of Dividend Growth Investing

The Cruel Myth of Dividend Growth Investing

One of the blogs that I frequent is called the Dividend Growth Investor.  I found one of its recent posts, titled “A Case Study of My Investment in Kraft Foods” to be particularly intriguing.  Of course, what I found most interesting about the post is how badly it misinterpreted the past and incorrectly forecasts the future.

So let’s dig into some of the ugly details.

The crux of the article is that the author invested in Kraft Foods (KFT) way back in April 2010 at just over $30 a share.  The intervening years were good, with a grand total of $17.88 paid out in dividends (to early 2019).  In addition, the original company split into two successor companies: Mondelez (MDLZ) and Kraft Heinz (KHC), which are worth about $58 after accounting for mergers and spinoffs.

The reason the author wrote the post was to prove that even a mediocre dividend growth investing play can still work out alright.  In this case, Kraft Heinz cut its dividend in February 2019, prompting shares in the firm to collapse from $48 to around $34 a share.

No worries, though!  Our intrepid dividend growth blogger simply sold his shares at the going market price in the wake of the dividend cut because Kraft Heinz no longer met his investment criteria.  Even accounting for this unfortunate divestiture, he still claimed a robust 11.1% annualized return (without reinvesting dividends) over the nearly 9 year period – more than doubling his money.

This seems like a great return, all thanks to (in his words) “selecting quality companies at good valuations, being diversified, and maintaining proper risk management techniques.”

The only problem is that his dividend growth investment strategy is a lie.  But like all good lies, it is clothed in half truths.

First off, he really did get an 11.1% per annum return from dividend growth investing.  But the more important question is: how exactly?  And can you and I replicate his success?

These are crucial details.  He would like you to believe that his good fortune was the product of buying a “solid company” at a “reasonable valuation” and then holding for the “long term”.  And if we were living in an economically normal environment, these justifications might be believable.

But these are not economically normal times.  Instead, what we’ve experienced over the past decade has been nothing less than the largest securities market bubble in the history of the world.  It is bigger than Japan’s twin real estate/stock market bubble in the 1980s, bigger than the Dutch Tulip Mania in the 1630s and bigger than the Wall Street Bubble of 1929.

Our current bubble exists on an almost incomprehensible scale.  In fact, our modern-day “Everything Bubble” is so massive that it pervades every niche and corner of the real economy, making it almost impossible for the average person to spot.  In other words, like a fish swimming through water, investors don’t realize they are lazily meandering through a vast bubble miasma.

What does this have to do with Kraft Foods and dividend growth investing?

It’s simple.  Investors in Kraft and other dividend growth companies did well over the past decade not because they were stock picking geniuses or because the firms had solid fundamentals, but because the Federal Reserve (and other central banks) inflated history’s greatest securities market bubble.

Kraft Foods took advantage of the Fed’s cheap money policies to buy back billions of dollars worth of their own shares over the years.  And they paid out generous dividends as well, amounting to billions of dollars more.  But here’s the kicker: the company didn’t have the cash flow from operations to pay out these billions of dollars.  Instead, the firm’s management financed these shareholder goodies by levering up their balance sheet!

What this means is that past shareholders (like our dividend growth investing blogger) benefited, while current and future shareholders will pay the price.  Both of Kraft Foods’ successor companies – Mondelez and Kraft Heinz – have accumulated substantial debt loads from these past financial sins.  Mondelez currently carries $19.4 billion in corporate debt while Kraft Heinz sports an eye-watering $31.3 billion debt load.  Oh, and both companies also have negative tangible book values, meaning their factories, offices and other physical assets are worth far, far less than the sums they’ve borrowed.

This is all a fancy way of saying that the future prospects for Mondelez and Kraft Heinz are questionable at best.  At worst, their high debt loads could ultimately endanger the future viability of both companies.  I know I wouldn’t want to own them.

Regardless, our dividend growth investing blogger can claim a Pyrrhic victory of sorts.  After all, he got out with a tidy profit despite Kraft’s pitfalls.  But it is important to note that he only made money because he sold before the bubble burst!  There are millions of current dividend growth investors who won’t get the message in time.  These unfortunates have swallowed the myth of “investing in stocks for the long term” and will inevitably ride the collapsing Everything Bubble into financial ruin.

