The Art of Dividend Investing - Complete course | Candi Carrera | Skillshare

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The Art of Dividend Investing - Complete course

teacher avatar Candi Carrera, Value investor & board director

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

16 Lessons (4h 36m)
    • 1. Introduction & course content

      3:55
    • 2. Definition, history & current state of dividends

      14:59
    • 3. Understanding the cash circulatory system

      16:57
    • 4. Cost of money & capital allocation

      20:17
    • 5. Dividends vs Corporate lifecycle

      18:37
    • 6. Dividend types & shareholder return through dividends

      24:54
    • 7. Share buybacks

      26:47
    • 8. Debt payoff

      13:25
    • 9. Dividend policy, frequency & consistency

      17:44
    • 10. Dividend aristocrats & kings

      11:55
    • 11. Dividend yield, coverage & payout ratio

      16:14
    • 12. Dividend payment process

      15:48
    • 13. Circle of competence

      11:41
    • 14. Intrinsic Value & Dividend Discount Model

      33:12
    • 15. Value traps

      15:42
    • 16. Dividend investing checklist & conclusion

      14:17
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About This Class

Investing in the stock exchange and specifically dividend paying stocks can be mastered by a lot of people. As Warren Buffett said, you do not need a PhD to be a successful investor. Investing in the stock master requires a minimum of good practices and to act as a business owner and not a speculator.

In this course you will learn all about:

  • the benefits of dividend paying stocks vs growth stocks

  • how to build up a portfolio of dividend stocks to develop a passive stream of revenues

  • understanding if a company is giving a good or bad return to its shareholders

  • if the dividends the company is paying out are sustainable in the long run in order to protect your investment

  • key action steps & a checklist to get started

Investing in dividend paying stocks can be a life-changing experience.

Learn from my 20 years experience as an investor running my own investment fund and rapidly move ahead faster with the knowledge I will share with you. Don't delay.

THIS COMPLETE COURSE WILL TEACH YOU HOW TO BE SUCCESSFUL WITH DIVIDEND STOCKS & HOW TO BUILD A PASSIVE INCOME STREAM.

WEBINARS : When subscribing to this training, you are also entitled to join a bi-monthly 2-hour live webinar

Many thanks and I appreciate your interest in my course!

-Candi Carrera

Meet Your Teacher

Teacher Profile Image

Candi Carrera

Value investor & board director

Teacher

Hello. My name is Candi Carrera and I am a value investor for more than 20 years with 90% of my personal savings invested in stocks. My main attitude as value investor is to buy shares as if I would be buying the whole company, acting as a business owner and understanding the business I am investing into.

I keep the remaining 10% as a cash reserve to buy more stocks as market corrections and bear markets happen regularly. During bear markets, investors are depressed and become pessismistic. I take the opportunity during those depressed periods of buying great companies at low prices. As famous investor John Templeton said : "If you want to have a better performance than the crowd, you must do things differently from the crowd".