So if you were to sell, where should you put the proceeds?

Well I can certainly tell you were you shouldn’t reinvest your windfall.  It is imperative you stay away from dividend growth companies.  Indeed, it would be wise to avoid the stock market altogether.  While there will always be a few niche industries that outperform regardless of the macro environment, I couldn’t begin to hazard a guess as to who will be the lucky winners.  Unfortunately, most companies will simply collapse in value once the Everything Bubble pops.

In fact, this prediction is already coming to pass.  Shares of Kraft Heinz have sagged from $34 to $28 in the last few months – an additional 17% loss on top of its earlier waterfall decline.

 

Kraft Heinz Stock Chart - The Cruel Myth of Dividend Growth Investing

 

I like cash as an alternative to redeploying money into the markets at the moment.  4-week U.S. Treasury bills are currently paying around 2.35%, which I find to be a decent risk-free rate in a world where most investment returns will undoubtedly have a negative sign in front of them.

For those looking for a little more investment potential, I find that tangible assets offer great value.  Gold, silver and platinum bullion are perennial favorites, with strong return profiles and almost no possibility of major capital impairment.  Investment grade antiques such as vintage wristwatches, antique jewelry and rare coins are also great choices.  They are tremendous bargains in the current environment, although you do have to exercise some caution due to their illiquidity.

In the final analysis, dividend growth investing is the cruelest lie of all – a seductive investment myth that has propagated because of the Federal Reserve’s Everything Bubble.

 

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Guatemalan Manzana Jade Slab

Guatemalan Manzana Jade Slab
Photo Credit: Paul’s Rok Shop

Guatemalan Manzana Jade Slab

Buy It Now Price: $120 (price as of 2019; item no longer available)

Pros:

-This light-green Manzana jade slab comes from the Motagua River valley in Guatemala, which was the source of the jades so prized by the Mayan civilization.

-It measures approximately 4.5 inches (11.4 cm) tall by 4 inches (10.2 cm) wide by 0.5 inches (1.2 cm) thick and weighs a substantial 501 grams (1.1 pounds).

-Manzana, the Spanish word for “apple”, is a moniker sometimes applied to pleasingly light-green varieties of jadeite jade from Central America.  Manzana jade was one of the Mayan civilization’s most treasured materials.

-A quick density calculation verifies that this piece is indeed genuine jadeite jade.  To do this we take the weight of the stone (501 grams) and divide it by the slab’s volume (11.4 cm x 10.2 cm x 1.2 cm = 139.5 cm3).  This gives us a density of 3.59 gm/cm3, which is close enough (given the specimen’s slightly irregular outline) to jadeite’s range of 3.25 to 3.45 gm/cm3.

-One of the great attributes of this Manzana jade slab is its shape; it is the perfect size for turning into a bangle bracelet.  Not only that, but the slab’s quality is particularly high, with a fine, even color and some evidence of translucence.  This is especially important because only the best quality jades are fit to be carved into bangle bracelets.

-This Manzana jade slab, like all high quality Guatemalan jadeite jades, is an incredibly underappreciated tangible asset right now.  In addition, they are rarely treated via bleaching or dyeing, meaning that you get a perfectly natural gemstone in a world overrun by synthetics and fakes.

-With a buy-it-now price of $120, this Manzana jade slab is selling for only $239 a kilo.  I find this price to be absurdly low given jadeite jade’s rarity and the excellent quality of the piece.

 

Cons:

-The eBay seller who is offering this jade slab, Paul’s Rok Shop, will stop selling rough jades by the end of June 2019 due to the low profit margin involved.  So if you are reading this article anytime after that date, it is likely that this specific piece of jade is no longer available.  For any who are interested, I recently wrote an article on the tragedy of losing this fine jade dealer.

 

Read more fascinating Antique Sage gemstone spotlight posts here.

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The Vintage Costume Jewelry Collecting Fad

The Vintage Costume Jewelry Collecting Fad
Photo Credit: Housing Works Thrift Shop

Vintage costume jewelry is a hot trend right now.  A quick search on eBay will reveal over half a million examples for sale, ranging from the 1930s to the 1980s.  And it sells too.  Almost 200,000 pieces of vintage costume jewelry have sold on the online auction giant over the past six months.