Through these courses, my personal goal is to... See full profile

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Transcripts

1. Introduction & course content: Hello everybody, welcome to my training on dividend investing. Before we deep dive into starting with the definitions of dividends and what dividend investing is about and how you can build passive income through dividend investing. I first want to walk you through the table of contents that you have a good overview of what we're going to be discussing throughout this course. As you can see from the table of contents light. So as always in my course, I'd like to introduce the topic and the term. What is, what is the dividends? And also looking at history of dividends and also the current set of dividends so that you have an idea about what's the current benchmark on the mark. And we're going to compare this with the S&P 500, which was a very diversified portfolio of US publicly listed companies. Then a second, and it's in fact a very fundamental concept that you need to understand related even to dividend investing is the return to shareholders. Because dividend investing is one of the vehicles to return, to give a return back to the shareholders. But it's not the only one. And in order to understand that, we need to first understand how cache works, how money works, how people and managers and board of directors have to do capital allocation decisions, the corporate life cycle. And then we are going to walk you through as an intro specifically on the type of dividends that exists, why dividend is returned to shareholders, what kind of forms it can take then also share buybacks. And because it is another form of giving a return to the shareholders and also paying off debts. Third chapter will be around dividend sustainability and process. Because again, this course is focused on dividends and building up passive income. The passive revenue stream is, you need to understand also what is the dividend policy, the frequency of the company, how often they pay every sustainable over time, are going to bring in a very important notion. And those are in fact companies I do have in my own portfolio of companies that I invest in to the content of dividend aristocrats and dividend kings were gonna discuss coverage and payout ratio. That will be very important test as well. When you're going to be selecting companies to see if it is sustainable over time for the company to pay out dividends or not. And then obviously you need to understand the dividend payment process. Things like the registration near the ex-dividend date. Those are things technical terms, pretty easy to understand, but you need to be clear and understand them. Otherwise, you're gonna make mistakes when you decide to buy dividends or when to expect them. The close to find chapter will be around. So as always in my trainings, I want to share with you my experience has 20 years of a value investor, but as, as well as as a dividend investor. So I'm gonna share with you and not as much depth as I have in my value investing training that you can find on this platform as well. But really about what's a circle of competence. And we're gonna use in this training the dividend discount model methodology to do valuation of companies only based on their dividends and share buybacks to estimate the intrinsic value of the company. And they're going to give you some tricks because sometimes companies, they do appear cheap, but they are in fact value traps. And that's something that you at least try to avoid those valid traps if you put your money into a company. And as a conclusion as always, and assignments with a checklist and some closing remarks. So with that, thanks for joining this course and I hope you will enjoy it. Thank you very much. Let see. 2. Definition, history & current state of dividends: Welcome back, dividend investors. So let's go into chapter one and we're going to discuss dividends or the history of dividends and also the current state of dividends on the market. But before doing that, there is one important thing that I would like for us to share with you. And it's true that in the value investing cores on the spectrum, I'm going more in details, details around the very important principles and behavior that you need to have the right investment mindset. But here has dividend investing cause they were just really touched on this in a very light way. But the most important thing that at one q as a dividend vessel or just even invested in general. I mean, you have in earning your money through your daily work with your partner probably. And a lot of people out there, they speculate, and this is not investing. So they think that putting money on the stock exchange is like casino or Russian Roulette. It's not. There are. What I want you in fact to act is like a business owner when you put your money that you have earned through your daily work into the stock exchange, I really want you to behave is it would be, it's your own money. It's not gambling. And you put it into the stock actually because you have an idea why you're doing it. And you will own a portion of the companies that you're gonna put your money into if we speak specifically about investing your money into company shares. So that's for me very important before we start this course, that you don't go into the stock market with a gambler or speculative mindset. It's not about speculation, it's, it's real money. Those are real companies. So I want you to develop an eye for what are the good companies, the bad companies. And acting as a business owner, as a Director of those companies, that's very important that you understand the business of those companies, but will come later on, I think isn't Chapter four, we're gonna discuss a circle of competence and I will emphasize and go a little bit deeper into that, but really keep that in mind. Very important before we start this course that I wanted to act as a business owner. So let's go into the dividends. When does, what is the origin of dividends? So the term dividend comes from the Latin word dividend and which means something that has to be divided or can be divided. And so if we look at the technicalities of a dividend, it's countless scholars, a reward that is paid by a company to its shareholders. Most of the people know or consider that dividends are cash dividends. And we're gonna see in, I think it's in chapter two, we are going to discuss the various forms of dividends and it's not just cash, the other forms of giving a return to shareholders and even different forms of dividends by itself. What is also important to understand is that dividends normally, typically are paid out by the profits that the company generates over the last quarter, the last six months, last 12 months. But they can also be paid out through reserves or what we call as retained earnings and adapt as well. I mean, I have seen companies, not the companies that I have invested into, but they have been raising fresh depth from external lenders in order to pay our dividends. I mean, I can already tell you here, even though we're in the introduction, that something eyes like, oh my god, this cannot be that a company raises debt to pay out dividends to its shareholders. But betas happens. You need to be attentive to those kind of things. As I said earlier, dividends can be paired, sorry, can we paid and issued on the various forms can be shared dividends, cash dividends, warrants, you're gonna see, but the typical way of paying out dividends is indeed through cash payments to its shareholders. Typically this added by the management, that's the proposed by the management and the board of directors, and then it's approved at the annual shareholder meeting when, for example, typically, for example, German companies, they pay out dividends and French companies once per year. So it requires pre-approval of the annual shareholder meeting based on the proposal of the board of directors. Always keep in mind when looking at dividends, that there is no obligation for the companies to pay our dividends. It's really in good faith that they do it if they have the possibility of doing it. But they can stop at any moment in time. Ping, ping out as dividends. And this is where later on in the course we're going to discuss dividend aristocrats and dividend kings. Because what I would like to have is when I put my money into a company is that I have, let's say, a very, very high probability that you're going to get a continuous stream of dividends. And this is where the dividend aristocrats and dividend kings can be a kind of companies that will give you that kind of guarantee. There's never 100% guarantee, but a very good guarantee, or high probability that the dividends will flow in every whatever quarter, six months, or 12 months. And always remember that dividends are not limited to publicly listed or coded companies. This also dividends is an acronym that can be used for privately owned private equity companies. What is also important to understand is the following thing is, when you put your markets, sorry, when you put your money on the stock market. There are a lot of people who only have one way of making money. And I'm speaking here about shares, I must bring about options trackers like ETFs for ex exchange, forex, foreign exchange, and currency trading Bitcoin is this is not part, I'm not a specialist in that. Here. I'm really speaking about investing into companies. And this is typically what a value investor does. He invests he or she invest into, into companies. And when you look at some even speculators, they put their money into companies. They are only looking at the growth of the share price of the company. This is what we call a share price appreciation. What I like to do, and this is definitely has a value investor. And you can look at Warren Buffett, he's also looking into that. What I would like to have is, of course, I would like to buy a company and a very cheap price. And the market goes up and then I can maybe decide to resell the company at a higher price. This is what we call a share price appreciation. So imagine you would buy a company at 50. And you think as a value investor and as a dividend investor that the company is worth 90, but the market is currently depressed. And settling time the company, the market gives you a price of 85. You can decide to sell the shares of the company. And the difference between 8550 that's in your pocket. This is what we call shepherds appreciation. Let's say the only issue with that is that you need to sell the shares of the company. So obviously you're gonna turn during the sales process this, this difference into profit. But you are no longer owning that portion of the company as you have been selling those shares to materialize the profit. Sometimes I mean, I do this. I have a tendency to trying to compounds and add more and more stocks of companies that have invested into and not selling them. I do have some permanent positions for years and years where I have my second way of making a return is I do get dividends. So when you, this is very important. A lot of investors on the stock market, they put their money into the stock market and the only way of doing money is selling the share at a higher price. So Chef has appreciation, a good dividend investor and a good even value investor. They look at both mechanisms. Obviously they would like to have a share price appreciation. So that's why they have mechanisms and very investors have mechanisms to determine the intrinsic value of a share and determining if the market is currently the president and he's giving you the shirt and a very cheap price, but it's still a good company. And you can know much more around that when you are going to discuss the dividend discount model in this course, but also in the value investing causing giving many methods on how to evaluate the intrinsic value of a company. In this one, it will be only the dividend discount model and the Gordon and deviation of the gun that are used and then set the second one is a luck to have written this dividends and this is a passive income stream with a good yield. So with good return expressed in percentages and hopefully higher than the inflation that we'll cover that in Chapter two of the cost of money and also capital allocation decisions. So, yeah, so as I said, so the side effect of dividends is that it's also a way for receiving a return for your investment into a company. And you don't need to do. The only way of making money is not just share price appreciation. It can be shepherded precision, but it also dividends. We have two ways of making money on the stock markets. And as I said before, is you are not obliged to sell the shares to realize a return because, I mean, while you keep those shares, you get dividends and you continue to remain an owner of the company. And what we have also seen, and this is typically true for dividend aristocrats and dividend kings. They support in a better way. Market downturns, market crisis. And something that is also very important psychologically for the CEO, he or she, when they started with a board of directors to paying out dividends, it's very difficult for them to stop paying out those dividends because shareholders get used in saying, yeah, well, I know I every year, every March, every May, I get my dividends from this company in the US, we're going to discuss the payment frequency and the hazard would be on a quarterly basis in Germany once per year, typically May, June timeline as an example, and paying out dividends and the process of having been regular paying out dividends acts like a stick. To the management. So they really will think twice about making bad capital allocation decision, but also stopping paying out dividends because they're going to have a backlash from the shareholders are used in getting dividends from the company. If we look now at the history of dividends and let me start here with a small quiz. I like quizzes. And I'd like you to ask here is, when was the first company of which counter was the first company that started paying out dividends. And in which century was it wasn't in the 17th century, the Dutch company in the 18 hundreds US cooperation and the 19th with the English cooperation. So I have a thought, take three seconds to think who was first paying out dividends and let me, let me solve this. In fact, it was a Dutch company in 1602. That's like more than four centuries ago, that the first company is known and has been recorded at paying out dividends. And so as I said, it's a Dutch company. It was called the Dutch East India Company of you see, you see the logo here with the Dutch flag. And there were specialized in international trade. At that time. Netherlands was very strong at maritime trade. So they were bringing in spices, coffee from Asia, et cetera. And what is very interesting is at that company for 200, nearly 200 years in a row, have been paying out dividends with whirled around 18% of the share value, which is a huge return if you compare it today with, for example, 2% of cost of living or inflation that we have over the last years. And so that's about history. It's always good to know that the Dutch were the first ones. I will not say to invent, but at least to start paying out dividends to their shareholders, or a four centuries ago. And if you look at the current set of dividends, there's also something very important that we're going to reuse in chapter two. And we're going to discuss cost of money, capital allocation, conversations, inflation and those kind of things. But today, and you see here in this graph, there's courtesy of the multiple.com site. You see that the current, let's say, average return on the 500 largest US treaded companies, which is called the Standard and Poor's five-fingered, The average or reading in the average is around 2%, more or less. And if you compare this with a 10-year US bond obligation or state obligation, you see that? It's pretty close. And if we zoom in, we see that dividends, they are more or less flat since let's say a decade, two decades around two percentage. And you see that in this case it's the two-year Treasury yields in there have been some crisis upon crises, European debt crisis and now the qubit 19 crisis. So that creates stress on the market and you see that even the US treasury yield has gone down while the dividends average as a P5 founder knows, keep in mind as a P 500 is a very diversified portfolio of companies and is around 2%. Just to be clear, I do not invest in super diversified portfolios with 500 companies. That's not my style. Maybe you feel okay with that, but then, you know that you're going to get an in average around 2% of return. And if you invest into and track on ETF and index, a vehicle investment vehicle that is following the ASCP 500. Just to put it already very straightforward. My capital allocation decisions are, I'd like to get five to 7% every year because inflation is close to 2%. If I just get a 2% return on 2% inflation. We're going to discuss this in the next chapter. Worth is not growing, it just remains flats. And that's why I want to have five to 7% so that it catches up on the yearly inflation. Let's consider 1.5, 2% of worldwide. And the difference between my return and inflation, that's how my worth is growing year over year. And we're going to discuss this in the next chapter and also doing throughout this course because that's a very important and fundamental understanding that you need to have. So with that wrapping up already, chapter number one here was a pretty short one, very simple. The next one when you are going to discuss written on, on shareholders and also cost of money, capital allocation decisions and how to give a return to shareholders through dividends, depth, paying off debt that paybacks, but also a share buybacks. So that's the kind of thing that we're going to discuss now more extensively in the next chapter. So I hope that you're going to stay with me. Thank you very much so far and hope you are enjoying it. Thank you. 3. Understanding the cash circulatory system: Welcome back, starting chapter number two. In this chapter. And it's fundamental aspect that we need to discuss is really the return to shareholders. And as a first topic, sludge leap to understand because certainly in time you're going to have to take investment decisions like an investor, like a CEO of a company. And concepts like understanding how cache works, the cost of money over time, but also capital allocation decisions and balancing the ride return versus risk are very, very important things that we need to discuss in this chapter. So actually, I mean, this chapter will be the longest one because we're really gonna go deep into those kind of conversations. So let me start with the cash circulatory system. And because you sometimes hear that people say cash is king. And so, and I'm gonna share at the end of this lecture the conversation around what are the financial statements, sorry, reporting, that typically are used. But consider that the balance sheet is one of the three fundamental financial statements That's a company has to report upon for their shareholders, for the public, for the tax authorities. And when a company is created, their balance sheet, and the balance sheet represents the current status of their wealth from the day they have been created. The initial set of the company always goes like this. There are some investors, they bring in either cash or benefits in kind. They cannot have written the computer cart at Robert consider that in most cases they're gonna bring cash. So the investors on the right-hand sides of the company has a liability towards the investors and the shareholders. So that's the initial equity, the seat equity. And the very initial set of a company is incase. It would only be cached at those shareholders bring in that casual sit on a bank account very properly, so on the asset size. So the liability side are the depths at the company has to either shareholders undergo and discuss third parties as well, which we would call lambdas or creditors. And so the neutralist stayed on the asset side is an asset and the asset is for the time being purely cash. Obviously, it doesn't make any sense that the company keeps the carriage and doesn't do anything with that cash. So what the company will have to do and the management of the company, they're going to the carriage that hasn't been made available to them by the shareholders in the first stage. So we're really at the inception of the company. They will transform the cache into some tangible assets or car or supply chain and office marketing campaign. Whatever, trademark they're gonna buy things, stocks, anything that can be materialized. First of all, that's the first thing that the company will do, taking the cash and transform it into a tangible material assets. Obviously sometimes companies that really start also to buy intangible assets and we will not cover this here. I'm going to create a specific course for financial statements. But in the dividend investing training that we're discussing here, it's important that you understand that the cursor is brought by the investors or the initial shareholders. That cash would have to be transformed into tangible assets so that the company can start generating hopefully profits from those tangible assets. And as I said, it's the only way of raising capital is doing this through investors or shareholders. It can also be done by raising depths, which is also liability, but it's a different kind of liability. So the lenders are not owners of the company, likely investors and the shareholders. And without going to the details, but consider that high risk investments, they should be funded by cash. Why low-risk investments they can be funded if the right attributes are there by, by depth because the risk is low. And again, the lender will only bring fresh Cas9 is expecting a return on that like an investor, but it's just different category, the investors or owners of the company, while the lenders are considered creditors or third parties in terms of liabilities towards the company and they will always come, we are discussing is more in-depth in the venture investing caused, but they will always come first. Then has always come for as in case of liquidation of the company versus investors. Investors are always the ones that are paid last in such scenarios. So as I said, typical balance sheet at a certain point in time looks like this, and this works for any company. The company is called Amazon Facebook whatsoever. Goodyear is you have on the right-hand side the liabilities in the balance sheet. So the initial shareholders, shareholders, and then the credit does dept. So those third parties, creditors. And then on the left-hand side, that cash has been transformed into most of the balance sheet for most of the companies, would it be tangible assets like stocks, hardware, buildings, property, equipment, those kinds of things. And the good company shall always keep a certain amount of cash as a reserve. That's what I call the residual cash here. And when they start doing acquisitions or developing intellectual property and trademarks, you're gonna see and also intangible assets in the balance sheet, on the asset side of the balance sheet appearing. So these are two examples of typical companies. You see they have the same, I mean, they don't have the same size. On the left-hand side you see a company that has currently a wonder to million US dollar equity that has been painting by the shareholders and 1 million of depth. And always remember that balance sheet has to be balanced out. The total of the asset is equivalent to the total of the liabilities. And so, so it has the sum of one plus 1.2x million, which is equivalent to two dot 2 million in assets, whatever the category of asset. That's not the conversation. It's an accounting training that we're doing here. And the right-hand side you see another company. They have 1 million in terms of equity and only 0.5 million in terms of adapt that has been borrowed from the bank. And the assets they have. Obviously they have less assets as they have less, let's say cash that they could transform into access. Or for the time being, the half, an assets total of 1.5 million. So again, here you see that the assets and liability side, the total balance sheet is bands out and it's worth 105 million assets and one that 5 million total liabilities between debt and equity. So you already saw the first two steps. So cash that is coming in either from owners, shareholders are from lenders to adapt people that the company borrows money from. And this cache then goes into E1 is invested into real assets because otherwise it doesn't make sense and the company will not be able to generate a profit. So those assets, they need to start producing something to producing an output in the hope that that output will generate profits and the profit margin. What that is, I think pretty easy. Cash coming in, liability transformed into assets and those assets start hopefully producing an output. And that output hopefully is profitable so that it has enough, it creates a margin that were then. And this is the flow number three that I'm showing here. That those productive assets will create an outputs within margin, positive margin, positive profits, which is, which is in fact new cache. This one I call it the cash generated by operations. So the initial series cash coming in by the investors, creditors, the management of the company transforms that cash into tangible assets in the hope that those assets will start producing a profit. That profit is new cash that is generated by, by the operations. And then comes a very important, and let's say governance or Stewardship conversation, which is the board of directors with management, with the CEO, typically with the CFO, they need to decide with that Canada has been generated by operations. What do we do with that? Do they decide to give it back to the shareholders as a return? They decide to pay off adapt. That's also a way of giving a return as well to shareholders by reducing the amount of debt that the company has. And we're going to cover this in this chapter, in the next lectures of this chapter. Or they can also take the decision. And this is typically what growth companies start-ups do. They will not give any return to the shareholders because they need that cash generated by operations to continue growing the wealth and even the market share of the number of new customers. So acquiring new customers, and this is what they would take care of by re-injecting, reinvesting the cash generated by the operations during a cycle, let's say a quarter, six months, a year, and taking that profits and injecting it into the asset side of things to grow even further the wealth of the company and having new assets as well. So what is important and we're going to stop here is that you understand this cashflow quitter a system. And obviously I brought in the concept of the balance sheet. And again, it's not an accounting training here. I gotta have a future or probably a Financial statements, specific training for investors. And, but consider that as an investor, you need to understand a little bit what are the typical financial statements that you have to look into and to typically have the balance sheet. So that is the stock of whether the company has been, let's say, compiling, keeping since from the 0 that the company exists. And then you have income statement and cashflow statement, which are two different financial statements. And I'm gonna explain this in the next slide. But the income statement compared to the balance sheet shows the flow of wealth in and out of the company over a period of time. The balance sheet is from the 0. And if the company has 55-year, as the balance sheet shows, the well of the company between 055 years, who's like the stock of assets of the company from day 0 on from the day of inception. While the income statement will show the performance of the company terms of revenues, profits over a period of time. That period of time can be period of one week, a month, a quarter, full year. That's typically the income statement. And it's used more to Annette analytical purposes in the sense how much money the company is making per unit of time, or making money or losing money as well. And there is something that a lot of people don't understand, which is a different between the difference between the income statement, the cashflow statement. And I would like to take two seconds on that because I think that has an invest, it's important that you understand those differences. So I've taken you an example. So we were discussing the cache circulatory system. Wherever he have cash coming in from investors or lenders, that cash is transformed into a tangible asset. Imagine that the company management decides to take that cash because the company is doing a limousine service between the airport and downtown and is buying a limousine for that. And and the difference why at a certain point in time in the history of accounting, there were only two financial statements in the beginning that it was a balance sheet and the income statement. But people who are asking for more, they wanted to see also the cash movements and not just the income movements because there is a difference in timing when, for example, and assets is sold to a customer. The customer has 30 days to pay that asset. And here's little bit the same. If the company is providing a limousine service between imagined at the airport and downtown IV and they need to buy. Here we are on the assumption they're buying and the museum, they're not renting the limousine, but if they buy the limousine, that limousine will appear as an asset in the balance sheet, right? But if you look at from an income and cash-flow perspective, there is a difference. Is that this, this limousine. When the company decides to buy the Limousin, they need to pay the car dealership for the price. Let's imagine the limousine costs 20 thousand US dollars, except if they have negotiated the terms with a car dealership. But when the limousine is deliberate as a new car or rented car, there's going to be 20 thousand US dollars going out of the bank account from the company to the cash position is going down by 20 thousand. And this is typically recorded in the cash flow statement because it's cash-out. The difference between the cashflow steam and the income statement is, if you look at it from a revenue perspective, while the day that the limousine has been delivered by the car dealership or the company that do the car dealer wants his money Armani directly. So cash out of 20 thousand. But that Li Museum, that asset is what we'll call a productive asset. That asset will generate a stream of revenues. And let's imagine this is what I'm showing here on the bottom right-hand side. That's that's limousine hopefully of their customers using this service between the airport and downtown, that lemurs in it will generate a revenue stream and I hope profits for the company. Let's assume here for a period of five years. So it would not be fair from an income statements to book their whole cash-out as a cost on year one. And I'm speaking out about the incomes. They are not speaking about the cashflow statement. The cashflow statement has to book the full cash out for that Lean Cuisine minus 20 thousand US dollars. But let's assume limousine has a lifetime of five years. In the income statement, you're going to see in year one, 4 thousand US dollars, which is a fifth. If we do a linear depreciation, it's going to be a fifth of the cost of the limousine. And this will go over time until the limousine is totally depreciated. In here, I just took the assumption for the for the sake of the example that it would be a five-year depreciation timeline so that we can book against the revenues that this asset will produce over the term of its lifetime that we can also book the cost of it. And this is what you see. This is where we have the difference between a cashflow steam and an inconsistent. And this is important. Again, it's under counting cause, but at a certain time and we're going to discuss the return to shareholders. You need to have a minimum understanding between what is a balance sheet and income statement, the cashflow statement. And typically when we're going to discuss share buybacks, dividend payments, you will have to look into the cashflow statement as well. So that's why I really insist that you have a minimum understanding of this and an asset if you want to have already more information on this, either you go right into my value investing course, where really go much deeper into the financial statements or hopefully in the future there's going to be a course of around financial reporting and financial statements for investors specifically. So that I can go even deeper into that. But I think this is important to understand the difference between cashflow and income statement and also the balance sheet which is in the wealth, the stock of well, if the company from the date of its inception. So with that, wrapping up the first lecture of Chapter number two, which is the cash circulatory systems. Remember, as I said, is a typical lifetime of a company is cash comes in, consider that it will be cash. Let's leave the benefits and kind of side, but considerate cash coming in by shareholders. And that cash needs to be transformed into tangible assets, productive tangible assets, in the hope that those assets, if they are well managed by the management of the company, will generate a profit. And that profit. This is where we come to the conversation. What does the management and the board of directors, what do they do with that profit? Are they RE injecting it into the markets, acquiring new customers, expanding market shares? Or are they giving a return to the shareholders of those profits? And this is what we are going to discuss that in the next lecture where we got and discuss cost of money and also capital allocation decisions because that's something that is very important even as dividend investor as well. So with that, thank you for listening in, in this lecture and talk to in the next one about cost of money and capital allocation. Thank you. 4. Cost of money & capital allocation: Welcome back dividend investors. So in this lecture, after having discussed cash circulatory system and how cashflows from liability side to the asset side in a regular company. You're going to be discussing because of money and how the value of money changes over time. And how this influences capital allocation decision that companies have to take. But also you as an investor have to take that. Let's get started and discuss first of all, the purpose of money. So money historically has been created when it became more and more complex to exchange goods for goods. Because before money existed, this is what the populations and the people living on the world were doing. They were exchanging some goods for other goods is what we call bartering. Certainly entirely became too complex, cause maybe for milk you didn't want to buy or to exchange meat. So they said, let's put something in between. And this is where money made its appearance. The what needs to be clear for you as an investor is that the value of money changes over time. And I'm giving you the example of a cup of coffee. So imagine that a cup of coffee 50 years ago was worth $0.25 per dollar in 1970. And today, let's assume that the same amount of coffee, the same quality, all the attributes remain constant. The same amount of coffee, the same cup of coffee costs $1.59. How is this possible? This is possible because of inflation. Inflation is when people, when they expect prices to rise, they're gonna buy now and not wait in the future. This happens for cars, for houses. If people live that power series will increase next year in two years time they will maybe preferred to buy the house. Now, when this situation happens, the producers or the manufacturers or the shareholders, they think that they can safely push higher prices to the people that wants to buy. And this is what is inflation all about? And this is how inflation actually happen. So it's like a self-fulfilling prophecy. And this is what in the example, if I come back to the cup of coffee over time, inflation is what has been pushing the price of the dollar as of the last 50 years, it has been multiplying it from 025 to 1.2x. That's like a six to eight multiple. And this is really purely linked to inflation. And as an investor, even as an investor, you need to understand what, why, why inflation is important for you when you're going to take capital allocation decisions, but also what are reasonable returns that you expecting on the investments that you are doing? What you need to know on inflation. So if we stay want seconds further on the conversation around the value of money and how that changes over time. So inflation, for example, in the US, is measured by the consumer price index, CPI, the role. And a lot of economists there, a lot of conversations but also investors about. The role of inflation, is it good or bad to inflation? For example, Japan has, over the last ten years, I think they were in deflation. And what what we believe, generally speaking, and what I also kind of agreed to is that a minimum of inflation is okay for the economy. If it is too much, it's heating up and that will not be goods and cars. I mean, dollar today will be worth may be $0.5 next year. That's, I mean, that's crazy inflation. But that's really not good. And that will create, if it is political or citizens will become angry. It can turn into civil war and those kind of things. But the, and we have organizations like the Federal Reserve and I'm showing you in the United States, we have the European Central Bank for the Euro currency and the European market. They try to balance the level of inflation that we have in our countrys. The general rule, what is today considered a healthy economy is that we have around 1.52 percents of inflation. The role of the Federal Reserve is to manage the supply of money up and down. Their printing more money when they need to ease monetary policy, are they reduced the amount of money that they are printing and they are reducing the supply of money just to make it more difficult for people to spend money. And this is the whole role of the Federal Reserve is, it's the most important tool that they have is their monetary policy. And you, I mean, if you are an investor already a little bit, you're going to hear that the Federal Reserve, a lot of investors are waiting for the announcement of the Federal Reserve or the increasing, lowering the interest rate on the two-year tenure, 30-year bonds and also the cost of money. And so why and invert going, it's not an economically course your why is the supply of money and managing the supply of money important for the Federal Reserve, the European Central Bank is, if there is a lot of money on the market, it will be cheap to use that money. So people who were, tends to take loans. So credits buy houses by cars, and by that it will heat up the economy. And companies were able to grow their revenues. And there will be more people that will be hired. So this has an economical influence. When the economy is too hot. The Federal Reserve, that European Central Bank, those central banks that manage that supply of money, they will increase the interest rates to make it more expensive to borrow money. So today it's very cheap to get a loan for a house, you're going to be added. So I don't know between 1, 2% of the loan. If the economy, if the economy would be too hot, the Federal Reserve will increase the interest rates and priority will become 5-6 percent For an example, on the credit loans. So it becomes much more expensive to buy a house, for example, to get a loan for buying a house. So this is the whole idea of the Federal Reserve. And just small parentheses. I'm not making any publicity here for this book, but nonetheless, if you are interested in becoming also good investor, I have in reading this book during the summer. It's called keeping at it from Paul Walker, who was a former chairman of the Federal Reserve in the US for nearly a decade. And it's very interesting to read what is happening behind the scenes between the various central banks and how to manage the economy versus Also the levels of inflation. So for me it was a good learning. And for those who have followed my very invest in training, you don't know that I like to read a lot to become everyday a better investor. So if we, if we want to have a broad perspective on, I think, I hope you understood how inflation works and also how the value of money changes over time. And the question is now, what is the current level of inflation and how has it been moving through history? And if you look into this graph, it's nearly 1.5 centuries inflation, you see that the level of inflation currently, if you take a 10-year moving average is around one, that 73%. So it's, as I said, between 1.51, 2% in average. And this is what the role of the Federal Reserve's, sorry, of the Federal Reserve's, or the national central banks is really to manage the amount and the supply of money over time to strike the right balance between not overheating too much the economy, but when the economy is cold, even because of a crisis, to be able to, to increase or to make the money cheaper so that people can spend more. For a dividend investor or an investor in general, you will, you will be facing when you have cash because maybe you have a salary or maybe you had money coming in because you want in lottery, you need to decide on what you do with that money. And this is the whole idea of the wealth creation. And I want to explain to you on two examples here, which are compounding examples how you can build up wealth, but if you are not taking into account inflation and you're going to destroy your wealth as well. So in this example, and you sit in the red frame, I'm, I'm taking the example of a 0 that 5% bank savings accounts. So today the bank savings account give you very, very low returns. And the example he goes accordingly, if you would have $1 today and the bank guarantees you that 5% on your bank savings accounts every year. And you are, what you are getting as written, you're adding it up into the bank savings accounts of the year after the sum is growing in a compounded way. After ten years, your 0.5. percents or your your $1, that's 5% on that $1. The $1 has turned into 1.05 dollars without doing anything. This is what we call a passive income. Is this good or bad? You will understand in the next minute if that it is bats. In fact, why? Because if you look at the second red frame, inflation, if inflation and you saw it in the previous slides. If inflation is currently at, let's say around one, that 5% as an assumption, if the inflation has been at one of 5% and will be over 105% over the next ten years. The value of $1 today, in order to the purchasing power that you have today with $1. In order to keep up with the rhythm of inflation, you will need 1.So $16 in ten years. The problem with a bank savings account investment decision is that you are destroying, and this is the next frame. You're destroying 11% of your wealth. So it looks like you have been growing your wealth by 5% from $1 to 1.00 five, because the bank is guaranteed you 0 dot 5% return. But inflation is catching up faster than the region that you have in the bank savings account. So over the next ten years, or if this was in the past, doesn't matter. You just destroyed 11% of your wealth. So the return has to be at least as high as the level of inflation that you have. And this is something that you need to take into account. If we extend this to 3%, 5 percent, or 7%. Let's take the example of 3%. Imagine you would have or you have decided to invest into an investment vehicle that compounds at 3% on a yearly basis. The $1 today will become $1.34 in ten years time with a 3% compound rate, you capitalize, you get every year return, you take that written, you add it into the basic, let's say value of the accounts or of the Capita. And then the new some compounds again at 3%. So we have like a snowball effect. So this is what, how $1 becomes $1.34. If you have some examples, him assumption, if you have an inflation of one that 5%, your, you will have a catch-up by 16%. So a dollar worth today will be worth 16% less in ten years time. But nonetheless, the difference between $134 in ten years time and the inflation to the change of money over time for that $1 will still grow your wealth by 18%. And you understand the principle, you do the same with 5% 7 compounding. What is interesting, and I'm going to elaborate these in the next minutes, is that if you are able to have a 7% compounded year over year, you will be able nearly two w wealth over ten years time, of course need to be patient. It takes you ten years. But if you're able with the one that 5% inflation and with the 7% compound rate. To do that for ten years, you're just doubled your wealth, so your $100 thousand became close to $200 thousand. And imagine you would do this over 30 years. You will have an enormous snowball effect. And the question now, the real question is, what is the right level of return and the right level of resident I want to take. And as an investor, you will, you will, when you have cash available, you will need to take those decisions. How much risk can I take and what is the expected reasonably written that I can get depending on the investment vehicle I will invest in. And we're going to discuss the risk versus written balance in the next slide. But imagine as investor that you're confronted with multiple options. You can invest into real estate, you can invest into corporate obligations, it can invest into bank savings accounts. You can invest into the Federal Reserve, treasury notes 30 years it will give you today, I think is one that 6% guarantee that you get over 30 years, but they guarantee you that not knowing how inflation will be over the next 30 years. But today you would probably tell me, yeah, but listen candy, the average worldwide inflation is one that seventy-three percent. So with a 30-year one that 6% year over year, I mean, it's like a Xero operation. Well, yes it is, but you are not destroying your money, at least your money, it gives, it keeps giving you the same purchasing power over the next three years if you invest into 30 year treasury note. But we do not know, we don't have a crystal ball. The Federal Reserve does not have a crystal ball. How the inflation will look like in 30 years. And just look at the graphs that we were discussing before, how inflation went up to 16% in the seventies. And now sometimes even is negative because of the qubit 19 crosses. And this is, this graph is very important for you to understand, is to strike the right balance between risk and return. So the, as an investor, as I said, you're going to be exposed to multiple investments opportunities. And it starts with startups, venture capital. And a venture capitalist needs to have, is taking he or she is taking much higher risks with the hope that that's a higher risk will pay off with a much, much higher return. That's logical. And venture capitalists do know that in most cases, nine out of ten stops they're gonna invest into will not survive the five-year period. And the tenth startup that is surviving needs to give a return to compensate the losses of the equity on the first nine start-ups. And that's something that they have to put into the equation. So that's why it's logical that venture capital is very often expect a between 2535% return per year on the investments into, into startups. And then you have private equities and private equity is a little bit more solid companies more mature, that typically the returns expected, I'd say 15 to 20%. My investment universe is typically large cap public stocks. I, I do not invest into real estate, I do not invest into corporate obligations, but I do invest in deed into those large-cap companies. And, and the my expected return, I can already say it here is between five to 7% year over year and trying to achieve this 30-year period to grow my wealth. And you have people who are very good at investing into corporate obligations. Risks are sometimes lower at with corporate obligations. You have big companies like Nestle who, who come up with corporate obligations, even countries. When we speak about sovereign notes, I think if I take the example of Luxembourg, the country I'm living in, they have a AAA rating from the ratings agencies. So when they come up with nodes, it's 0 dot something is very, very low in terms of written that they will give because the risk is very low, because the country has very high solvency rating. There is political stability. So if you want to get new money, it's, they don't need to give a high return to people that are giving them the money. So this is the whole principle of this risk versus return band. The higher the risk, the higher the expected return, the lower the risk, the lower the return that you will get. So you need to strike the right balance as an investor where you will put your money into. And as already said earlier, is my, my expectations in terms of yearly written on between five to 7% if I'm able to do that year over year, and I'm doing this now for 20 years. And if I continue doing this, obviously my wealth is increasing. But I need to be patient. I'm not an investment style where I would like to double my wealth from one year over the other because that would take me too much risks to take. And what is interesting, and I mean, for those who follow me and the value investors. So I, I've been learning a lot of reading a lot. You sit in my library behind me reading a lot around security analysis, value investing, listening to all the podcasts, reading all the investor are shareholder report from Warren Buffett's Benjamin Graham books as well on the Intelligent Investor. And, and what is interesting is that indeed Buffett says the same or I learned from him. So he, he taught me that, throw those readings and listening to this podcast. That if you are able to grow your wealth by 67% per year over a 30-year period, you will become super rich. And this will also allow you not to destroy value. If you take into account that average inflation will be between 1.5, 2% at a worldwide basis. Obviously for your country, inflation may differ. I live in Luxembourg over the last year, the inflation was between 2003.5%, but still with sixty-seven percent on Euros. I'm okay with having such a written on a yearly basis. And remember, I want you to act as investors, not as speculator. So I really believe that having such a return year over year and but you need to be patient. If you're able to compound this every single year, you're gonna be richly gonna multiply your wealth. And if you start with 1000 US dollars, you're going to multiply those 100 US dollars over the next ten years. But if you put 10 thousand or 100 thousand US dollars, it will be the same effect if you're able to achieve the sixty-seven percent return year over year. So with other I'm wrapping up here the conversation around cost of money and capital allocation. I hope you enjoyed it. I hope also that you understood that we came in, in the first lecture of this chapter and understanding how cashflows through the company from the liability side, turning it into tangible assets and then trying to turn it into profit through productive assets. And then you need to take on the profits. That's, that's that's a residual that remain the management of the company or the board of directors. You need to take decisions what to do with money, but those profits, but they need to take into account also risk versus return. What are good capital allocation decisions? Is it better for them to put that money into the operations? And so putting the profits back into the operations to grow the market share the number of customers at the company has. We're gonna discuss it in the next lecture when we're going to discuss corporate life cycle, or is it better that they give a return to the shareholders? And this is what we want you to understand. The next one before we decide or we define dividend and the different types of dividends, written a standard corporate life cycle. What are typical attributes of companies when they decide to pay out dividends versus keeping the profits and bring them back into, into the operating assets or the production of the company. So here we will discuss mature companies with versus growth companies of growth stocks of this. So stay with me, that's part of the next lecture on corporate lifecycles before going into the dividends. So hope you're enjoying, enjoying it so far and stay tuned for the next lecture. Thank you. 5. Dividends vs Corporate lifecycle: Welcome back dividend investors. So in this lecture, we're going to discuss corporate life cycle because before understanding why companies do or do not pay out dividends, it's important that you understand also how, what is the life cycle of a company and through which stages the company goes through from the inception phase of potentially to dying or in your face. So when you look and this quarter Z of next ten sources that I've put you here. When you look at the typical accompany lifecycle, the company will go through many phases. I mean, when you start and I've started as well start-ups, it comes first of all from an idea. And very often this is very fun because people who don't have money have ideas and people who have sometimes money, they do not have ideas. So this is where the banks, or at least also investors come into play to give money to people who have ideas that they do not have. But typically you can see it goes from an idea. Then the startup is created with initial funding or seed funding. Then it goes through a rounds of funding, ABC series. And at a certain time the company is growing, becomes mature, and, and even potentially has different shapes. And then kind of people and management go into a comfort zone and the company becomes less profitable. And I submit in time, it comes even rigid and potentially the company dies. If you look at it from a little bit, a simplified graph that I like to you as you go from the launch growth maturity decline phase is if you look at it from a revenue's perspective, I mean, this is the curve, how the revenues go and grow. So always accompanies sounds with very few revenues and then it grows, grows consistently. And the challenge is to continue to have that level of growth. Always keep in mind that companies cannot grow at a 30% growth rate for 100 years. They would outgrow the US economy, the Europe economy. They would outgrow even the universe. So certainly time companies, they are going to have their growth rates that will flatten and will become organic. If you look at it from a profit perspective. And specifically when, when, uh, companies in their startup phase or in the lawn trees, they do business plans. And they know that the first certain period of time of the launch phase, they're gonna destroy capitals because they need to take that cash. And we have been discussing in previous lectures, transformed into assets. But in the beginning of his assets will not generate a profit. So the capital equity is going down. They may be even writing losses instead of profits, but at a certain moment in time, if they have a good product, a good service, and they have good go-to-market strategy, the profits will increase and the profits will then increase. I would say in the same way how revenues increase. And at some point in time when the company has reached its maturity phase, obviously, the profits will go down and potentially go even to 0 or become negative. If you look at it from a cash perspective, it's a little bit similar. It's just a little bit delayed in time. So after the launch phase, the company is still destroying obviously cash because it needs cash for those in the beginning, non productive assets and answered when in time the profits will allow to, let's say, to bring back the original position of the cache. And, but again, it follows the same cycle. This is very important as a dividend investor. So this red frame, you cannot expect from companies that are in their lounge or growth phase to pay our dividends. The reason for that is that those, if you remember and we're going to re-discuss it, is that those companies in the cache, a circulatory system are, there are the stage where, remember the car circulatory system, you have cash coming in from investors invested into tangible assets. Are those assets generate a profit? Yet profits will be allocated into increasing the growth, increasing the market share, gaining new customers, it will not be paid out to the shareholders, at least during the launch and the growth phase. The typical, what I call dividend payouts zone is where when companies are in their maturity phase or even when they start in the decline phase, because it would like to keep their shareholders and their giving them a return to make those shareholders patient. Maybe they turn the company around when we're speaking about a company that is declining and what happens. And I'm going to show you an example later on as well with Microsoft, for example, you have companies as well that are able to go through a renewal face. This what I'm showing you here in this graph. So they went through lunch and growth phase at a certain time they became mature. There was a certain decline because they stopped innovating and they, they went into their comfort zone. But the change of the management of the Board of Directors, of the shareholders changed the management and the new management came up with new ideas, new innovations which allow the company to fuel a new, a new face of revenues and new cycle of revenues, of new profits and cash. So it does happen and I'm going to show you through this example from a dividends perspective. And you see this now in this extended red frame is that the dividends, Very often when the company has started paying out dividends. Remember when I was defining dividend in the very beginning, I said, But you have a company that starts paying out dividends. It's very difficult for the company to stop paying out as dividends. It does happen. Just look at what happened during the qubit 19 and please stay with me in this course, we're going to discuss dividend aristocrats and dividend kings at the very end of the course. But asset. So remember that dividends, they act like a stick to management. When management has started paying out dividends, it's very difficult to stop paying out those dividends. And when the company started to go into the decline phase, but maybe through a change of strategy, change of management, they went into a renewal phase. The company will do its best to consistently pay out dividends even when the company was declining a little bit. And this is a little bit what you see here. Take it as, I would say, a general assumption. You may have companies that started paying out dividends through a short decline failure. They stopped paying out dividends. And then again, they restart paying out dividends in the renewal face. But as a general assumption considered that this is something where companies typically, it's a Zona. Companies typically pay out. Dividends. And when we discuss about this corporate lifecycle, This feels like little bit theoretical those curves. I want to show you a concrete examples. The first one is if you look at the Dow Jones 30, which is a document industrial average, average, which consists of the 30 largest US and publicly traded companies. And this is courtesy of the SAP Dow Jones Law. You can see that in 1928, you had some companies like America, a smattering of American Goodrich International Nickel. And you see that today, and this graph goes until 2019 a per seconds. You see that a lot of, I mean, the doldrums, 30 of the largest companies in the US. But still, even though those companies have 0s to hire talent, they have 0s to find new money from creditors, from banks, probably from shareholders. Even a lot of companies have disappeared or have been removed or swept for other companies. And you see there is in this graph, evening, Dow Jones 30. There had been enough changes in and out of this index while being speaking about large cap, mega cap companies. And what does an interesting thing, and I'm using this also in my trainings is that we see that the average life cycle of companies, it is doctrines 30 or the S&P 500, which is a broader portfolio, or let's say of the 500 largest US publicly traded companies, we see that the average lifespan of a company is going down in the 19 fifties. It was like 60 years. That's why, if I come back to this Dow Jones graph, you see that there have been more changes happening since the last three to four decades than for the previous half century. But, and this is, I think it's a study that has been done by New York University professor. You see that the current lifespan in the S&P 500 is around 15 years, which is really not a lot for those very, very large companies. And, and discontinuous. I mean, I've taken here an example of August 20-20, whether Dow Jones decided. And you have here also as well the weightings bisector for Dow Jones by end of July 2020, you see that information technology is like 27% of the Dow Jones weight of as EV, those mega caps like Apple, Amazon, Facebook, Microsoft, Google as well. So Alphabet and so health care. I mean, you see the percentages and what is interesting in August 2020, the Dow Jones has decided to swap three companies. So companies like Pfizer, which is a pharma company, Exxon Mobil, which is oil and gas, oil and gas industry, and Raytheon, I think if I'm not mistaken, it's a, the microchips are either military or Aviation and remember, sorry for that. And they are replaced by Salesforce, which is a tech company, Honeywell kind of as well, and MGM, I think it's a biotech company, if I'm not mistaken. So see that even as we speak during the 19 crisis. Jones 30 is adapting to a market conditions. What they feel are companies that should be part of that huge index versus other ones that should go out. If I take the example of Microsoft, I mean you remember the curve that company is launch phase grows, becomes mature, and then there is a potential decline. Microsoft went through that. They had until 2014, with all the respect for the CEO, Steve Ballmer, they they had a lot of cash cows like Windows and Office. But I certainly time max over stagnating and they had to change the management. Satya Nadella came in and Satya actually change the total addressable market of Microsoft. And you see that the share in the total revenue of Microsoft that was very focused on max of products and not allowing the technology, the max of technology and products to be used by by competition, example iPads. We've seen that a lot of the revenues are also coming by selling subscriptions on competitive, on competitor platforms. So this is a good example where you see this decline. So maturity decline phase and then a renewal phase of a company like Microsoft. So having said that is, you remember this cash secretory system graph is at a certain time the company, depending on where it is, in terms of maturity phase, has to decide. Do I reinject the money into the, into the operations typically at launch and growth phase, this is what will happen. They will not give a return to the shareholders immediately. They prefer to take the cash and grow the market share and grow the customer base from when the company isn't maturity phase, maybe starting decline phase or renewal phase, then there's going to be shareholder return. And we're going to discuss in the next three lectures the ways, the various means that a board of directors has to give a return back to shareholders. Remember this graph we'll discuss in the previous lecture that a company has to take decisions between, so on capital allocation between risk versus