Although inexpensive jewelry has been with us since the time of the Roman Empire, modern costume jewelry really came about in the 1920s.  This was a period of incredible prosperity and loosening social mores for women.  Newly independent women began looking for ways to experiment with jewelry as a fashion accessory.  Unfortunately, traditional jewelry made from precious metals and gemstones was far too expensive to wear casually or haphazardly.

This was the pivotal moment in history when the renowned French fashion designer, Coco Chanel, spawned an industry.  In the late 1920s she released a line of costume jewelry that allowed women to indulge in their wildest jewelry fantasies without breaking the bank.  She was soon followed by other well-recognized vintage costume jewelry brands, such as Trifari, Coro, Christian Dior, Miriam Haskell, and Napier.

The nascent costume jewelry industry soon received an unexpected boost from the advent of World War II.  This global conflict restricted access to traditional precious materials.  Suddenly gold and platinum from South Africa no longer reached Nazi-occupied Europe.  Likewise, rubies and sapphires from Burma were cut off from the West by the Japanese occupation of Southeast Asia.

This meant that costume jewelry was often the only game in town.  It was made from inexpensive and readily available materials like gilt-brass, silver, plastic and glass rhinestones.  However, considerable effort went into its design and marketing to ensure a high quality product that appealed to a broad range of women.

In spite of its storied history and interesting designs, there is something about vintage costume jewelry that really bothers me.  Specifically, I’m worried about the extreme prices that some people are willing to pay for what amounts to faux jewelry.  To be blunt, costume jewelry – even brand-name vintage pieces – shouldn’t be reaching the exceptionally high prices that it is.

The vintage costume jewelry market has all the hallmarks of a fad.

For example, almost 600 eBay listings of vintage costume jewelry from major makers sold within the past 6 months (as of May 2019) for more than $200.  Fully 49 examples even sold for more than $1,000.  And there are undoubtedly many other high value sales of lesser known makers as well.

Now many people might argue that it isn’t possible to buy “fine” jewelry – vintage or otherwise – for only a few hundred dollars.  So what is wrong with paying a couple C-notes for a very nice (and sometimes historically significant) piece of vintage costume jewelry?

My complaint is that vintage costume jewelry is not (and never will be) investment grade.  Sure, if you love it, buy it.  Just be aware that you are collecting, not investing.  Vintage costume jewelry will never reliably appreciate in value like a piece of fine vintage jewelry.

Let’s examine a real life comparison between a piece of vintage costume jewelry and a piece of fine, albeit modern, jewelry:

 

The Vintage Costume Jewelry Collecting Fad - comparison

Photo Credit: Floridas-Ultimate-Treasures & Cutterstone

The piece on the left is a late 1940s Jewels of Tanjore brooch by Trifari.  It is made from vermeil (gold plated sterling silver) and set with glass stones.  The design was inspired by the Indian jewelry of the British Maharajas.  It sold on eBay on November 11, 2018 for $359.95 (plus $6.00 shipping).

The contemporary Modernist piece on the right is a sterling silver and 14 karat gold pendant by Cutterstone, a small artisan jeweler based in Calimesa, California.  The piece was cast using a hand-carved cuttlebone mold, which is destroyed in the production process.  It was then laboriously hand-finished and set with a natural, 1.27 carat purple-pink, marquise-cut sapphire and a smaller, 0.24 carat beryllium-diffused, round-cut orange sapphire.  I purchased it on Etsy in 2016 for $365 (plus $3.50 shipping).

The Trifari Jewels of Tanjore brooch was mass-produced in a factory by the thousands.  It is likely that hundreds of them are still extant today.  I (generously) estimate the scrap value of the sterling silver used in it at $10 to $12.

In contrast, the Cutterstone pendant was individually designed and hand-made by an experienced craftsman.  And due to the cuttlebone casting, there will only ever be one in existence.  I estimate the intrinsic value of this piece to conservatively be around $300.  As an FYI, I featured a pair of luscious Cutterstone sterling silver earrings in one of my recent Spotlight posts.