return. And you remember this when I discuss in the previous lecture that an investor has to take decisions between various investment vehicles being in the bank, savings account, stocks, real estate, but a company and the board of directors, they need to do the same. So they need, depending on their risk appetite, on the expected returns it would like to have. And also the competence as well. And just looking at the options, they would have an a CEO of a company and even the board of directors. If the, if the assets generate fresh cash, they need to decide what do we do with that cash to it, give it back to the shareholders, but the money has gone, will not increase our market share. Do we invest into new manufacturing plant and you e-commerce platform? Do we put our money because we don't have a possibility to grow further or market share and we don't want to do geographic expansion that we put the cache into other securities. We do have companies that transform their cash into securities to get some kind of return. Or do I does the company just retained earnings waiting for an acquisition opportunity may be in two to three years. That's the kind of decisions that they can take as a management or board of directors. And this is an example, and this is exactly what we're going to be discussing in the next three lectures. This is an example where a company, so remember the cash circulatory system. Cash has come in, cash has been transformed into tangible assets, productive tangible assets are, those assets generate cash, net income, and the board has to decide in the management has to decide what do we do with that cash. In this example, it's just an example. The profit of the year, 50% of that profit will be reinvested into the productive assets, into the operations. And the company and the board have decided that they're going to take 10% of that profit to reduce the amount of debt that the company has. And 20% of the profit to give a cash dividends to the shareholders. And also 20%, if it is a publicly quoted company, a publicly listed company, to take 20% of the income and TBI back, so to remove shares from the market. And I'm going to explain that in detail. How does that work? What are the effects of Sherpa effects as well? But from the 100% that has been generated in terms of net income, they can decide to allocate left or right with various percentages are only right, the only left. What they do with the net income of the latest period, let's say in this situation of the last fiscal year of the company, how can you Annemarie sharing you here we started discussing balance sheets in the, I think was a previous lecture. So in this lecture, what I'm ready, I'm already sharing with you is when you can, can you monitor what the company is doing with its profits? But the right hand side, so the return to shareholders, you need to look into the cashflow statement. So the return to shareholders is, let's say registered, written down in the cashflow statement as a financing activity. So again, the purpose of the course to depict the whole cashflow statement, but to make it simple, you have mostly three categories of cashflows. Cashflows that are ready to operating activities. So operations are the ones that are linked to investing and other ones that are linked to financing activities. And, and this is, what we see here, is the when the company pays out a cash dividends or is, or is buying back shares from the market, or is reducing the amount of depth. You're gonna see this typically in the financing activities of the casual steam. And you see it here in the red frame of this, an example of a company where you see three years 20141516 with those three vehicles of giving a return to shareholders. So to wrap up this lecture and to summarize, so remember that when a company generates profits depending on where they are in the corporate life cycle. And it's important to understand for you as the dividend investor, that you will probably not get a very high dividends when you invest into growth companies, because it will probably prefer to take that money and reinjected into, into the current operations to expand their market share, expand the number of Cosmos at they have, when you have companies that are mature or even sometimes in a decline. And this is where we're going to discuss value traps at that moment in time, which is a risky investment as well. But if the company isn't mature, you will very probably see dividends rain back and definitely return to shareholders on the various means. And this is what I'm kind of summarizing here. Either through adapt payoffs, author share buybacks, or indeed through dividends. The most well-known way of dividends is a cash dividend. But we're going to discuss in the next lecture different types of dividends that indeed exist and are used as tools to give a return to shareholders by those companies. So that thank you for your attention. So we have in the previous three lectures, I hope that you understood how cashflows through a company. So from right to left and then from the left, potentially back to the right, to the shareholders. And I hope that you understood the impact of inflation on the cost of money and also how investors, they need to think about what are goods, capital allocation decisions in what they should invest into because they have various options. But depending on the option, they're taking more risks. And they take, yeah, by taking high risk potentially may lose everything. And, and this is also free us David investor and important notion to understand. In the next lecture, we're going to really go deep now into dividends, different form of the evidence that exists before wrapping up this chapter with share buybacks and depth pay up with that, thank you for your attention. I hope that you are interested in joining it and see you in the next one. Thank you. 6. Dividend types & shareholder return through dividends: All right, welcome back, dividend investors. So in this lecture, as we have been discussing, cash, cost of money, inflation, capital allocation decision, but also the corporate life cycle that you understand. Where in the corporate life cycle companies typically pay out dividends. In this lecture, we now going to go into really deep dive into dividends and what kind of dividends types do exist. Just as a reminder, what we discussed in the very beginning of this, of this training is so dividend comes from the Latin word dividend and which means something stupid, thumb, something to be divided. And typically, typically, as I said in the introduction of this training, its rewards paid out by the company to its shareholders, typically out of its profits. Remember that I said, I don't like companies that raised debt to pay our dividends. That's for me a very bad stewardship decision to do. And you remember in the beginning, without going through the details, I said there are different types of dividend forms. The most known being a cash dividend. And we're gonna discuss specifically in this lecture are the different types. And again, gonna give concrete examples of types of dividends or how you can see the various forms that companies pay out dividends. Always remember that dividends, it's at the discretion of the company. They are not obliged paying out dividends. And it's not limited to publicly listed companies. But again, don't wanna just insisting as, let's say, warming up through the conversation with what I said in the very beginning of this training. So why do companies pay out dividends? So first of all, it's a capital allocation decision. Remember when I showed you in the previous lecture the risk versus balance graph. And so at a certain money time, depending on the corporate life, Sackler Weather Company is they're going to start paying out dividends to their shareholders as a reward for their patients, for their trust in the company. And typically it's x1 when companies are doing well and they do not have better capital allocation decisions, they are dividends. I was giving me for m and the previous lecture in the example where the company was taking 100% of its profits and just giving 20% as a cash dividends to shareholders. So it's very often, it's not a binary decision. Do we pay out dividends, meaning the full amount of the profits or not? It would be a balanced decision in most of the companies if you look into so part a percentage of the profits will go into the operating assets. So to generate, to grow further, the market share, part will be used to paying off debt, and part will be used to give a direct written a or through share buybacks or through dividends to the shareholders. And this is what I'm showing you here. If you remember this cash circulatory system here we are clearly taking an amount of the profits generated by the operation of assets and giving this an outflow of back to the shareholders or the owners of the company. When you look at dividends times and maybe, I mean, if you interests a little bit into it, probably have heard other terms that only a cash dividends, but this is a list of dividend types that exist. You have typically the cash dividends type, which is paid out in currencies. It's taxable to the shareholder. And they're gonna give you a concrete example. I think it's in the next slides that I'm going to explain to you how taxes have an impact also on the return that you get on cash dividends. And the impact for the shell is because of opportunity. So what is being done with that? Money? Companies sometimes payout as well, especially one time dividends, can be related to an extraordinary events that they say. For example, our profits have been so high this year, we want to reward our shareholders. And this would be again, It's a specific form of a cash dividends very often. And taxable as well, do not forget that this one is taxable. Scripted events. So scripted ends and they're gonna give an example on Telefonica. It's a way of rewarding shareholders by printing new shares. It's taxable as well because it's considered as and revenue stream. The impact for the shareholder is that if the company has, let's say 100 shares and it's printing. And you have 100 of those 1000 shares, so you have 10% of the company. The company is printing new 1000 shares. And the total amount of shares is now 2100 shares and the longer 10% but 5%. This is what I call the delusion of the book value of shares. So some people do not like scrip dividends. I'm kind of mixed about that. I'm OK to get a scrip dividends. Another condition that the company consistently continuous paying out cash dividends at a certain moment in time. Warrants are gonna go. So show you, so I'm gonna go, I'm gonna show you a very concrete examples on cash dividends, scrip dividends, but also warrants. Warrants is a legal future entitlement. It's like a contract, an agreement between the current, so the current shareholder in the company and the company is giving like an option to buy new shares somewhere in the future. And from a textbook perspective, it depends in which country you are. In some countries, you're going to be taxed at the execution. In other countries, you're going to be taxed at the entitlements at the, at the day this legal entitlement is setup and not when it is executed in the future. The impact of the shareholder can be, again, I'm neutral on this can be considered negative because printing out new shares is like diluting the amount of existing shares as you are remunerated with, accompanies remunerated the shareholders with new shares. You do have warrant warrant plans where the company is not printing out new shares, but just giving an option to buy on the market shares at a certain cost price. And this is the example I'm going to give you four Reshma. It happens, it's not very often, but the dividends are turned into form of property. And what could happen is in terms of products. So imagine it's a retail shop and instead of paying under cash dividend, they are shipping, I don't know, chocolate bars to their shareholders. So it's similar to benefit in kind to it can be text as well. And yeah, so I mean, I I never saw in my investment universe companies paying out dividends through property, but you never know it. I mean, it's a form of dividends that could exist. And then liquidation dividends, this can happen as well when a company decides to shut down its operations for whatever the reason is bankruptcy or not, it could potentially if they are amanda still returned earnings that are still return retained, sorry. And the liquidation of all the asset and paid back all the depths. They could potentially also pay out a liquidation dividend. But again, I never saw this kind of example. And also what is important, and we saw it, I think it was in the previous lecture that dividends are not considered an operating expense, but they're really considered a financing activities. They do not appear in the income statement, they appear in the cash flow stream. That's an important thing because I want you to develop your eye practicing and looking into those financial reports so you will not find them in the incomes him. You need to look at the cash flow statement for dividends being paid out. So I start with a very easy example that is not directly related to company where we have a cash dividends. So let's assume the company has decided for one share to pay out a $1 cash dividends. And in the US, typically cash dividends are taxed at 15% for the time being, you have other countries, it's 19. I think Germany's twenty-six percent, Switzerland's because I do own Nestle thing, it's 33%. If I'm not mistaken that I pay in terms of taxes to the Swiss government. And because it's considered like revenue, revenue, revenues have to be taxed or incomes have to be taxed as well. And so when you calculate your return, you need to take into account that when the company says the pain you're out a $1 per share cash dividend, you will not see the $1 per share except if you would have maybe a company in the United Arab Emirates. I understood from some ambassador there, it's tax free, but otherwise you need to get the net return of your investment. So for one child that you have invested, you are getting a $1 on the share. It you need to calculate it after taxes. And this is the example I'm giving you here. So you have the gross cash dividends with a certain amount of taxes depending on the country that you are in. And then the payout happens, but you will only see the net cash dividend, which is the gross cash dividend minus the tax rate. So you see here $1.1 US dollar and you expose the 15% taxes, you only gonna see eighty-five cents of the cash dividend, which is 15% less. I mean, if you're having a dividend yield of 5% unitary move, then 15% of those 5%, which will be something like four dot, dot 4% as a net dividend yields. And as I said already earlier, is, so dividends in general, you will see them in the cashflows him and not in the income statement. I'm taking the same example I was showing in the previous lecture where you see. The cashflow statement for a company for the last three, so far, 2014-15 and 2016. And you see here in the financing activity in the red frame that the company has been. And you could analyze what does this mean? The company has been more or less consistently paying out three billions of cash dividends to its shareholders. We're gonna discuss dividend yields and how to calculate that and value later on. It's in a different chapter. But for the time being, just consider that you now know that the payment of dividends is reported in the cashflow statement or in the income statement. And in this case, you see that the company has been consistently ping out around 3 billion US dollars of cash dividends to its shareholders. And obviously it's booked as a cash out. So it's booked on the brackets in us, let's say term standards of writing these into financial reports. It's a negative figure. When it is under the brackets, maybe in Europe you would see an negative sign in front of the 3058. But this is indeed a cache up to it reduces the amount of cash that the company has. Let me give you a concrete examples because as I told you, I like you to practice your eye. I'm going to this financial reports and being able to understand what the company is doing. And I got to start with a company. And again, I'm not telling you buy this company or not. I'm just giving them concrete examples that are part of my portfolio of companies. Nestle is the largest food manufacturer in the world. I do own them and I want to explain to you why I own them and again, please, I mean, I'm not telling you I'm giving you now here recommendation by them. Everybody has to take their own decisions and remain and take accountability for that. I'm just giving you an image, just sharing my experience, which is the purpose of this trainings and I'm doing on these platforms. So Nestle, what is remarkable for Nestle is that since 1959, you know that since 1959 there have been a lot of crisis. 1973, there has been, I think, Wars, oil shocks. You had 911, You had the subprime crisis, European debt crisis covered 19, unless there has been consistently paying out dividends since 1959. And on top of that, growing those dividends every year without any single interruption. Again, I'm not telling you should by Nestle, but that's the reason why during the 19 crisis, I decided to investing too nasty because I had some cash that was available and the stock went down to, I think 95 and it's now around 110 at the same time. And I'm getting those two dots, 70 Swiss francs on a share per dividends. The bat that I'm making is that the dividend will increase and then I will be able to get, if I keep this shares for ten years, 20 years are going to be at maybe 10% of yearly return, but I need to be patient and keep those stocks in my portfolio. So this is an example of a cash dividend. They do pay out cash dividends in Swiss francs. And as a shareholder, I'm exposed to the tax authorities of Switzerland and I'm paying 26% back. On the initial gross cash dividends in order to get my net cash dimer, which is more CDS. It's, and I think in luxury brands it's very important luxury branding in cars, but also they do trucks. And here, what I wanted to show you is mercedes as well pays out the cash dividends, sorry. Pays out a cash dividends, but they have specific dividend policy began and discuss dividend policies in the closing chapters. But dividend, sorry, mercedes with Dymola has said that our dividend policy, and you see here the snip of the investor relations site and you have the sources also in the left, left bottom corner. They say, whatever the profits are, 40% of our profits go back as cash dividends to our shareholders. This is what the current management has decided and they are doing it kind of consistently. Of course, if the profits are negative or bad's 40% of nothing is nothing. If 40% of huge profits, you're going to, I mean, I did, is I, I really had thousands of euros that came to me because they had over the last couple of years good results. The results are getting better. But obviously with the qubit 19 crisis, Chinese market shutdown, it also complex for them and they need to move from combustion engines to electrical or hybrid engine. So there's a lot of investments going on. But I believe it's a very strong brand. That's why I do like an I keep the shares that I have in Dymola currently, but here cash dividend, one with the concrete dividend policy, it's 40% of our profits will be paid back, would have given us return to our shareholders. Telefonica, it's Spanish telecom company like AT&T for you guys that are from the US. And here I'm giving you another example. You remember in the types of dividends I was telling you their cash dividends, onetime, special dividends, you're gonna have scrip dividends and warrants. So here we are no longer in cash dividends, but we are in a script evidence. So scripted event is and entitlements based on the number of shares that you have today to get new shares from the company. So the company is printing new shares. And and this gives you a certain return. And I am taking an example, June 2020. And you have here the extract and the links to the California site, where imagine you would have around 5 thousand shares of Telefonica and you would get a script rights, what we call scrip, right, of 0 dots. And that was the real case here. Sorry, you see it in the red, in the red circle. You would get a script right, of 0 dot 19€3 per share that you own. The current market share being at around four Euros. If you take the amount of shares that you have, let's say around 5 thousand. You multiply this by the script, right, per share divided by the current share price. This will give you 238 new shares because you do have 4,950 shares, you will get 238 new shares. And obviously you ex-post to taxes. I think in Spain it's 19%. That's why I did the calculation here with a tax rate of 19%. So net-net, you're going to have 192 new shares and this will give you a yield of 387%. Because without doing anything, this is kind of this passive income streams. Without doing anything, you have moved your amount of shares of Telefonica from 49524,950 plus 19 to these 19 two on the 4,950 is a 3.What 87% return net. So after taxes and for dot AT pretax, this is a scrip dividends. But I do not like about scrip dividends. It's printing new shares. So the 4,950 are no longer worth from a book very perspective what they were worth before going into the value investing course to understand what book value is, it's not the purpose of dividend investors to have a clear understanding on that. But just consider that if a company decides to create new shares, the old shareholders are kind of penalize and their value is a little bit destroyed. That's why I do not like too much of those script dividend mechanism. I do prefer cash dividends shy, but share buybacks or even warrants. This is the next example I'm going to give you, which is rational. And a lot of people nourish mom or reach meu is one of the largest Swiss companies. They own luxury brands like captive and Kevin outputs, which is a competitor to Tiffany's. So Diamonds, retailers, a lot of luxury man's watches and those kind of things. So it's really a super luxury brands. And and I mean, again, not giving you any recommendation of service station to buy them, but I own them in my portfolio because I do like luxury brands. They tend to be a little bit better and through crisis than I would say other industries and what happened. And you can see on the right-hand side again, always putting into the sources that you can look it up yourself because I want you to become an independent investor and to know why. If your mom, if your wife or husband would ask you, why are you putting your money into this company that you understand what you are doing? So you need to be able to explain the reasons behind it. So here for Reshma, you see that since the year 2 thousand, they have been paying out dividends. And those dividends even until 2019 have been growing. We're gonna discuss dividend aristocrats and dividend kings. This could be a kind of a Dividend Aristocrats, dividend King. Maybe we're going to see what happened in 2020 when he 20-20 because of the qubit 19 crisis, Reshma has over the last year, is it transformed as well into selling online luxury items, selling online with things like watch finder yokes. And this kind of things have a partnership with Alibaba. But what they did, a lot of their luxury shops, for example, infinity I need tell me they were close though Chinese or in airports as well. There were, there were no tourists, so they had less revenues, what they design it. And this is also something that you need to know. Reshma is a family owned business. And they decided to preserve cash just to make sure that they have enough cash during the crisis. And they said, listen guys to the shareholders. What we proposed in 2020 is we want to remunerate. Our shareholders will be unable to give to Swiss Francs as, as an ordinary cash dividends to our shareholders. So we're going to reduce by 50%. We do apologize as management for that. But I think it's better even for you as shareholders, that we are a little bit more conservative on the cash dividend that we're gonna do this year. But we want to, we will pay out a cash dividend and actually we are now September they're paying out the cash student now in September, we're going to discuss about the dividend payment process later on in this course. And what they said is, we want to set up a loyalty scheme for shareholders because we obviously recognize that one Swiss Franc versus two last year. You are nonetheless little bit unhappy, a little bit frustrated as shareholders, or you're going to do is we expect the market to come back over the next few years. What we're gonna do is we're going to let's say, give you warrants that you can now in 20-20 shell as of 2020, you have them and that you will be able to exercise in three years time. We will guarantee you is the current price of the markets by remember the exact date, I think it's 15 of September 2020. So they're taking the price of a rich Marsha, September 152020. And they're gonna say, in three years time, we can guarantee you that you can buy through that warrants schema. You can buy shares in 2023, whatever the prices at the price of today in the hope that the price will obviously increase. So, and this is a document that comes from the Reshma sides and that I receive as well as shareholder LOA, the given example. And I'll try to make it very easy here. So under the assumption and the share price is around, I think 6364 bit higher what their assumptions were when they printed out this document. If the share price, let's say it's 60 in September 20-20, and the price three years later is 90. The 30 difference is a profit for the shareholders because they will be able to buy shares from from Reshma that are quoted on the public markets at the share price of 90 Swiss francs per share. But they are entitled for these warrants scheme to buy them at 60 Swiss francs. Which is actually very interesting because you're going to turn a profit by the exercising of the Warren's. Of course, if in three years time the shepherds of Reshma has gone down to 30, you will not exercise as a shareholder, Anna, and I will not exercise as a shareholder those warrants, but I have those entitlements now that are let's say register because I'm a shareholder of Reshma. And I hope that in three years time the economy is booming. To some extent again, that has been increasing their profits and I will exercise those warrants in order to buy new shares at 60, hopefully and whatnot, Sorry, I have a guarantee of buying them at 60 and hopefully the price would have increased maybe to 890 or even 100. And the difference between the two, that's my share appreciation to have gained in terms of capital, in terms of wealth. So with that, I'm wrapping up this lecture was already a little bit longer. I see it was kind of 25 minutes, but I think it's important that you understand that dividends are written to shareholders. There are some tax implications related to dividends and the different forms of dividends. Cash dividends, scrip dividends, Warren's. Those are the typical schemes that you see on publicly quoted companies as well, especially one time items or cash dividends and didn't cover them here because it's a cached and it's just an extraordinary event that they do. It doesn't happen very often. But a lot of companies, they do pay out cash dividends or they go for indeed, scrip dividends or even for warrants depending on the situation and the right vehicle. And you saw that at Reshma, they actually use two vehicles. They use cash dividends on one Swiss Franc that was 50% lower of the two from last year. And on top of that, they added his warrant entitlements for their current shareholders. So I hope that it's now much clearer and better on the understanding, on your understanding of dividends, different forms of dividends, and also the tax implications around that. So with that, thank you for your attention and also for these longer lecture. And in the next one we're going to discuss share buybacks. And you're gonna see specifically on, on, I do like sharp buybacks as well because I'm not exposed to taxes, but we're going to discuss in the next lecture. So stay with me. Thank you very much and tuning into the next lecture. Thank you. 7. Share buybacks: Welcome back dividend investors. So in the next lecture, after having discussed different types of dividends that exist, I'm gonna walk you through, throw different type of return to shareholders, which is or our share buybacks. And just to warm up a little bit conversation in this lecture. So we are going to be now a little bit more precise is when we are discussing about and shareholder returns, as you can see, on the liability side, we have the creditors, we have the equity owners, which are the initial investors or the shareholders. So we are now in the conversation if remember the care circulatory system and that there is a return flowing back to the shareholders. In the previous one or two lectures hours explained to you that we're going to. And I'm gonna walk you through the different, the three different types of returns that I do see. One being cash dividends, what we discussed, or sorry, dividends that we discussed in the previous lecture. In this one it will be share buyback, which is not a direct cash return. And this is where I'm kind of already separating between direct cash returns, either returns, cash returns and are now or in the future. If we look at scrip dividends or warrants and share buybacks like depth paybacks or down payments. More what I consider non-cash returns because you will not directly have an impact on your bank account or cash flowing in either now or in the future. But let's go into the details that you understand why share buybacks are interesting. And you're also going to have a conversation on tax exposure as well. Alright, so what are share buybacks? So Sherpa, buyback is way also accompany to reward shareholders. The, it increases the value of the stock, specifically the book value of the stock or the equity portion of the balance sheet. And what is interesting is it's tax-free for the shareholder. So that's definitely something that is very interesting. Obviously as always, there are some pros and cons. So the pros, the most important one is that you, as a shareholder, you will not be exposed to taxes if you compare it, for example, to cash dividends, the coin is, as always, if the company is raising depth, putting share buybacks, again, in my opinion, that's really not good. And before walking into two different angles are examples of it. So there are two ways you can look at share buybacks, how Eat remunerate shareholders. The first one is the increase of the equity slash the book value of one single Share. This is what I'm going to explain to you. But also some people or even analysts, they don't look necessarily an increase of the book value of one single share, or at least what they owe and in terms of equity. But they look also at how share buybacks artificially, let's be very clear. It's artificially increases the earnings per share. And I'm going to walk you in the upcoming minutes, are going to walk you through those those two angles. How the book value is increased, but also how the earnings per share are increased. So the first one is the impact on the book value of the equity value. So let me elaborate here in this example. So imagine that the company has, or you have 50 shares and the equity of the company is worth 100 thousand US dollars. So if you own or if the total company owns 50 shares or has 50 shares that represent the full equity of 100 thousand US Dollars. The one cher has a book value of the total equity divided by the total number of shares. So that's 100 thousand US dollars divided by 50 shares. If the company, let's imagine it's theoretical, but let's imagine that the company, through the profits they did the last fiscal year, they decide to buy back five shares from the market. And obviously, I mean, the real, in real life, on the real stock market, you will have to add or to multiply those fingers been by 1000, by a million potentially. But let's just assume for the simplicity of the exercise that the company is removing five shares from the market to the company takes cash from its profits, are retained earnings, and buys five shares from the market. What happens to the equity and specifically to your equity. So the, you need to take, because the equity remains unchanged, it's 100 thousand US dollars, but you just have removed five shares from the total amount of shares were 50. So in reality, you equity, you're no longer divided by 50 shares now, but by 45. And miracle, it's that the book value of one single share has been artificially increase from 2 thousand US dollars to 2222 US dollar just because you did not change the equity, but you just removed five shares from the total of 50 from the market. So you have removed 10% of the shares of the markets with cash to you bought like anybody could sue the company bought on your behalf those shares with cash that they had and with the agreement of the shareholders or the board of directors obviously, and the book value has increased by 11.1%. That's, that's great for you because you as an investor, you did not do anything. You just approved as a shareholder. Maybe having representative at the board of directors that they would buy instead of paying these in terms of cash and tons of cash dividends back to the shareholders where you're going to be exposed to taxes. They're going to buy on the market five shares of the total of 50. And by that, increasing your equity value by 11.1%, that's a great return, right? I mean, this is way above the six to 7% average yearly written than I would be expecting. Or that even Warren Buffett would like to have over a period of 30 years consistently. So that's one element how you can see the book value of a share can be changed in the interest of the shareholders by doing, by using share buyback methods and using cash for that. Second one, that's analysts. I mean, when, when you look at financial press, the Bloomberg, Reuters, Financial Times. When companies pose their earnings, they really like to look into earnings per share and try to analyze with the earnings per share growing or not. And since more or less a decade. And I'm going to show you this in the next slide. Since, since now a couple of years, what the management of the companies they like to do is to artificially increase these earnings per share ratio by reducing the amount of outstanding shares. So imagine, and this is an example. Imagine the company, a company would do a profit of 1 million. And so before, during the share buyback, the company has 1 million of outstanding shares. It's 1 million of earnings, US Dollars, Euros doesn't matter on a 1 million of outstanding shares. So with that, it means that the earning earnings per share were exactly of one. So 1 million divided by the total number of outstanding shares. Imagine the company would do a share buyback and would remove 40 thousands shares from the market. Obviously, by doing that, the earnings per share will grow because the denominator is smaller. So with the same amount of earnings, obviously, and having less selects an unheard 60 thousand shares outstanding. Obviously, your earnings per share just artificially have increased. And this is again, a way of how companies can artificially, let's say, increase the earnings per share ratio, which is something that a lot of fun the financial press likes to look into. And here you see that the, the EPS earnings per share one from one to one non-zero for does by doing a share buyback, what is positive four. And again, for the shareholder, is that you are not exposed to any tax, I would say accountabilities and, and it increases your value as a shareholder. You will not see this directly in your bank account because there is no cash flow coming into your bank account. But on the other hand, if you had one share before the buyback, now one share is worth more we sought in this example and we saw in the previous example where the book value of one share increased by more than 10% of it was, I think 11.1% by the SharePoint buyback mechanism. So I mean, if you want to have more details about it, I definitely recommend you on the book value and readjustment of balance sheet that you go into my value investing complete course. Because I'm going to speak extensively about this. So I was speaking about taxes and let me give you a concrete example how the share buyback has different impact than the cash dividends. So if you remember in the previous lectures I was showing to you if the company would pay out a gross cash dividend of one US dollar per share. That gross cash dividends carries an amount of taxes, 15% for the US, 19% for France, 26 for Germany, 33 for Switzerland. At the very end, depending on where you live, depending on that country has a double tax treaty or not, with your country of residence, you will have a net cash dividend. That will be probably this gross cash dividend in this example, one US dollar minus the tax rate. So you see that you're exposed to taxes and this is not the responsibility of the company that is paying out cash dividends to own that. When you look at the share buyback, if you kind of compare it to the cash dividends, if the company was paying out or doing a share buyback, equivalent of one US dollar per share. As you are not paying taxes on it. It's just a company that I was exposed to those kinds of movements. You remember that we saw in the simple example of total 50 outstanding shares, five being removed from the market, that your book value of the share has increased. So you're going to have a capital gain. But it is interesting is that at a certain moment in time, the market will reflect this because there is less author for, it's an often demand conversation. It's less shares on the market for your company that you have invested into. And, but that's automatically as the book value has been increased. Through this share buyback mechanism, you're going to see their share price in, except that there is a crisis. But normally the market, Mr. markets will follow and this mechanism, and you're gonna see the share price increase. So you're gonna see a capital gain happening. And the previous example we were showing the 11.1% because the total amount of shares available outstanding went from 50 to 45 through these five share buyback. I hope that is clear for you. And I do like companies who do a mix of cash dividend share buybacks, because I like to have cashback, tons of cash dividends, or can then decide to allocate the money somewhere else or maybe buy more of those shares. But also the share buyback is not exposing me to any taxes. And you as an investor, 20 taxes, so the book value of the share will increase. And if you look at history of buybacks and dividends, you see that if you look like two decades back, the, I mean, the amount of dividends has continued to grow if looked at from a volume perspective on the SMP 500. So those are trillions of dollars. But you see that the buybacks, I mean, if you look in the early two thousands, there were not a lot of companies that were doing buybacks. But you see that lately, I don't have the dq2 figure for 20-20. But you see that lately indeed, by banks even have outgrown, the ratio between buybacks and dividends by banks are now more than 50% of all the returns. If your total lines the two together, you see that there are more buybacks and dividends probably because of the tax exposure amongst others. But also for growth companies, growth companies they do like at a certain anytime before, if remember the corporate livestock before they turn into the maturity cycle or status, they, they really will start buying back shares from the market to have a capital gain to the shareholders. So that's really, and you see it here in the graph on the SMP 500. That's really something that is being done regularly and consistently over the last years. Asset with an increase in buybacks versus dividends. But dividends, you see that the total amounts continue to grow. And you, what do we find this? Where can we track what are the amounts of share buybacks that a company is doing? You may recall in, I think it was in the beginning of this chapter, I was telling you that. So from the financial repulsive financial statements, remember you have three balance sheets, income statements, cash flow statements, that returned to shareholders is a financing activity. You will not see this in the operating expenses in the income statement. And and you're going to look at the red frame. So it's the same company that was using before with the 20141516 cashflow statement. You see? And now I need to be precise here. The share buybacks in the US very often are reported under treasury stock purchases. So those are, that's the line that tells you how much the company has been removing shares from the market. You will not have it in amount of shares, but this is an amount in currency, US dollar, euro, here it's, the unit is millions of US dollars. Remember as I said in a previous lecture, that being under brackets in the US means typically it's a negative figure, so it's a cash out, it's not a cash in. So it's an outflow of money. And so last, I would like to ask you a question here is, if you look at the treasury stock purchases line, so well, can you kind of as an analyst, as an investor, tried to interbreed between 20142016, what has been happening in that company. So I'd like you to take a second and to look into that. So look at the land treasury stock purchases. So what do you think? So, let me solve this here. The, you can see that the company, and if you compare it to the line that is below, which is the cash dividends that were paid out to shareholders. The cash dividend has remained pretty constant, adds between three to 16 in 20143 to 3015 and a little bit less so short of above three. So 3 thousand millions, which is three billions of US dollars of cash dividends. So coming back to my question on treasury stock purchases, so share buybacks, the company has been nearly doubling every year since 2014, the share buybacks while keeping the cash dividends constant. So you'll see that the company has been buying back in 2014 nearly the same amount of or has been putting nearly the same amount of money into share buybacks versus Castilian. So three, 19, eight 0.6s for the share buybacks versus three to 16, No.1 for the cash dividends. But look at the 1015, you see that the company has pretty much remained stable at x3, 0, x3. So 3.times billions of US dollars of cash dividends, but has been buying back from the market for 6 billion of US dollar. And even if not worse, but it's good for you as a shareholder. In 2016. It even went to 11 D21, billions of US dollars of share buybacks by keeping the cash dividends at 3058 dots too. So that's the kind of thing. I want you to practice your eye and be able to look into financial statements, financial reports, in this case, the financing part of the cashflow statement. And you see that the company is indeed, let's say, burning a lot of cash for giving a return to shareholders. And obviously what you need to take into account. I mean, at a certain time this will have impacts if, if the cash and you see it above, if the cash provided by operations is not high enough, the cash burn rate specifically on financing activities will be too high. And a certain point in time the company has to stop doing those huge amounts of share buybacks and maybe kind back to a more reasonable ratio because it will be burning cash. And as always tend to say, it's always good for a company to have a minimum of cash. I don't know, five to 10% of the balance sheet and having that one very liquids under some kind of current cash assets. While it would not be a good tool to burn everything because maybe it a supplement Tammy company wants to become liquid to do maybe an acquisition. So those are the kind of things that you need always to be conscious about when looking at what is the what are the end positions of cash at the end of the fiscal year? And this is what I'm showing you here in the next slide. You see that the cash and equivalents at the end of the fiscal year, they indeed ones down a lot, obviously because of the huge treasury stock purchases of 11 billion while keeping the cash dividends more or less constant over the 20142016 period at 3 billion US dollars, more or less or 3.times 3.1a and three dot 0. So that's really first of all, understanding and why share buybacks can be interesting for shareholders. One of the things that's, I, I definitely like to look into when I look at my total return on my investment is I have an, i do include Treasury biobanks so that I have what I call a total yield or a total return expressed in percentages. And let me give you a concrete example here. This company had, and the graph on the left hand sides, on the bottom left is quarters the courtesy sorry, of morningstar.com. It's aside. I like to use I don't pay a lot of fees. I didn't pay any huge, let say, monthly subscriptions, but morning standard Cummings Really aside that I do like to use because it provides a lot of pre, let's say pre structured data on all the companies in my investment universe. And we're gonna discuss investment universe in chapter four, if I'm not mistaken. So in this situation, so this company that we were analyzing and we have been using the cashflow statements since already. A couple of lectures, 10142016, cashflow statement. You haven't understood now where the share buybacks are, whether cash dividends are. So the company at that moment in time had a current share price of 186 dot ten US dollars. And the total amount of outstanding shares, what was 861 million of outstanding shares? If you take and let's do the exercise following a, in 2016, the company has been removing 11 No.1 billion. So it has been spending 11.1 billion of US dollars on share buybacks. So that's the 2016 Treasury Stock Purchase figure of 111710. You can express this share buyback in a percentage. Remember there as an investor, you need to, depending on the risk versus balance, you need to have an idea, what are your expected returns that you would like to get from your yearly investments on a yearly basis from your investment. You remember I said for me, if I can get between six to 7% over a period of 30 years, that would be great consistently. So this 11 D21, 71 billions of US dollars, or 11,171 millions of US dollars, divided by the total number of outstanding shares means that the company has been removing the equivalent of 12 dot 97 US dollars of buyback per share at the current share price. So obviously it depends when they did the share buybacks. Some companies would once per year, other companies do it consistently. I do like and this is also an important statement I'm making here. I do like companies that do share buybacks when there is a crisis, for example, when the price of the share is depressed because people get emotional, do not like companies that wish I bought a share buybacks, sorry, when the price is at a premium price. And this is something I really do not like. So I really like companies when they buy their shares when the price is cheap. And, and so if this, so this term that 97 US dollar of buyback per share at the current share price is equivalent to yield, in fact. And what is it? Well, as we did in the very simplistic example on 50 versus 45 shares when the company was removing far shares from the market. In this real case example, the company has been removing six dot 9% of their shares. This is what it means at the current share price. And this is great because we have here two ways of making money. The first one is, remember the company is paying around three billions of US dollars of cash. So there you have a cash dividend yields, which is pre-tax around, compounded this, it's around one dot 9%, right? The total amounts. So if you take the 3 billion, you divide it by what was it 100 or sorry, 861 millions of shares. You're going to see that that cash amount is equivalent to 1.9% of the 186 dot 8-10. And, but the share buyback in this situation is adding six dot nine percents to your cash dividend yield of one dot 9%. And its logical because if you, if you look in the year 2016, the company has been spending, if you make the sum of 111001713058, the company has been spending more than 14 billion. From those 14 billion, nearly seven out of ten, or 70% of those 14 billion have been spends on share buybacks and the rest 30% on cash dividends. And this is exactly from a rational perspective. What yes, what you are seeing here is that your total return for that company in 2016 has been a great eight dot 8%. Inflation was at one that 5% when you have increasing your wealth by a massive, let's say more or less, 7%, which is really, really great. If you do this for ten years, you double your wealth by doing nothing, just leaving the company, pay out cash dividends to you that you will recapitalize. So you're going to buy new shares of the company. And at the same time, if the company is able, I have a doubt on this company that they were able in 201718 to sustain this 14 billion of cash out on shareholder return. But maybe it was the case may be I mean, I have not analyze it, but if that was the case, I mean, your, your total yield is really, really great and above the average that Warren Buffet told me it would be a good average yield over a 30-year period of hang the six to 7%. So this is how we need to look into this. So you see that Shabaab a share buybacks not only have an incentive that you as a shareholder, as an investor, you will not pay taxes on it. But what is great is that it adds to the cash dividends and you get a total yield, which is the sum of the cash dividends and the share buyback yields. And this probably will increase the total written that you have on a specific company and on your investments. So remember, this is very important to understand how you calculate this. Remember the cash dividend yield is you take the total amount in the cashflow statements divided by the total number of outstanding shares. And for the share buyback is the same. It take the total amount of share buyback purchases expressed in millions, billions of US dollars, and you divide it by the number of outstanding shares. And this will give you also a yield value expressed in percentages. In this case is one that 9% of cash dividend yields and 609% of share by vacuoles, which gives you a total return of eight dot 8%. And so, yeah, so keep that formula in mind. Do not forget that it's not just about cash dividends or script or warrants, but you need Austro get buyback heels to have a total yield. So with that, we are wrapping up this lecture. So you see that share buybacks can be an interesting way of returning or give, of giving a return to investors and to shareholders. And do not forget that it's not just about cash dividends, but you need to add both vehicles together. One being a direct, very probably cache mechanism that you're going to see an impact on your bank account or the number of your shares in your broker account. The share buyback Uganda, more C, capital gains happening at a certain time. And by that the book value of the one single shadow will be increasing and the earnings per share, just because a company is removing shares from the market and you have the tax advantage that you will not be exposed to taxes versus cash dividends as an example, or warrants or scrip dividends, those kind of things. So with that, thank you for your attention, who it was interesting and that, I don't know, maybe have learned something new in this lecture and in the next lecture we are going to discuss before wrapping up chapter number two, everything that is related to how paying back damped as well will increase the book value of your shares. And probably you're gonna see a capital gain through that as well. Thank you for attention and hope to see you in the next lecture. Thank you. 8. Debt payoff: Welcome back. Dividend investors, nearly finished with chapter two and the return to shareholders. And as the third vehicle of giving a return to shareholders directly. We're going to discuss in this will be a little bit more short lecture the depth down payments on the debt payoff as we call it. And you're going to understand What's nonetheless interesting and how we, how, y, sorry, y, we can continue this till a return for shareholders. Let me elaborate on that. So if you remember this studying again and rehearsing here, the big picture, so remember that we looked at 3V because of giving a return to shareholders. So two lectures ago we discuss about direct returns being either through cash dividends warrants, scrip dividends, especially onetime dividends. You remember that those are taxed in most countries. And in the last lecture we were discussing share buybacks knows explained to you that you could calculate a total yields by adding the dividend yields to the share buyback yield. If you look now at depths down payments or payoffs. So remember the cash circulatory system. If a company generates profits from his operations, the board of directors, the management has to decide what do they do with that cash? Do they allocate a portion of that cash back into operations to increase market share. Or, and, or they taking part of the profits and giving a return to shareholders. A way of giving a non-direct return to shareholders is by doing depth down payments or pay off of the depth. So let's, let's go into the details how this works and I'm gonna give this to you through an example. So remember that when we discuss about the balance sheet, and this is a very simplified balance sheet, but it's, it's good for the example, is on the right-hand side. Remember that very often caches coming either from investors, shareholders, or creditors depth a bank, for example, because the company raises a loan at a bank because you want to invest, I don't know, into pneumonia manufacturing plants. And that's the liability side of the balance sheet of the company, owns those people, those companies, bank, Bank of America, Wells Fargo, those are creditors, but also opens to the shareholders apart of the asset side of the balance sheet. And typically in a balance sheet, if we look at categories, you're going to see very liquid assets like cash securities, those kind of things. Then you're going to have tangible assets, which will vary probably be property, plant, equipment. Remember, we had an example on the limousine service where the car that was bought not rendered, but that was bought would be also as well a tangible asset in the balance sheet, in the asset side of the balance sheet. And sometimes you have intangible assets like goodwill or also which are the results of merging acquisitions, and sometimes also intellectual property or trademarks that can be intangible assets. And again, I got to have a specific course hopefully in the future on purely financial statements and financial reports on those things going little bit deeper for those that are interested in. So how does the depth downpayment or pay off mechanism work? Let me take a very concrete example. Let's imagine. So we have still this five categories that we were discussing, depth equity on the liability side of the balance sheet and cash tangible assets and intangible assets on the left-hand side, on the asset sides of the asset side of the balance sheet. Let's assume that the depths at a certain moment in time, the depth of the company is worth 0.5 million and the equity is worth 600 case. So 0 dot 6 million US dollars. Remember that the balance sheet has to be balanced out. So the total amount of liabilities needs to be equivalent to the total amount of assets. So the total amount of liabilities and 0.5x 06, that's one dot 1 million. So that's what the company has in terms of liabilities. On the asset side, the company has a cash position of 0 dot 2 million on the Wonder one, which is okay, ish, any task 800 K of tangible assets currently at the moment we take the picture of the Balance Sheet. One of the things that is interesting also look into not for dividend vessels, but for value investors. And this is something that I really extensively discussed in my value investing, is the debt to equity ratio. The debt to equity ratio also is a good criteria for value investors to see if the amount of depth at the company carries is, let's say okay ish, it's okay compared to the amount of equity that the company carries and and the book value. That's also something I discussed extensively in my value investing cause because it's not directly linked to dividend investing but to value investing. So the book value, it's the same as the equity value. So continue it this way that you understand. And I'm taking here a direct shortcuts to this. The book value is in case the company has to be liquidated. So it means that the company is shutting down. The company will do it will take is its assets and tried to sell those assets to turn them into cash in order to give it back to the shareholders. In case of a liquidation, those assets are sold, not discuss at which percentage they're going to be sold, but let's consider those assets are sold at 1.01y million. So cash is cash, that's easy and all the rest is transformed. The company still has an external debt of 0.5 million. So from the 1.01y million of assets, 0 No.5 is an external liability to credit us. So what remains for the shareholders is 600 K. So one dot one minus the 0.5. of depth, 0 dot 5 million of depth. So what we call the book value of the company or the equity value is in fact just the equity that you have after having paying paints of the damped totally 100% of the depth. So it means that if the company has a total liability of 101 minute on the balance sheet and it has paid back all its depth. The book value of the company is worth 600 K. This is important for you to understand that here in this example, what I'm telling you is the value of the company is not wonder 1 million, but the real value to the investors is worth 600 K Because there is damped and this DEP is not owned by the company, is owned outside of the company to creditors like could be Bank of America, Wells Fargo. Et cetera. So now coming back to depths down payments, the imagine the company during fiscal year or fiscal quarter doesn't matter. Fiscal periods earns from its productive assets, adds 100 K in terms of profits. So the company has to do something with that. Let's assume that the company is not transforming this fresh cache, which is a margin of profit margin into new assets. It just says, I would like to keep those earnings and I'm going to leave that money in my bank account. So what happens is what you see here is that on the one hand side is 100 K of supplemental profit increase the cash position of the company by 0 dot three. And that net income also increases in the position of retained earnings, which is a balance sheet position increases the total amount of equity of the company to 0.7. million serve 0.06 plus retained earnings. What is interesting already here is you see that first of all, the amount of the balance sheet has increased from one that one to 1.2x. The company has now 100 k, so 0 dot 1 million of assets. So that increases the amount of the balance sheet at the same time because they turned 100 k during the last fiscal period into profit. The equity amounts also increases, so the depth has remained unchanged to 0.05. but now the equity value has increased as 0.7. million, which obviously increases the book value for one single share as well because the company has not printed out new shares. But the company with the same amount of shares has increased the equity value of one single share with this profit that they did. What seems logical Again, you don't need a PhD to understand this. This physiological company turns, has more cache, does not change the amount of shares it has automatically the book value of one single share is increasing. And also very interesting is that the debt-to-equity ratio that for value investors, not necessarily for dividend vessel, but for value investors is a very important ratio to look at. What is the amount of solvency or how solvent is the company, solvable is the company. You see that the debt-to-equity ratio, that was 0.05. divided by 0.06. So that was 0 dot 83. Hazard ratio has now gone to 0 No.5 divided by 0 dots seven, which is now 0.7c one. I always tend to say and again go into the value investing costly have more details, but when the debt-to-equity ratio is below one, that 5-1, it depends on the industry. So chemical industry, former common effecting, they all are gonna have different equity ratio benchmarks. But I always said when you have a debt to equity ratio that is below one, that's really great. The company is very solvable, so the solvency ratio is very high. That is why we look as Van investors into this debt to equity ratio as well. Dividend investors do not directly look into that, but I'm not a dividend unless I'm a value investors. So that's why I'm yeah, without I mean with all humanity, without any arrogance. I'm Yvonne investors I do like into look into the debt to equity ratio of companies as well. And imagine that you have seen took liabilities balance sheet is Growing, Equity is growing. Debt to equity ratio is going down because they are retained earnings that are there. Imagine that during the next fiscal period the company decides, well guys, what we're gonna do as management, as Board of Directors, we're going to take this 100 k that we retain as earnings and we're going to pay off debts so that we reduce the amount of debt that the company has. So if they had in their bank account 300 thousand, they're gonna destroy 100 thousand to remove the amount of debt that the company has. By doing that and look at the slides, the balance sheet goes down to wonder 1 billion to one that won a million, which is logical. They just destroyed 100 K The destroyed 100% of the profits they earned in the previous fiscal period. The balance sheet goes down from 1.2x one-on-one physiological, but the damped has gone down to 0 dot 4 million. And by doing that, they increased the equity that the shareholders they own with this exercise. So less depth equity remains constant. And by that, indeed, it looks better for the company because in debt to equity as well has now changed because there is less depth versus equity that is remaining. Obviously what they need to take care about. I left hit the depth, sorted the equity at 0.7. you need to look this on a total period. Otherwise, the company would write a loss if if the depth payback would be the only operation during the fiscal period, they would write a law. So also the equity would go down by 100 K. So I'm continuing that they're not writing a loss here just for the sake of the example, how this works. And that's already it from Adapt pay off perspective, it's not more complex than that. But again, on top of dividends, on top of share buybacks, it's a way of paying back damped to, to investors and to shareholders advantage again, it's tax-free. You're not exposed to that as an investor. Remember that when you look at companies and companies need to take capital allocation decisions between, Remember the cache circulatory system, between moving money to, back to the operations from their profits or allocate part of a portion of those profits into dividends. So direct, sometimes cash returns, sometimes share buybacks, removing shares from the public markets to increase the book value of one single share, which will probably result in capital gain, but also paying back damped, which is also good. So that increases the amount of solvency of the company, which is something that I do like. I don't like to have companies at that carry heavy amounts of depth, versa that cash positions versus the equity positions. So as that