The vintage Trifari piece cost $365.95, delivered; the Modernist Cutterstone piece cost $368.50, delivered.  They were effectively the same price.

 

Affordable Vintage Karat Gold Jewelry for Sale on eBay

(This is an affiliate link for which I may be compensated)

 

And yet the Cutterstone pendant is a one-of-a-kind work of art that will undoubtedly age into a fine antique over time.  Its organic lines and superb sense of proportions are truly stunning.  The very real, very enticing, very high quality sapphires merely sweeten the deal.  It is a consummate investment grade piece of jewelry.

On the other hand, this is as good as it’s ever going to get for the Trifari piece.  It is a mass-produced brooch with very little intrinsic value.  Its design is solid, but not particularly original or groundbreaking (there was a lot of Indian-style jewelry being released in the 1940s and 1950s).  Yes, it does have a famous brand name attached to it, but it is a name intimately associated with costume jewelry.  Trifari is no Tiffany & Co. or Cartier.  This is not an investment-oriented piece of jewelry, despite the fact that price trends have been quite favorable for vintage costume jewelry over the past decade.

One of these pieces is a great buy at $370 and one is not.  The worst part is that both pieces use the same primary medium – sterling silver.  Yet there is still a world of difference between them.

In my opinion it would be wise for jewelry collectors and connoisseurs to avoid buying vintage costume pieces at anywhere above $100 or possibly $200.  It is simply too easy to find compelling examples of real jewelry at the latter price point to fool around with fake or junk jewelry, vintage or not.

 

Cutterstone Hand-Crafted Jewelry for Sale on Etsy

(These are affiliate links for which I may be compensated)

 

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3 Troy Ounce VPS Silver Bar – Crack Jenny’s Teacup

3 Troy Ounce VPS Silver Bar - Crack Jenny's Teacup
Photo Credit: Barry’s Postcards

3 Troy Ounce VPS Silver Bar – Crack Jenny’s Teacup

Buy It Now Price: $110 (price as of 2019; item no longer available)

Pros:

-This limited edition 3 troy ounce VPS silver bar features pirate cutlasses, oxidized surfaces and Vollmer Poured Silver’s skull and crossbones logo.

-This artisan hand-poured silver bar weighs 3 troy ounces and is made from solid, .999 fine silver.

-Vollmer Poured Silver, also known as VPS, is a precious metal micro-foundry located in the picturesque Berkshire Mountains of western Massachusetts.  All VPS silver bars are individually designed and hand-poured using traditional methods by the studio’s founder, Devin Vollmer.

-Modern hand-poured silver bars are becoming increasingly popular among collectors because of their superior workmanship, pleasing compositions and interesting visual effects.  I consider hand-poured silver to be a stealth tangible asset investment suitable for the adventurous alternative asset investor.

-This VPS silver bar is #4 of a strictly limited edition run of only 5 specimens.  This is an incredibly small mintage in the world of hand-poured silver, where limited editions of 100 or 200 examples are the norm.

-This VPS silver bar comes with its original certificate of authenticity signed by Devin Vollmer himself.  It also identifies the work’s name as “Crack Jenny’s Teacup” – a reference to pirate slang from the 17th and 18th century.

-There are many different small companies that specialize in hand-poured silver bars, including Yeager’s Poured Silver, Bit Bullion, Mutiny Metals and MK Barz.  But in my opinion, none of them can compare to the sheer artistic character and aesthetic qualities of Vollmer Poured Silver bars.

-I believe this Crack Jenny’s Teacup silver art bar is well worth the $110 price tag.  The low asking price also means that this VPS silver bar is attainable by investors of even modest means.  This is an underappreciated advantage in a world where it can be difficult to open a brokerage account for less than $1,000.

 

Cons:

-The cost per ounce for this work is $36.67 ($110 asking price / 3 troy ounces), which is on the high side for a silver art bar.  Artisan hand-poured silver bars from other makers can often be found in the $25 to $30 range.  However, given the absurdly low mintage and tremendous artistic beauty of this VPS silver bar, I feel the higher cost per ounce is justified.

 

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