assets are wrapping up, Chapter Two, hope you enjoy it returned to shareholders. And in the next chapter we will really go into dividend, sustainability and how we look into everything that is around dividends, even the process. What are goods? Good ratios in terms of dividend payouts? And this what we are going to discuss in Chapter three. So with that, thank you for your attention and let's turn in into chapter number three. Thank you. 9. Dividend policy, frequency & consistency: Welcome back dividend investors. So we have finished chapter number two, discussing returned to shareholders. In this chapter number three, we're going to be discussing more in detail. Dividends had dividend works. What's the policies that companies use? We're going to discuss aristocrats payout ratios and also dividend payment process because there's some technicalities that you need to understand and also to have the right timing when to keep companies, depending on they're going to be paying out dividends. But let's start with dividend policy frequency and consistency. One of the things that you may remember when I was this finding, when I was defining what the dividends are, I set a certain time that the company is not obliged of paying out dividends. It means that it's at their full discretion to decide if they wanted to pay out dividends or not. For that, you need to understand the philosophy that management is using. And this is very often reflected in a dividend policy documents that even our very often for publicly listed companies is published on the investor relations website. So if a kind of categorize the three kinds of dividend policies that you're gonna find out throughout markets and the stock exchange, you're going to have the first one which I call residual. And if you recall our the example of dimer, so the Mercedes brands, where the company says, whatever the amount of profits are, what remains in terms of profits begin to apply 40% of those profits and pay this as a cash dividends to our shareholders. So this is what we typically call a residual one or a remaining dividends policy. What is good is that obviously it pushes managements to make profits because otherwise, dividends is absolutely unpredictable and this will create frustration from shareholders. Always remember what I said in the beginning that shareholders, at least when management starts paying out dividends, shareholders get used to those dividends and they don't like when dividends are then stopped or reduced. So residual dividend policy is positive because if the company is not making a profit, there will be no cash dividends, but at the same time, which is, what is good is that it pushes management, CEO, board of directors to make profits and to do undertake the goods and the right capital allocation decisions. But I set the impact for the shareholder. I just put one plus here, as you can see in the table, is that the dividend is less predictable depending on the industry, the vertical market or the market conditions. A stable dividend policy and was taking the example of Telefonica, telephony, telephonic. If you look at their at their dividend policy, they have I think it's for the last 10-15 years. They have been they have been paying out very close to 0 dot, dot €20 per share every six months. Every six months we're going to discuss by frequency in the next slides. So it means that it's stable, so it's predictable. People know when it's coming in, whatever the profits are, it's dangerous. Because if the company is not making profits, it may have to burn a lot more cash than it can afford to. But at the same time, what is positive? It's predictable for shareholders and it keeps the shareholders under, let's say, friendly conditions. So it will not be a shareholder riot against the current management. So that's why some managers, they prefer to have a stable dividend policy in order to have the peace of their shareholders. So asset dividend, and that's why I've put two pluses here. The dividend or the impact for the shadows that the dividend is predictable short-term, but just be aware that if the company is in a decline phase, remember when we were discussing corporate lifecycles, the dividend at a certain time or the cash usage is at risk. The third one, which is my favorite one, is what we call a progressive dividend policy. So remember I was giving the example of Nestle that since 1959, Nestle has been increasing every year by, if, I think if you calculate it in percentages, Nestle has been increasing every year by 3% their dividends since 1959. And what is fantastic is that not only every year you're going to get dividends, but that dividend increases over time. So imagine you would have bought Nestle in 1959. I was not born in 1959, was not fluent in, let's say in dividend investing until, Let's say the early two thousands years. So two decades ago. But that's time. I mean, you would have a huge snowball effects. And that's why I've put three pluses here. And we're going to discuss dividend aristocrats and dividend kings in this chapter because those are super powerful tools of generating passive income's when you buy dividend aristocrats a dividend kings. And you understand the company within and discuss circle of competence at the very end of this training. I mean, this is a huge amount of money that you will get by buying into these companies and getting those dividends. But the dividends are increasing every year and you're gonna have crazy yields year over year. And this is what Warren Buffett has been doing. And Benjamin Graham and many, let's say successful investors value investors have been doing these because they rely on dividends coming in capitalizing those dividends. So having already snowball effect. But the snowball effect is even stronger when you have progressive dividends that are being paid out by those companies. And again, stay with me in the, I think it's the third lecture of this chapter I want to share with you Dividend Aristocrats in dividend kings. So if you look at payout frequencies, you just said that for example, Telefonica is painted. These are 0.2x pre-tax 0 per share on a six month basis. And what is the current status? Because it really depends on the companies when they decide to pay out dividends. And there is, I've put you here the source, because there is lot of research being done also by the academic world on dividends and value investing. And so what you can see on this graph with those histograms is that throughout the world, and this is an analysis they did over, so over 32 countries for a decade between 19952005. So one out of three, so 36% of the companies in those 32 countries, we're paying out dividends once per year. That's what the one histogram mean. So 36% of all those companies that have been analyzed whipping out once per year. 43%. So nearly half of them were paying out dividends twice per year. Three times feels little bit words you see, I mean, three times a day. It's three months, six months, or full year, but why would they pay out three times per year? So that's more like an exception or more than four times as value sees like 0 to 12% 1983 of all those counters and companies in counters that we listed were paying out dividends once per quarter. That's what the figure number four on the histogram of 19.3 under the valley of 19.3 means. And they are indeed differences, cultural differences in Europe, for example. So I own in my portfolio, I own a mix of US companies and European companies. I, for the time being, I do not invest into Asian companies, neither China nor Japan. It may happen in the future. But today I'm, I do not consider myself competent enough to understand and those markets and those companies. So I'm, I mean, I'm getting fluent more and more into Chinese companies, but for the timing, had not decided to invest into Chinese companies. So in Europe, for example, there are differences between Germany and France versus Spain. So Germany and France, typically the big companies, they pay out annually, very often, often springtime. So they have a fiscally that's done January and goes very often until December. And then until all the annual reports are finalized that the annual shareholder meeting is taking place somewhere early spring. Then they decide to pay out a dividend with the approval of the annual shareholder meeting very often made to June timeline. And you see it well here in the red frame, you see that France, Germany, annually speaking, have 89% in this study, 89% of the 281 French companies and 97% of the 1120 German companies were paying out dividends on an annual basis. So that means once per year. Dymola is paying once per year, B-A-S-F, which is the largest chemical company in the world, which is a competitor to Tao in the US. For those who know Dao, They pay once per year and it's spring time. Spain for example. They pay. And you see it in table on the right-hand side, you see that it's, it makes 31% of the 300. And to analyze, companies pay out once per year, 49% paid semi-annually. It's just cultural In Spain they use of paying out twice per year dividends. In the US. It's obviously it's I mean, everybody knows that in the US, it's quarterly how the dividends are paid out. And you see it in the in the bottom right, red frame of the rights at table, you see that from the 7 thousand or knowledge 64 companies that we're analyzing this study, 87% were paying on a quarterly basis. I mean, in the US, that you get dividends on a quarterly basis. What are the pros and cons? The advantages of quarterly dividends, I believe I what I like about that is that I get cash all the time. Every quote, I get cash and I kinda sad every quarter, where do I allocate that money? So as a shareholder, I'm being a more liquids, so I'm getting streams of revenue more frequently. It does not mean that the yields, the total yearly yields is higher. It's just a frequency. So instead of, let's assume a company would pay $1 in Europe once per year, or company would pay $1. Also on a yearly basis. It means that on a quarterly basis you get 0 dot 25. So do not be fooled. That's because it's quarterly dividends. If the attributes are the same, that you're gonna see more cash coming in. It's just that the cash flow is divided over four streams, over four periods, right? So that does not change. But I do like quarterly dividends because I can then rapidly decide depending on market conditions and record a where do I reallocate my my fresh cash that I received from cash dividends on annual, annual dividends. What is interesting with annual dividends is that something I do not like about the current market? Is that analyst, there is lot of speculation, a lot, a lot of emotions. And people look every quarter how the company is behaving and paying out an annual dividend allows management to focus on their customers and their employees and their suppliers, and not being focused on the financial analyst. That's really something that I do not like. All this information entertainment around the financial world with all due respect with Bloomberg. I mean, this is just show, right? Io prefer if I'm an investor, if I'm a shallow level company at the management delights our customers. If I'm a shareholder, that they, that the management delights my employees, our employees as a shareholder. And this is why I'm seeing I'm an acting as an investor, not as a speculator. So it's true that on the one hand said, I like to have quarterly cash coming in for capital being liquid capital allocation decisions. But on the other hand, nonetheless, I prefer that a little bit of pressure is removed from this financial analysts to worlds speculators and that the management focuses on annual reasons and annual dividends. So, but again, you need to know this as dividend investor that they are frequencies that change. But the total amount of dividend does not change because the, the, it's paid out quarterly. It's really just a matter of profit allocation, capital allocation. So the, one of the interesting, and again, I'm showing you here really where I look into and also I hope some knowledge that will be useful for you to become an independent also dividend investor. The most known currently in 2020 dividends analysis report is this generous handlers and investors report they bring out is very interesting to read. You have the source here, even the screenshot with copyright and courtesy of janice Tennyson investors. So they analyze the benchmark either through verticals, through regions, what is happening with dividends if dividends are growing or not, what you can see is. For example, if I start with the total dividends by industry since 2009, and you see here the graph is on a quarterly basis. The amount of dividends that are paid out by technology companies is growing. The amount of dividends being paid out by consumer basics is also growing. And but you see that, you see that the graph ends at the second quarter of 2020, which is in the middle of the 19 crisis. And you see some sectors that were unable to sustain, like consumer discretionary, like oil, gas, and energy. I mean, they were super depressed. They stopped out paying dividends because they had to and be conservative on the consumption of cash. Then if you look at from a regional perspective, and this is q2, if we have the generous Harrison report for Q3, probably going to update the training. But you see that in Q2 20-20 compared to q2 2019, you see that Europe, for example, excluding UK, saw a drop of 40-45 percent of dividends compared to q2 2019. This is huge. Look at Asia Pacific, the same look at UK minus 54 dot 2% of dividends compared to the second quarter of last year. It's because they were, those regions were in the middle of the wave, one of the qubit 19 crisis. So they had to be conservative on cash and as a benchmark. So it doesn't mean that all the companies have acted like this. But as a banjo on average, a lot of companies have stopped paying out dividends during second quarter. So we will see what will happen in Q3 and Q4 moving forward. If you look and this is also interesting. This is also an extract from the Janice Henderson report and I do like to look into and I kind of challenged myself, do I own some of those companies in that Janice Henderson considers as being the biggest dividend payoffs? Well, I've put them in the red frame yet. Again, with all due respect, I'm not telling you to invest into this companies. I'm just sharing what I do. And indeed, look at Nestle. I was speaking about Nestle. Nestle has a progressive dividend policy since 1959. They are consistently in the second quarter since 2014. And I can guarantee you in deposits like this as well, but the report isn't showing it. They are the largest dividends payer in the world. This is reasonably have Nestle and I used the opportunity of having cash during the crisis to by Nestle shares and to buy more of them. Microsoft, which is also a, its, it's a mature company. It's like a growth dividends. It starts getting into the value area where if you look at the amount of share buybacks that maximum is doing and also cash dividends. Microsoft is growing as one of the largest dividend payers in the world. And specifically from tech sector or tech industry perspective. And then one that I have as well in my portfolio. And here is just the top 20 of the, of any companies worldwide. I own day as f, which is the largest chemical company and we're going to discuss it in, I think it's in two lectures. Because F is a dividends. I think it's an Dividend Aristocrats docking and do not remember, but they have been consistently paying out dividends and growing those dividends like Nestle Over the last many, many, many years. So that's something that we're going to discuss. So with that wrapping up here, the dividend policy frequency and consistency. So remember that dividends are not something that companies and managing is obliged to pay out. That the frequency changes on cultural aspects in Europe. Even between in European countries, between European countries like Spain, rest is Germany versus France. The payout frequency is different. And then consistency so that you understand that they are companies that have residual policies, stable policies, but also progressive policies. And one of the things that you will have to look into is as we're looking into how consistent and when they're going to share my checklist at the very end of this training for you as a dividend investor, which is also my checklist. When I look at dividends or value plus dividend stocks, is the consistency. How often and has the company been consistent on paying out dividends? And we're going to discuss this intellectual when we're going to discuss dividend aristocrats and dividend kings as, as well. With that, thank you for your attention. And in the next one, we're going to specifically discuss dividend aristocrats and kings from what I see here in the table of contents. Thank you. 10. Dividend aristocrats & kings: Where connectivity in investors. Next lecture in this chapter number three around dividend aristocrats and dividend kings. If you remember in the previous chapter around dividend frequency consistency and even dividend policies, I was commenting that one or the type of company that I really like are the ones that are applying progressive dividend policy. So if remember we had residual, stable and progressive. The progressive ones are the ones that consistently pay out dividends year over year for certain period of time. And so on top of being stable, they, and this is why we call them progressive, the increment, the amount of cash dividends every year. And this is, as I said in the previous lecture, this crazy huge snowball effect. And there is a term into dividends, let's say investing area domain that is used for those companies. We call them dividend aristocrats or kings. So definition of an aristocrat is a company that consistently pays out dividends to shareholders. And that's the progressive part of things. Increases on an annual basis and the size of its pay out. There. Aristocrat, there is a small nuance as well. Because very often we say that dividend aristocrats are also as a P 500 companies. So part of the largest companies. So, and we always say in aristocrats normally has a track records of 25-years paying out dividends in a progressive way. So increasing the amount of dividends year over year and is part of the S&P 500. I even believe there is an official list of the different aristocrats on the S&P 500. And probably you're gonna find some ETFs, so trackers. And again, I do not invest into ETFs. You decide what you want to do with that. But I do not invest into tabs. I really buy the shares from the companies. And then you have the aristocrat kings. There is no officially track lists of the S&P 500 dividend kings, like dividend aristocrats. But the kings are more than aristocrats. And aristocrat is 25 years of progressive dividend policy and a king is 50 years of progressive dividend policy. Is that possible? Yes, it is possible. You remember in the previous lecture was committing to you that this is one of the reasons why I am owning Nestle and I'm gonna give you an example on a progressive dividend policy and the stream of revenue that you're gonna get. If you look at, I just, I mean, you can Google this up. If you type dividend kings, even aristocrats, you're gonna find a lot of companies that will pop out of this list. It's less than 100, but there's gonna be a lot of them. I've put some examples here like triple m, Coca-Cola, Colgate, Palmolive, Johnson and Johnson, Procter and Gamble, Target Corporation, which is I think return in the US. There are some I do not know in the US like Emerson Dover, I don't know this those companies, but there are a lot of companies that are very well-known brands and very large market capitalization brands as well. And this is in my attributes, and I'm gonna show this in the checklists for this training as well. I definitely like to have. Large-cap companies that are financially very healthy and on top of that, that they are dividends. So dividend aristocrats or King with a possible progressive dividend policy. But let's, I want to show you this snowball effect. This is for me a super powerful tool and this is reasonable. I, I have invested into Nestle and piazza for example, and also Reshma. So this is the example of Nestle that I was already commenting in. I think it was in the previous chapter that they have since 1959 consistently paying out dividends year over year, whatever the, the financial crisis were. And on top of that, they have been increasing the amount of dividends. I'm year over year. So it's a very clear progressive dividend policy company. Let's take the following example. Lets assume, and we are looking ten years back in 2010, the share price of Nazlet was at 49, that 1100 Swiss francs. The currency doesn't matter. Just let's consider that the Sherpa asthma, that's 49 at 11. At that time, they were paying out a cash dividend pretax of 1.8em five. So it means the dividend yield and may go and discuss in the next lecture, the dividend yield is the cash dividend pre-tax developed divided by the share price. Because at that moment we consider that you have been buying the shares. That would have been a three dot seven pretax cash dividend, which is not too bad. Remember that from a cash dividend perspective, I always like to between 35 and having them maybe a second tool shepherds appreciation to growth. My return to Rome, I returns on the, on my investments. If you would have ten years later, you would analyze the same situation. The share price has one, went up to 109.70 already. See here that the share price multiplied by more than twice. You have not been buying shares in 2020. You just bought shares in 2010 at a share price of 4911. And in 2020, nestle is paying out a cash dividend of two dot 70. So the now 20-20 dividend yield for you if you have been buying shares in 2010 and you are keeping those shares until 2020, just for 20-20, your pretax cash dividend yield, it's 5.49% from the three dots seven before. Why? Because you went long. You had a buy and hold strategy. He bought, let's assume, one share at forty nine hundred, eleven thousand and ten. That share has been paying out in 2010, 1.8em, five Swiss francs of cadherins pre-tax, nine, 20-20, that share, paying you out to that 70 cash dividends pretax. So the yield has grown from three dot seven to 549%. Well, this is, what is even more powerful is the following thing. And this is some people, when I explained this to them, they sometimes don't do not believe me, but this is true. It's the same example. The only thing I'm extending here in the analysis and asking it to do interpretation of it. In the previous slide, I was just comparing the yearly cash dividend yield. I was comparing the 2010 yield of three dot 7% pre-tax versus the 2020. If you kept. And note that share for ten years. But two things I miss to explain in the previous slide or on purpose did not want to explain because I'm trying to build this up here that you understand the snowball effect. That first of all, you may have seen that one share bought ten years ago at 4911 is not whether 109.70. And on top of that, Nestle is paying out every single year a cash dividends. So if you look at the amount of cash that you have received in ten years time, you have received just by owning one share, 20 to 25 Swiss francs in ten years. That's a cash with that you have received, you have not. So the share, you have just summed up all the cash dividends, 20101112, you have it in the table in the bottom of the slide. This makes 20 to 25 Swiss francs in terms of cash dividends. So if you adds to the capital gain, you add the yet the cashflow that you receive from the cash dividends pre-tax. Let's keep the text conversation and 1 second aside, your return pre-tax buying one share at 4911 is plus 82 0.8c for Swiss Francs. So that's nearly doubling in ten years time, nearly doubling the amount of cash that you have received. So 4911 twice would have been 150, but if you calculate 49 plus 82, you are not exactly at 150. So that's why I'm saying it's not doubling. It's, you add it one time and 1.5 time. So this is the 168%. But without doing anything, shepherds appreciation grew and you received a huge amount of cash passively without doing anything. Imagine such an effect. Over 20 years. Over 20 years, the cash dividend who'd have covered the full cost of the share. Even ten years, we received 20 to 25 Swiss francs probably in the next 20 years. Between years 1120, probably with a progressive dividend policy, you will at least get twenty-five, twenty-six, twenty-seven Swiss francs in the next ten years, if you add 20 to plus 27, the purchase price is covered. But you're still could sell the share and gain on that as well. So this is what I call the snowball effect. This progressive dividend policy of different aristocrats and dividend Kings is so powerful that I'm surprised that not more people than that, that they look into that a lot of people look typically add growth stocks and startups and they want to multiply it by 100 fast because they are speculating, they're gambling their growth, their wealth, becoming millionaires very fast. It's true you can be lucky in doing this. I tend to go for this kind of scheme. I need to be patient. At the very end of the day it pays out, but you need to be patient and just look at the power of this snowball effect. The power of the snowball effect is just enormous. And this is typically where you can look into my value investing cause we're gonna use methods like free cashflow of future cashflow, future earnings to evaluate the intrinsic value of a company. In this course, specifically, we are going to use the dividends flow of cash to determine what is the intrinsic value of a company. And we're gonna discuss this in, in a couple of lectures to calculate this so that you have a sense, if I buy it now at 49 with this stream of dividends, what is it really worth? So Dividend Aristocrats wrapping up the lecture had dividend aristocrats and dividend kings are super powerful tools. You need to be patient. You need to go long on those positions. You need to have what I call a buy and hold strategy. But they are very, very, very powerful. And this is the explanation. And I'm not soliciting you adhere to buy those companies. But this is the explanation why I do own, amongst others, companies like Nestle, like bears EFF, who fall on the European dividend aristocrats and dividends, kings that wrapping up here. And in the next one we're gonna go a little bit deeper into the dividends yield, how to calculate that more precisely. And also different coverage and what are good payout ratios to check if whatever, if it is a progressive, stable or residual dividend policy, specifically the stable and progressive one. What are good payout ratios and what is a fair amount of dividends return to the shareholders. Thank you for tuning in and talk to you in the next lecture. Thank you. 11. Dividend yield, coverage & payout ratio: Welcome back dividend investors. So in this next lecture, still in chapter number three, begun to discuss little bit more in detail, dividend yields as we have been already using this concept, I would like you to be able to develop your eye in where to find information to double check by yourself and estimate dividend yields were going undisclosed coverage and payout ratios because that's important to remember when we were discussing dividends paid out consistency and how sustainable the dependence over time with the example of dividend aristocrats and dividend kings. That something I'm going to give you a recommendation how I look payout ratios when paying out dividends. But let's get started. And let's start with the concrete exercise. So you see here, it's company that I've been using already throughout this course. You remember we were discussing this 1111 billion of share buybacks and 3 billion of dividends. And you, we are using here not the balance sheet, but we are using the income statement and the cash flow statement. And the idea here is that you develop your eye, your train your eye at calculating, compounding yourself. The dividends or the cash dividend per share. And how that, what the meaning is of that in terms of percentages versus the capital allocation decision that you need to take. Remember, we're discussing sixty-seven percent compounded every year is a good average return if you able to do this for 30 years in a row. So the first thing that you need to look into, or at least the figures that you need to have if you want to calculate the cash dividend yield, we are leaving aside the share by Bucky buyback. He'll, we're discussing how the cash dividend yields is. You need to figure as the first one is the amount of dividends that are paid out in terms of US dollars. And then you need the amount of shares that the company has in its equity. And for that, very often, you're gonna see two terms and having given this training also in presentation mode, so instructor-led, I've seen a lot of people. People do not know the difference between basic shares outstanding and diluted number of shares outstanding, which is something that you will find if you look here in this slide, the very button on the left-hand side, left-hand side of the income statement where you see a 254 dot for millions of shares basic and 860 1.2x millions of shares diluted. And what's the difference between the two? So the difference between the two is affording basic shares are common shares. Shares at a typically that's a listed on stock exchange. And when the income statement is published either a quarterly basis or yearly basis, the number of common shares are the shares that are outstanding at the day of the reporting. Why is the number of diluted shares always well, yeah, always higher than the amount of basic shares. In fact, the amount of diluted shares equals the amount of basic shares. But it adds, you need to add on top of that everything that our stock options, for example, for employee compensation. I mean, not all the companies pay employees through standard salary or wages, but they use stock options that vest over time. That's something that, for example, you will have to add because it's a liability that the company has in order to generate those new shares towards its employees warrants. You remember we discussed the example of Reshma. If there were ends, this will, this is like a promise of creating new shares. And this will also increase the amount of diluted shares versus number of basic charts. So the best thing to do, and you have other vehicles like convertible, convertible depth, those kind of things. The best thing to do is to take the diluted one and I'm going to give the calculation here. So if you're looking in the red frame, so I'm always taking the worst figure, which is the highest figure. So it's the diluted amount of shares. So this company has 861 million dot TH2 millions of shares outstanding. And in the year 2016, that ended December 31st, the company has been ping out three billion zero fifty eight US dollars of cash dividends and said We're leaving the share buyback conversation 1 second aside. So the cash dividend pretax is 3058 divided by 860, 1.2x millions. And this gives you the cash dividend in terms of US dollars pre-tax per share. So and in this next slide, so this is, sorry, so just wanted to say that this is 3.1a, five US dollars per share. You see the effect of using the smaller number of the basic number of shares. So, so you take the same amount of cash dividends and you divide it by the smaller number. And this is 3.What, 58 US dollar. So difference is minor. It doesn't change the order of magnitude, but I tend and I prefer to use a diluted one. Because as really the worst-case figure that can't happen and that situation. So 3.1a, five US dollars per Russia. The problem or conversation now is, OK, you get the 3.1a, five US dollars per share. But what does it mean in terms of return, in terms of yields? So this is why what you need to do is in case you would be buying or you bought one share at 186 dots ten, you need to take the cash dividend pretax of 3D or 55. So based on the number of shares diluted and divide it by the buying price when you bought the shares. Remember in the previous lecture we started with Nestle. If you bought shares in 2010, you need to calculate the yield on the purchase price, on the buying price of your shares, not on the current market price because it doesn't make sense, at least not directly. You need to look at your own return. And if you take 355 and you divide it by, and let's assume that the share price when you bought the shares of this company was 186, not ten. It's giving you a yield of 1.and 90. So one dot 0. The first thing before moving forward and we discuss now payout ratios is always, you need always to think now. How is this one 0.9c versus the maybe six to 7%. That's my arbitration. I'd like to have sixty-seven percent 1.The MIT is not enough. You remember when we were discussing share buybacks, we already have been using an if you're unsure, please go back to the share bike back a lecture where I was telling you that the total yield of this company was eight dot 8%, it was 1.and 90 on the cash dividend. But as they had a huge share buyback during that year, you can see it in the cashflow statement of 11 billion. They were adding, I think was 60 something percent on top of the 1.The 90 to reach eight dot 8% of total yield. The total yield being the return of cash dividends plus the yield from share buybacks. So at the very end of the day, that company, indeed the cash dividend is low, is one dot 90% versus the written that I'm expecting of 67. But if I add to that, the amount of share buybacks as expressed in yield and percentage as well, I'm above my sixty-seven percent benchmark. I met above 8%, which is indeed pretty, pretty cool MSA. Now the question comes as well. And I was discussing this when we were discussing also the share buybacks is sustainability of it than you remember when we were discussing the cache circulatory system, how much shall the company reinject and put back into the operations to grow market share, acquire new customers, versus moving part of that money to shareholders or paying off debts. And there is one important ratio that we look at is what we call the payout ratio. And it's very easy. The payout ratio is if you take the net income, you take the amount of dividends and you divide it by the net income. This will give you a ratio between 01. Well, normally between 01, because normally the company cannot pay out small, then they have earned for the net income. It's true, I'm taking the assumption the ratio is between 01. I have seen companies that are paying out more dividends that their real earnings or net income. So there the ratio would be above one. But in most cases, a portion of the net income will flow back to shareholders as a return in terms of cash dividends, for example. And obviously you can do the same for total yield if you, if you, if you take the ratio of total yield being the sum of dividend yields plus shared by bank yields. And you look at this in terms of monetary value. So we were discussing 11 billion plus 3 billion, those 14 billion, how do they look like versus the total amount of income? And I'm showing you here in this slide, you see that the operating income is 7.7 billion, the net income is 4.2c, 6 billion. So guys, at a certain moment, this company has been paying out 11 billion of share buybacks and 3 billion of dividends. That's huge amounts the versus what they are really earning if I just look at the operational income. So that's why you, Miriam and some a couple of previous lectures I was saying, I'm not sure that this company can sustain. Amount of share buybacks in the future as well. So having said that, so first of all, we are looking at payout ratio. So the payout ratio, normally if the company only gives a portion of its dividends back to the shallow loss, it's always between 01 the versus the total income. But now, what is a good, a good ratio on this? And, and obviously, ratio between 01 can also be expressed in percentages. So the first thing in terms of process, and I'm already showing you here some couple of selection, let's say steps. The first step to do is you need to look at the dividend yield. So you take the cash dividends and you divide the current cash dividends on a day if you're buying now. So the current share price, or if you bought it in the past, you divide the cash dividends by the purchase price of your shares, then you need to assess, is this a fair return on getting for my money compared to bank savings account compared to the sixty-seven percent, That is my benchmark compared to other opportunities that this company with your money is competing against. Because always remember you have multiple opportunities to deploy your money. And then a third substep that you need to look into is the dividend increasing over time? So you need to check as well, is this dividend King isn't even an aristocrat. Not and maybe you are happy in having a company that has stable amount of dividends, but it's not increasing them over time. But then the second step that you need to look into and looking at payout ratios is what you need to do. An interpretation of that, I do consider, and I will explain this, that goods ratios are between 0 dot three or 0.7. which means between 30, 70% of the income that is paid out to shareholders. What's the reason for that? I believe that 32s minuss speaking about dividend-paying companies, those are mature companies. And those companies, they normally put some money back into cash reserves. Retained earnings may be doing more marketing, et cetera, but they tend to give a fair portion of the income to return to its shareholders. And I believe that a fair portion is between 30, 70%. Why? Because I believe that below paired ratio that is below 30% is not providing enough return to shareholders. And if it is above 70%, there is a high risk that this will not be sustainable over time because we are nearly paying out the whole net income to the shareholders through dividends mechanism. And I would ask if I would be sitting at a board of directors or as a shareholder, I would challenge that. You say, Do we really need to pay as much as 9590% percent? Don't we have any opportunities, capital allocation opportunities to put that money somewhere else to grow even further. The wealth, the equity, the book value of the company. And as I'm sitting here as a final remark, you need to look into this from a total yield perspective. So this payout ratio is not as about cash dividends, but you need to add also incase, incase the company's doing shaft by banks need to add the shared by bank yield or the shape bar back amount plus the cash dividend amount. You need to add those and then look how does that fit versus the amount of profits that the company is doing? And you need them to check, is this sustainable? If it is not sustainable, you're going to see a dividends going down. Meaning you assumptions if you're, if you're taking assumptions on and you need to decide if you're investing today into this company or not. Those assumptions would change over time, etc. The company will acquire another company through a merger and acquisition. But otherwise, if the company is paying huge amounts even beyond 100% of the incomes to shareholders, there's gonna be an issue somewhere and this will not be, in my opinion, will not be sustainable over time. So I like to look at total yield. So cash dividend yields plus share buyback kids. And if I take that portion, I summed that money together and I compare it with the net income. I'm checking is this between 30, 70% below 30 asset would not be happy. I would like to have more return from the management and the board of directors of the company, if it is above 70%, would start looking into, is this really sustainable over time? And if not, I'm may be rethink if I would really like to invest into this company because the, my assumptions from the beginning may change because a company will maybe in the future and not be able to pay out this amount of dividends or returns back to shower loss. And here you have an example. If on the net income that was fought, 6 billion, company paid out 3 billion in terms of cash dividends, while this is a sixty-five percent payout ratio. So it's pretty OK with to do that. And I would be happy as a shareholder to see A65 percent because it's between 30, 70% payout ratio. It not more complex than that, but it's a very good test to see if the company is, let's say, fair towards its shareholders by giving a return. And also if the returns are sustainable over time. So with that, we are newly wrapping up the, let's say, understanding and interpretation of dividends from the policy's a sustainability, the payout ratios, dividend Arista present kings in the last lecture of this chapter is now coming up. We're going to discuss a deployment payment process because there's some technicalities that you need to know not to miss deadline or timeline because you just didn't understand what the difference is between registration date, ex-dividend date, and those kind of things. So that's wrapping up. Thanks for your attention and hope to see in the next lecture. Thank you. 12. Dividend payment process: Alright, dividend investors will come back. The last lecture before wrapping up chapter number three. And this will be about the dividend payment process because there are some technicalities that you need to know unrelated to the amino and the company decides to pay our dividends. That there is a timing perspective or timing, let's say attributes equation that you need to take into account our, I'll try to walk you through this in order to make it clean for you as well. So let's go into the dividend payments. So the typical dividend pen process. So imagine the company has decided to pay out dividends. It shall, as you're speaking, you typically either Warren's cash dividends, scrip dividends, one time special event related dividends. So there are five stamps that are important and they're going to walk you through them with a concrete example on dimers. So on the Mercedes company, the first one. So you need to understand the sequence of events. So the first one is the announcement date. So the announcement date is when and this is before the announcement. It normally the information about the income of the company, their intention. It's private. It's not public. Except if you're an insider, you don't have that information. And we, as investors, shareholders do not have that information at a certain moment in time. Taking into account the profits of the quarter of the six months of the year. You remember when we discussed dividend payment frequencies, you have some companies, typically the US, where more than 90% of the companies pay out dividends on a quarterly basis. In Spain, very often it's a 66 plus six months. In Germany, France, for example. For example, most of the companies pay out dividends around me to June timeline, which is springtime after closing the fiscally that goes from January to December, they calculate all the figures, all the incomes, and then they do an announcement somewhere in February, March. What's the intention? And let me give you a concrete example. This is the example of dimers. So it's an Culture sea of Reuters. It's a screenshot where on the 11th of February, so their fiscal year is January to December. So on the 11th of February, the probably had enough, let's say idea about their income for the 2019 year. So fiscally a January to February to December 2019, February 2020, they communicate, they announce what's the intention of the cash dividends for the previous year, for the year 2019. So ready here you see that the cash dividend always comes after the fact. So after the fiscal year, after the fiscal quarter. And here. So it was like six weeks already into the new fiscal year, into 20-20, Dymola says that they are cutting their dividends and they have the intention. Of paying out a dividend of 0.95. so 0 dot 9€0 per share. But it's a proposal. It has to be approved by the annual shareholder meeting. So but the first step is there is an announcement date where Dima says, we're going to want to pay out this amount of dividends for the previous fiscal year. For US companies that pay out quarterly, it's the same. They will do a quarterly announcement probably between four to six weeks after the closing of the quarter. So if the court is let's imagine January to March. So somewhere and of of a PRO start of May, they're going to decide the gonad doing announcements. What is the intention of the dividends paid out for one share? So that's the announcement, it, that's very important. And then very often what happens as well when the announcement date and the announced the announcement carries as well as the amount of cash dividend to be paid out. Cash scrip again, warrant whatever. But when the announcement is done, very often on the investor relations site, and I've extracted here the investor relation set of dimer. You're gonna see the dates. So you see that for example, on the 11th of February, they made the announcement in 2020. It was very special because they had to push the annual shareholder meeting out to July because of the qubit 19 Button. Normally the annual shareholder meeting is taking place for dialogue between mid April and May, something like that. So they do announcement in February, the annual shareholder meeting will then approve the proposal of the management for the amount of dividends and then indeed the company and I will explain this in the next steps. And the company will, at a certain point in time register who is a shareholder and then pay paid that amount of cash dividends to the shareholders. Step number one is the announcement. And very often with the announcement comes the process with a specific date, as you can see here, the various dates in July. Then the second step, very often that happens and this is more true for European companies that have to go through the shareholder meeting. Us companies. Very often the board of directors is empowered to a certain extent to do things before the annual shareholder meeting. But in these example of Dymola, they have, so the management has to propose to the annual shareholder meeting. The proposal of the cash dividend observed €90. Then indeed, when that is approved, it becomes a liability of the company towards its shareholders. And this is what we see here. So as I'm an Dymola shareholder and again, I'm not soliciting you here to buy diamonds shares, but I'm just taking the example. I have received the invitation for the annual shareholder meeting on July eighth. Remember that announcement was February 11th. And after February 11th, Dymola has published the dates, July eighth, et cetera. And and because of the qubit 19, the annual shareholder meeting, remember it has been postponed normally would have been like two months after the announcement more or less, that the annual shareholder meeting would have taken place. You see it's in German. Sorry for that. But you see that in the red frame that the as part of the invitation to the annual shareholder meeting, you get a brochure with all the talking points, decision points that have to be decided by the shareholders. And you see that point number two is to approve the payment of a 0.9c euro per common share too. And they put also the total amount. So it's less than a billion. So it's €962 million of amount that the management and the board of directors proposes to pay out. And this would be on July 13th, 2020. So that's the so it's the part of the agenda. So you can see it in the Sharman is part of the agenda. And then as you can see here and again, I'm building help the scenarios have taken next slide also from the Dymola, while you see because of the Nineteenth socialists distancing from the management and the board of directors. But you see after July eighth that indeed there has been a confirmation by 96 dots, 60% that's has been approval by the shareholder meeting on the payment of the zeros at 90 Euro, which was more or less around the €1 billion cash-out pretax for the company. So we had the announcement proposal at the annual shareholder meeting. You see that it's part of the agenda in this specific situation. It was point number two. And then after the annual shareholder meeting, you see that 96 or 60% were agreeing to this and the dividend was lower versus the previous us because they were not doing as much profit as the previous years. And now, indeed, the, now the process can start to pay out the dividends. So that's not a third thing. So we have announced, or the company has announced, the company has proposed to the shareholders and has received the approval from the shareholders. Now comes a very important thing that a lot of people do mistakes on this, which is the ex-dividend date. So the, what is important is that when the company announces and approves it at the shareholder meeting and this example, Daimler, you have the they say what is the record dates? So the record date is the date where they go. Now the company going to make a photo of the register of shareholders. And based on that, they will pay out dividends on the shareholders that are shareholders of the company at the record date. And the ex-dividend date is the date before the date of record where the stock is no longer carrying, will no longer carry the dividends. And this is very important because if you are buying the at the end, I'll explain payment they later on. If you have seen in the announcement or in the inner shell admitting that the company is paying out dividend on the, let's say 15th of September. You're buying the stock on the 14th or 15th, you will not get the dividend. You need to understand this principle of ex-dividend date and record date. The most important one is the ex-dividend date. So past that date, you will not get dividends. Let's elaborate little bit on that. So on the ex-dividend date 11 of the effects that this is not very often discussed in even investor circles, is the market will correct the share by the percentage or by the value of the cash dividends down pretax. Here you can see and I'm using trading view. It's a very nice tool. I don't I mean, as I'm an value invest and dividend investor, I don't cuz a lot of trading tools, but nonetheless have from town to town, like to look at the graphs of the market also for the purpose of this training that you can visualize what is going on with the, with the share prices. But here we see that the share price has been, has been dropping after the ex-dividend date by nearly exactly the same amount of the cash dividend that has to be paid out. And you're gonna see this systematically for all companies, there's gonna be a market correction. So people keep there, there are some trade-offs that keep the share until the ex-dividend date and then the day after they start selling it out. And then obviously, as there is a lot of, let's say, of offer the price and the demand remains constant or the demand is going down, the price will go down more or less by the same amount of the cash dividends. Something systematic that is happening on the market. And at a certain time the price will come back. So, but this is really just a temporary effect that you have after the ex-dividend date, then you need to know that this, so don't be scared. If imagine the company is paying out a 5% cash dividend yield pretexts that the day after the ex-dividend date, your, your, your share value will go down by nearly the same percentage. That's normal. This is the what happens after the ex-dividend date. Then we have the record and payment date. That's obviously very straightforward. And at the record date, the holders or the brokers will share with Dymola has a register of shareholders. They will then, let's say look into that, take a snapshot of that, and then indeed, payout, based on that register of shareholders pay out the dividends for you and for me as a shallow will be always be pretax and the bank or the broker will take care of. Very often removing tax amount. If you're exposed to taxes in other countries, maybe you need to declare the gross cash during you have received and then you're going to be taxed by the tax authorities at a second stage. So it really depends on the countries. And as I said third example, in some countries you don't pay taxes on cash dividends like United Arab Emirates, where I understood, I mean, talking to other investors, they had that they don't pay taxes on those cash dividends. So that's actually already, it's, it's, it looks pretty straightforward, but it's very important that, you know those steps. So from announcement date, announcement date isn't intention. It's not written in stone, it's not a commitment. The commitment of paying out the cash dividend starts when the shareholders or the representative Quora. So percentage of shareholders agrees to pay out a dividend, then it becomes a liability. And then keep in mind between the commitment dates that could be in this example of diamond other shareholder meeting approval date up to the payment date, you need to take into account specifically the ex-dividend date and the record date. I have seen junior investors making mistakes on that example was giving before they read in the press at the payment date of Dymola is on the 15th and they are buying on the 14th, but the requisite was the tenth, then it's too late. And what will happen is if they buy out the fourth 14th, they will not see the dividend coming in. So they just made a wrong assumption on a inflow of cash for them. So keep this in mind. It's very important, reread it and you practice it. And you need to buy your own stocks that are paying out dividends. And then you're going to see and understand how this works. And also keep in mind, I am not elaborating too much on that, but after the payment date, it takes a couple of days that the money flows from the company to your cash or bank or broker accounts. I mean, I'm seeing typically two to three days when for European payments for the US sometimes it's also two to three days, sometimes four to five depending on who the company is, but It's a liability. You're gonna see this cash coming in. And yeah, and then you have the cash and then you can decide with the cache, do decide to keep it to buy new shares of the same company to become the capitalization effect? Or do you want to reallocate that money to something else? So understand the dividend payment process. Do not make mistakes and not understanding the ex-dividend date, which is a date after the moment the share no longer carries dividends. And the record date is the one that is important so that you, you see the cash dividend coming in into your bank account, cash or whatever it is, script or weren't, but it's the same. I think you understood the principle without wrapping up. Yeah, thanks for your attention and wrapping up chapter number three on technicalities of dividends. And in the next chapter, which is nearly the, it's the final chapter before the conclusion, we're going to discuss a little bit, what are good companies? What are value traps, but stay with me. So thanks for tuning in. 13. Circle of competence: Welcome back, dividend investors. We nearly at the end of this training, I hope you are still enjoying it. The final chapter before the conclusion on dividend investing is really about how to select companies because there are indeed good and bad dividend companies out there. And I'm gonna share with you my experience and some of my attributes and also the mistakes maybe I don't want you to do, but you need to learn by yourself afterwards, of course, what's what are the attributes that you're investing into or what are the attributes that you're looking into companies to then maybe decide to put your money into these companies. But let's start first with what I call the circle of competence. If you remember in the very introduction of this training, I said that I want you to act as a business owner. And those gentlemen, IT IS Benjamin Graham on the right-hand side. Blows Warren Buffett and Charlie Munger. It's something that they have also been teaching me through all the lectures, books, podcasts, videos, YouTube videos I've been listening from them. Is they really act as a business or not? And this is also the mindset. I'm the approach I have since 20 years. I'm not a gamble or speculator because I earned that money in hand way through my daily job. And I don't want to lose that money or to be wiped out because I'm doing stupid things on gambling with that money. I could then also go to the casino. Wouldn't be the same in play Russian Roulette. So that's the first thing before Discuss the circle of competence that you, you keep that mindset of acting as a business owner because you do own a portion of the company they are buying into, even it's one share, even it's a minimal portion of the company, but it's a portion of the companies, you're an owner of the company. The circle of competence is the following thing. And I'm going to share this with you as well on a couple of examples of sharing how, what are my attributes? Something that I've learned over the years is that you cannot be good at everything. You cannot be good at understanding all possible businesses. And as Buffon Buffett says, is that he became a better investor because he was a businessman. But at the same time he became a better businessman because he wasn't investor. And honestly in my own experience, as an executive of various companies and also as a member of board of directors. Indeed, I must say H0 is true on he's dating is correct, is that I feel myself stronger being on the board of directors because I'm a value investor. And at the same time, the fact of being an investor, you need to have CMMI as well in order to be a better businessman and vice versa. So the circle of competence, I said is that you cannot be good at everything. So try to avoid investing into industries that you don't understand or verticals or geographies that you do not understand. And I'm gonna share what is my What I call investment universe. Later on, when you look at a circle of competence on investment universe, you typically use what I call segmentation attributes. So you have growth versus value stocks. I'm a value investor. A value ends dividend investor. I'm not a growth investor capitalization size. So I like to buy very large companies that have big market capitalizations. I don't like to buy what we call a micro capitalizations, micro, micro caps or small caps. I want companies that are big. I do not invest in every industry. And you have industries that I like, that I like, like automotive. I love cars or love sports cars. Definitely automotive is one of the industries I invest into an reads what is fought too in General Motors, French market, carmakers, German, et cetera. For example, pharma and biotech companies that I refrained from investing into because I do not understand them. I do have one of my very close friends who is very good in biotech and pharma? Yes, something like the PhD in microbiology. I have no clue about biology and pharma. And for me it's not predictable and I don't want to make the time and take the time to learn those verticals. So I do not invest into pharma and biotech because I don't understand those businesses. Banking is also an example. I and I exclude them from our investment universe, telecommunications because I'm an initially Emmett tech executive, so I kind of understand telecommunications. So that's something that potentially at least would stay in my attribute of not being excluded but maybe being included if the other attributes of investing our code as well. Then geographical markets are going to share this with you in a couple of minutes. I do inverse into Europe and US, maybe in the future, I'm currently starting to look at Japanese and Chinese companies, but for the time being, I'm not fluent and that I'm trying to read Chinese culture, Japanese culture since a year and I'm, I'm not feeling still okay on understanding even the differences between Chinese and Japanese companies. So for the time being, I'm not investing, probably the next one I'm going to be investing into will be Japan before China. But again, that's my choice. And then in terms of circle of competence, you may remember I was discussing through other whole corps that I'm a share common share investor. I am not invested into derivatives, into trackers, into indexes, ETFs, forex, those commodities? No metals? No. I am a stock investor and specifically a value ends dividends stock investor. And so this is important for me. So you can see that by combining a couple of those attributes, value stocks, large caps, some industries, geographically markets, and only stocks. That creates my circle of competence. And I'm trying to be better at that circle of competence since 20 years. You may, you will have to decide what is your circle of competence. As I said, I have a friend which is very good on biotech and is a successful investor in biotech. I'm not some really refraining from investing into. The, let say, the attributes of markets I do not understand as a value investor. And really if you would like to go much more into the details of that, please be so kind and going to my value investing cost because I'm discussing it extensively, but one of my attributes is investing into large-cap companies. And I really like convert into what we call blue chips, because blue chips, they have what we call a mode. A mode is really a differentiator, such a strong brands that people come back to those companies to purchase more of them on their products and services. And even being willing to pay a premium price compared to cheap alternatives that may be out there. And then again, please go into my value investing cause I'm just extracting two slides are from my van investing course because we are in a dividend investing costs. So you can observe those modes in a very easy way, as Warren Buffett said, you don't need a PhD to understand what the mode is. You can test the resistance around your family does observe what your family is a buying in terms of foods, drinks, a parallel cars, and just test if the would have a resistance to change. Buying a premium brand like Mercedes, probably Marcellus driver does not want a fourt of French bruno With all respect for Renault. And because they liked Mercedes, they like the style of the cars, et cetera. And they are willing to pay a premium for that though that's the kind of mode that you're going to. You will be able easily to observe them and asset please go into my value investing cost because I'm even elaborating further how those modes can be observed in a tangible way. That's current research that I'm doing now for a couple of years, 3-4 years, to make those modes a little bit more tangible than just being something, let's say fluffy. What modes could indeed be? And that's something typically this mode or this castle is typically something that Warren Buffett, Charlie Munger, Benjamin Graham, Warren Buffett and Charlie Munger have been buying into those companies. And for me, again, notice devastation to buy those companies. But for me, this is my investment universe. So I said that I'm buying blue-chip companies, so large-cap companies, what do I do? My initial list of companies are the largest brands in the world. They are around. And I'm saying here, 86 top brand companies because some of those some of those companies have multiple brands in the top 100. This is like Proctor and Gamble has, I think two or three. And they have other companies that have two or three brands in this top 100 brands list. Then also I, as my investment universe is European, I have the same list. And also for large, not worldwide, top 100, but top US and EU brands. So I have, I think it's one hundred and thirty six and eighty six companies that are in, this is my starting portfolio to observe those brands. And then indeed, I run a couple of Tasman on that and please go into my value investing course to know how, what is the process for doing that. But for me, even as a dividend investor, for me, those companies that have strong brands are mature. Even some are in a growth phase. They are good candidates to look if they match the criteria to be good dividend investing companies. And so asset, so remember this risk versus return a balance. So my, my idea is really that my investment zone is a large caps only a UN us for the time being. And then obviously I need to, I mean, there are more attributes and will not just blindly invest because it's a large cap or tub ran into you. I need to look at ratios valuation. We're going to discuss in this lecture how to determine the intrinsic value of a company based on dividends, cashflows, and then yeah, if the criteria are matched, if it is not a value trap them potentially are going to put my money into that company. And remember that one of the attributes that I do like to look into, and we have been discussing this already now a couple of times in the previous chapter is the companies that are blue chips, large camps in my universe, investment universe, AU or us. And then if possible that there are dividend aristocrats and dividend kings, that their revenues, the income, and their cash dividend is growing year over year so that we have this famous snowball effect I was discussing earlier, I think 2-3 lectures ago. So without already wrapping up here, this, this conversation around the circle of competence and the investment universe. And in the next lecture we are going to be discussing a small detail around regular versus prefer chest because it has, that can have a small impact on your dividend yield. But then we were really go into the dividend discount model and how we use the initial Gordon formula. And then I'm going to show you how I use my own formula on top of the Gordon. I call it the golden plus formula to determine the intrinsic value of a company. With that, thanks for your attention and hope you tune in for the next lecture. Thank you. 14. Intrinsic Value & Dividend Discount Model: Welcome back, dividend investors. We have nearly finished the whole training stood in the closing chapter, chapter number four. And the main part of this. So we're going to I mean, it will take us two minutes to go through the regular versus preferred shares topic, but we're going to immediately go into the dividend discount model and valuation of intrinsic value. That will take us a little bit more time, but it's very important aspect that has to be even for dividend investor, not just for value investors has to be addressed. But let me start with the regular versus preferred shares because they are when you investing into the stock exchange, there are different types of shares and the most, let's say, common share and sometimes mistake or misunderstanding of dividend investors is they do not understand the difference between a preferred stock and common stock. And you do have companies publicly, very well-known companies that have, in fact those two types of stocks. Who preferred stock is a stock that gives a supplemental incentive compared to common stock. But very often it removes the voting rights, so set differently, the management is buying the silence of the stock owner by giving it an incentive, by removing the voting rights from the, from the owner of that stock. Common stock typically gives voting rights to shareholders and also access to the profits that are linked to the share. Very offices except it had been splits and those kind of things was very often one share, one vote to the annual shareholder meeting of the election process with a board of directors that is also very often part of the annual shareholder meeting. The typical mistake that junior investors do when they buy stocks, specifically junior dividend investors, is they sometimes mix up the preferred stock versus the common stock. For me, it's relevant that you understand the any kind of stock, every kind of securities on the international market carries a single unique identifier, which is called an ice into international securities identification number. And it's country-specific. So if you take the decision to buy and they're going to give you the example of BMW, of buying a preferred share of BMW or common share of BMW. You need to be able to clearly see on the broker platform, your bank platform, what is the ISI in the ice and number that you are buying? Because the preferred stock will have a different IC number compared to the common stock. And let's give the example here and then we're gonna move immediately to the validation process. So for BMW, you see that the ordinary share has the German. So D for Deutschland has different IC number than their preferred chair. As I told you, very often, companies set-up preferred shares to buy the silence or remove the voting rights from the shareholders of the preferred share versus the common chair. And for that, the company has given incentive. In the example of BMW, the company is giving a little bit of a higher cash dividends for preferred chat owners versus common share or ordinary share owners. And you can see it here. Since 2009 to 2019, I've shared with you the buildup table. So you see that it's always $0.02 of a euro more then compared to the ordinary share. So if 2009, preferred share owner was receiving thirty-two cents per share, cash dividend pre-tax, the ordinary shown there was only giving, was only getting $0.30 per euro per ordinary share. And you see if we bring this back to the current share price or at that time and remember thing, it was in April 2020 that I put this chart from Morningstar. At that time, BMW was quoting at around €52 per shirting. Now it's 646065. You can see that the yield to difference in terms of cash dividend yield between a preferred and ordinary share was of 0 dot 0, 4%. So again, I will not spend too much time on this. But just as I want you to be an independent investor, I just want you to do a stupid mistake because you have bought the wrong share. So just be aware that there are very often two different types of shares between older than Russia and preferred share. But let's move directly to the conversation around evaluation process. And here specifically the dividend discount on because that one is more important. So this, in addressing these really in the value investing cause much more in depth. And what I'm gonna do here, because here we're just gonna use the Gordon model for establishing the intrinsic value of a company. But let me explain this graph and I think these graphs specifically for value investors is the most important on that. They need always to have in mind what we are trying to achieve as value investors, but also as dividend investors is not only do we want to have a nice return from the cash dividends or share buyback yields from the company. But the best thing to do is to try to determine what is the intrinsic value of a company. And if the company is currently, Mr. Market is giving you a cheap price. But you know through various mechanisms, methodologies that the real value of the company is much higher than what the market is giving you now. And this is where we are looking into the intrinsic value and there are some methods to do that in the value. I mean, I recommend you if you really want to have an extensive view on that, I will not be because this is not part of a dividend investor scope. It's more part of a value investor scope. We are looking at price to book value. We also looking at doing a readjustment of the balance sheet, specifically the assets, the intangibles trademark, this kind of things. Individually investing course. Indeed, I do speak about the Gordon model and we're going to extensively discussed is here. But also we are using discounted methodologies on a cashflows of free cash flow, but also discounted earnings to establish the intrinsic value of a company. So again, the idea here is to buy when the market is being depressed. And you know, by having done your homework that the company in reality is worth much more. And, and gaining on that. Because at a certain moment in time, it would take me some years what the market will come back to the real intrinsic value of the company. And this is where you're going to have as well a capital gain and why the capital gain is not happening. You're going to have a stream of dividends, revenues that are coming in this, remember, those are the two options that we are looking into. So here I set, we're going to discuss specifically about the dividend discount model, which is one of the methodologies that works only for stocks that pay out dividends. So that's why we have other methodologies. Because even if I take the example of Amazon, I think that Amazon is not paying out dividends. I'm not judging if it's good or bad, but they're not paying out dividends today, the Gordon model, the dividend discount model will not work. So we need to look into book value. We need to look into readjustment of the balance sheet. We need to look into future earnings and future cash flow. But, but here as we are non-dividend investment course and you as a dividend investor, you can use dividend discount model to already established an approximation of the intrinsic value of the company. So the real value per share of a company. So let me elaborate on that. So the Gordon model is a good approximation. And when I do my intrinsic value calculation before doing investment, I run a set of calculations. The Gordon model is one of them, but it's not the only one I'm going to run the book value, are going to run the readjustment of the balance sheet and we're going to run the future earnings and the free cashflow, So the future discounted cashflow as well. So what is the Gordon model may seem super simple because the assumption is the following, is that the value of a stock, the value of a share that you are buying is in fact the sum to infinity of all the dividends that you're gonna get from that stock. And the formula is very easy, is you take the dividends per share that you are having today and you divide it by the written that you expecting. So what we call the cost of capital, the capital allocation cost, or your expected returns and incase. And I'm going to show you the variation between the two. In case we are speaking about a dividend Orissa credit or dividend king, remember that they have a progressive dividend policy. We're going to subtract from the cost of capital. The yearly dividend growth that you can observe from history. Although we don't have a crystal ball for the future. But it's worth an assumption and doing calculation. So let's take a concrete example. What I am looking here is a company and we're gonna do three intrinsic valuations based on the dividends the company is paying out. So the name of the company doesn't matter. The company is paying out in the last year is 0.5. US dollar per share pretax. And me as an investor, remember that I said I would like to have six to 7% consistent return year over year and capitalizing the return that I get to that I have a snowball effect. I need to divide the 0.5. by my cost of capital allocation, which would be 6%. And this to infinity because we can tell that the company will still be there in 50 years, 60 years, which isn't assumption. We can discuss it. Remember as I shared with you that a lot of companies have an average lifetime on the SMP 500 of between 1520 years. So maybe that's an exaggerates exaggerated assumption. But it is as it is with who we need to take that into consideration. And you remember when you were discussing the Nestle case. And if not, please go back to the Nestle case where we were discussing dividend kings and dividend aristocrats. That was after the lesson or the lecture on the progressive dividend policy. Remember that if you look back on this slide, that the, in 2010, the company at a shepherds or 49 dots ten, if I'm not mistaken. And over the last ten years from 20102020, the cash dividend pre-tax that the owners of 2010 were getting was around 22 dot something Swiss Francs. And I set during that lecture that if the company continues to grow the cash dividend and to paid out consistently for the next ten years. After 20 years, the cash stream, the cash dividend stream that has been received or will have been received 20102020 and probably 20-25, 20-30. That cache will cover 100% of the share price of the 49 or ten Swiss francs when the very end of the day, the company over a 20-year period. So ten in the past and hopefully ten as a forecast in the future, will fully cover the purchase price. This is a flow of cash dividends that the company is paying out to shareholders. And so the first violation, the first valuations, what I call the V1 here, that is, without any dividend growth, so there is no dividend growth. The company is paying on 0.5. US dollars to infinity and you have two, infinity is 6%. Expectations of return that will give us an intrinsic value of eight dot 33 US dollars. That's devaluation of the stock. What the stock is really worth with a 6% return, with a 0 dot five US dollar per share pretax cash dividend. Let's take, let's take the assumption it's a cash dividend to make it easy here you can do it with a scrip dividends. And with Warren's as well, it works the same way, just complexifying a little bit the model here. And no dividend growth. That is giving you an intrinsic value of 833. And then I'm taking the assumption and then we need to do the interpretation of this because A33 is like, OK, but is this good or bad? So stay with me. I'm just going to elaborate on the V2. So the Gordon Growth Model, what we call the GM, in fact, takes a dividend growth into account if the cash dividend is growing by a certain amount of percentages, in this case 3%. You need to remove from the return the 3% to infinity. And it means that the second intrinsic valuation method using now dividend growth doesn't assumption. We consider that the company will be able to pay out 3% to infinity as dividend growth year over year. You see the effect on the intrinsic value. So the company today's paying our No.5 and those 0.5 will grow by 3% year over year to infinity. And your capital allocation is unchanged. You are expecting a 6% return. If you're expecting a 20% return, you need to replace a sixt by 20. And obviously it will reduce the intrinsic value because the higher the return expectations, the lower the intrinsic value, the lower the expectation. If you are happy with a three to 4%. Let's say return. Well, then obviously the intrinsic value will go up because the denominator is smaller than obviously what will be remaining on the nominator said will, will grow. So in the V2 valuation, with a 0 dot five US dollar per share cash dividend pre-tax with a 6% return expectation from you as an investor. For me, as investor with a 3% dividend growth. So we, and the area of the dividend aristocrats, civil and kings potentially. He said that intrinsic value is the double the size. And it's normally because 0 that five divided by six is the heart is 0.5 dot five divided by six minus three, which is five divided by three. So six to three is half of it. So the denominator is half as big as in V1. And the other way round the impact is that the valuation will double. The V2 is the double of the V01 is logical, right? This is not rocket science. You don't need a PhD degree for this is just very simple arithmetic calculations. And, but one of the things that I am missing personally in the gardens, in the Gordon Growth Model or the dividend discount model is not all companies have growth. Okay? But a lot of companies, you may remember in the lecture we were discussing the cash dividends versus the share buybacks. I was showing you that over the last decade, more and more companies have been paying out, giving a return to shareholders by share buybacks, which are tax-free for the shareholder. Because cash dividends, you remember that you are exposed to taxes and this potential can increase your written as an investor if, if you have share buybacks versus a cash dividend for the same amount. You remember this graph will not come back into the details, but we were calculating what is the year, the share buyback yields if the company is buying back shares from the market. And let's take an example here. First of all, before we do an example, I'm gonna stick to my 0, that 5-years dollar per share example. Just wanted to show you. And I know that not a lot of people look into that. I've extracted to you the courtesy of Morningstar screenshots from Microsoft. And you see that on morningstar, they not only show the dividend per share, in this case US dollars, they also calculate the dividend yield in percentage. But you see that a satellite Morningstar compounds automatically the buyback healed and then comes up with the total yield. So what is interesting is that if you would look at MarkovOne from a cash dividend yield perspective, you'll probably be unhappy because it's not enough to even cover the inflation. Remember, inflation was, I think one that 73% in average over the last ten years moving average. And currently my assumption is one that 5% worldwide. But we need to add the buyback he needs to in order to calculate a totally remember we made examples whether cash dividend yield was one that 9% and the share buyback Hill was 69. Compounded the company was giving you total yield of eight dot 8%. Remember those examples in the previous two lectures ago. In this example it's the same. It's, the total yield of Microsoft is between, let's say 2, 3%, which is already above inflation. It turns out the cash dividend is not above inflation, but remember, you need to add both things into it. So let me, let me calculate this and you can call it the golden plus formula, the Gordon plus candy formula. I don't care at a one have any intellectual property or royalties on this. I'm just telling you how I add to the v1, v2 calculation that we haven't before, you can find a lot of scientific documentation on the Gordon dividend discount model valuation or the Gordon Growth Model. I'm adding the buyback healed into this because I believe that otherwise we are missing something and we need to be respectful of Mr. Gordon because if I'm not mistaken, his formula has been set up in the 19 sixties or seventies. I may be wrong. I have not looked up this, but this one I have in mind. So what we are doing here is going to do so we have the V1 that was without dividend growth. The V2 was with a dividend growth of 3% with 0.5. cache and a 6% expected return. This is what I'm showing you here, but now I need to establish a need to add the amount of money that the company is doing through buybacks. And in this example, we have currently the company has decided to put 100 million of their profits and to buy back shares with that, how many shares can they remove from the markets? Well, we need to know for that the current market share price where they, when they gonna execute the buyback plan. So the current market share projects and assumption is at 14 US dollars. And we know that the company has a number of outstanding shares that is 500 million. Remember the diluted versus a basic, a number of outstanding shares? Well, we need now to calculate is how many shares can accompany buyback. Those 100 million, and this is what we are calculating here. So we are taking the 100 million, we are dividing it by the current share price. We are taking the assumption that the company is doing the buyback today with a share price of 14 US dollar. So the company will be able to remove seven dot 142 millions of shares from the market. Remember that there are 500 million outstanding. And so the new number of shares is not 500 million, but 500 minus those seven dot 142, which means that the total number of new shares is 492 dot 86. Remember, go back to the share buyback lecture to understand this mechanism. So expressed in percentages. The company is removing one dot 42% of shares from the market, from the total number of outstanding shares. And if Ann Warren Buffet sometimes does this, and in the beginning I wasn't understanding how does he come up with the US dollar figure in terms of share buybacks? He takes that percentage and he multiplies it with the current share price. So it means that on a 14 US dollar current share price, the company is removing zeros, 0.9c and 88 US dollars, which is what the current share price multiplied by the percentage of the number of shares are being removed. To take the time to go through this again. And remember now, to be able to compound the, the total yield, you have 0 years. There is a cash dividend pre-tax, but you have the equivalent of 0 dot 1988 share buyback equivalent on a 14 US dollar share price. If we divide this by 6% with the dividend growth as well as 3%. We able to compound the intrinsic value and expressing dividend yields. And that was the example I was showing you with Microsoft as well, is you have a 3.What fifty-seven percent cash dividend yield pre-tax or 0 that 5-years dollars divided by the current share price of 14 years there was if you would be buying today. But for the share buyback mechanism, the company's adding one, not 42% of yield on top of the cash dividend yield. This is the total lead that Morningstar is looking into that I also calculate the total yield of that company is for 99, not just 357, which is the cash dividend here to please again, take your time to go through this figures. For me, It may seem easy because I practice this very often and again with all due respect since 20 years with all humility. But you need to practice this and do you need to practice your eye? But again, as already said in the share buyback lecture, please add the share buyback yield to this. So what does this mean now from an intrinsic value perspective? So this is my extension of the Gordon formula, the Gordon Growth Formula, because I'm adding the amount expressed in US dollars of buyback per share in US dollars. And I'm adding this to the cash dividends expressed per share pre-tax in US dollars. So the same Gordon formula, we're just adding the 0 dot 1988. And it's interesting, the intrinsic value of the company to infinity is 2329 US dollars. So what does it mean? It means that in case the company Is able to pay out continuously 0.5. US dollar per share pre-tax. This is important if the company is able to pay our 0.5x dollar per share pre-tax with a 3% growth on that, and is able to also have a share buyback consistently to infinity of 0, 0.998c eight US dollars with a 3% growth on that, and that your expected return is 6%. The intrinsic value of the company is worth 23, sorry, 2329 US dollars. And if I put the three values together, you see that this is changing. Very probably the interpretation v1, no buyback healed, no dividend growth accompany the share, one single share the company is worth eight dot 33 V2. The company is like a dividend aristocrat dividend, dividend King, the company's growing the dividends by 3% every year. So next it will not be 0 dot five, it will be 0 that five plus 3%. The shaft, it will be No.5 with a 3% next year and then again 3% on the previous year. So there is a compound effect. So it's 0 dot dot five US dollar multiplied by one dot 03 exponential 2t. We have two years of compound effect. That's what the 3% means. So there is also kind of a snowball effect on the dividends. This is dividend aristocrats and dividend kings are doing. And then we are adding in V3 the share buyback because it's worth something as well. And you see that interesting. We go from an a, the v1 of A33 to v2 of 667, or a v3 of 23 dot 29. Now what is important is this margin of safety for remember the graph I was showing in the very beginning is with the intrinsic value that we have calculated. Now this is the moment of truth. How does this compare with the currents? Current market price? Remember that the current assumption in this calculation, the market price is at 14 US dollars. So at 833, if the company is not paying out growth on the dividends. And you hope that the company will pay 0 dot 5-years dollar per share pre-tax as a cash dividend to infinity and your expected return is 6%. At the current share price of 14, you should not buy that company because intrinsic value is telling you candy. I calculate that it's A33. You would be paying 14 today. That would be stupid investment decision. If the company growing the dividend by 3% every year, the company is worth 16.67 to infinity. At a price of 14. Today, you would have a margin of safety of around 19%. That is for me, not good enough. I want to have a 25 to 30% margin of safety. Obviously, if the company on top of growing their dividends is doing share buybacks. And again, this is an assumption. The value I really need to compare is the V3, so 23029 US dollars. And if I can buy it today at 14, I gonna buy that company because I have a 66% margin of safety. So this is very important in the interpretation and I'm showing you this year in a visual way. I have in terms of margin of safety, three zones. I tend to buy companies when they are undervalued by the market. And I do know by having done my homework, not just on the dividend discount model. I mean, as a value investor, I take the other models as well. And again, I'm not promoting him I training, but really, if you want to be more than a dividend investor, please go into my value investing training and look specifically at the electrodes around book value adjusted book value, dividend, dividend, sorry, discounted future earnings, discounted future cash flow. And already in this, I will cover the dividend discount model as well in my van investing cause. But this is one of five methodologies that are used to calculate the intrinsic value. And then I compare if they're big discrepancies between what I get with the various elements. And very often I am in an, in a window of five to 10% maximum margin of safety when I apply this five methodologies. So book adjusted book value, dividend discount model with share buybacks, what I call the golden plus formula. And then discounted free cash flow, future cashflow, and undiscounted future earnings as well. But coming back to the margin of safety. So, and this is something I learned from Warren Buffett's listening and reading a lot of his books and listening to the podcast is, if I want to have a margin of safety of at least 25 to 30% if the current intrinsic value of the company I'm looking at I'm interested in, is 25-30 percent below sorry, zinc is again, if the current share price of the market of the company I'm looking into is 25 to 30% below my intrinsic value, are going to buy the company. Because the market is giving me the company at a cheap price, which is 25 to 30% below what I have estimated. If the market is giving me a price that is between 0 and let say 20-25 percent of what the company is really worth. I may step back and continue monitoring this because maybe I don't know how the market will be tomorrow. Maybe there's going to be people who will become manic depressive and they're gonna start like yesterday. We are September 20th, if I'm not mistaken. 22nd. So yesterday, September 21st, the market was too proud to present. The market was 8%. So maybe those 8% on one day will give me enough margin of safety to buy, to buy that company. Because it was at maybe at minus 20 before. Now, minus 28 because the markets has gone crazy over one day. So that's the kind of thing where indeed it make sense sometimes to look what the market is doing because you can have, and you will have opportunities to buy companies cheap. And then indeed, if I don't have any margin of safety, meaning that the market is pricing the company as at its intrinsic value or even way above, because you have overprice, overvalued companies. Just look at what happens. From the last, I think, mid of September weeks, there were around ten days where all the tech growth stocks, Microsoft, Amazon, Apple, Google, they were. Absolutely losing 15 to 20% because they were overvalued and there was a correction that happened on those stocks. So again, my homework that I do as a value investor is I look if the market is giving me the company at a cheap price, if I have more than 25 to 30% margin of safety between the current purchase price that the market is showing me versus what I know what the company is really worth, then I'm going to buy if I have cash available. And this is important that you understand this mechanism. So with that, we are wrapping up this dividend discount model. It's very, very important one and you see we have taken 30 minutes to walk you through this. It requires practice as we very honest, it requires practice. And again, if you want to have this intrinsic value, let's see methodology applied even to stocks that don't pay our dividends. Please look into the value investing course because there are other methods to estimate the intrinsic, the real value of a stock of a company. But you will need to look at book value adjusted book value of future earnings and future cashflow. Which here as a dividend investor, you're just looking at cash dividends and the flow of cash dividends and the flow of share buybacks that you could expect. Again, there is no guarantee about it. Nobody of us has a crystal ball. But at least you can have an idea about nestle. If they stop paying out dividends and growing those dividends, shareholders will get crazy on them. So that's the kind of thing you remember when we were discussing the stable progressive or residual dividend policies, a. Told you that when management starts paying out, dividend is very hard for them to stop paying out dividend because shareholders will get used to that. So they don't have any incentive in stopping that in order to have peace from their shareholders and having the support of the shareholders towards the management. So without wrapping up, the last one before we go into the conclusion will be the value trap. That's a very important conversation even as a dividend investor. Because specifically dividend investors, they tend to make mistakes because they don't look at value traps or they just take a couple of ratios like high dividend yield. Or I get a 20% dividend, you that's great. Going to buy the company. No, no, be careful. It can be valid traveling, you may lose your money on that. That's why I've specifically added this lecture in chapter four. After having done this, let say dividend discount model conversation, that you have a little bit more attributes that you are conscious. What could be a value trap and potential, you will need to stay in this trap for 15-20 years because the market is not coming back on the share price and you will be not happy on yourself as an investor, but also maybe about me because I trained you on dividend and value investing and I did not mention the value trap. So the attributes to measure if a company is a value trap or not. Always with, let's say, disclaimer that nobody of us has a crystal ball. So its assumptions we are making, but at least there's some, let's say, stupid mistakes that can be avoided by knowing what are the typical attributes of Vandal tribes. So that tune into the next lecture to discuss valid traps. And then we're going to go for the conclusion. Thanks for having listened in to this longer. I think it's the longest session of the whole training, but I hope you enjoy it. And, and again, practice, practice, practice your eye, do your calculations is very important that you become like a super performance sports athletes. You need to practice this and do those calculations with that. Thank you. Talk you later. Thanks. 15. Value traps: Welcome back, dividend investors. We are at the end of chapter number four before the conclusion of the whole training. And one of the specific points that I wanted to address in this training as well is valued traps and maybe have already heard about it. But I want to make sure that you are aware of what a valid trap is and that you understand a little bit what are the attributes of a valid trav while valid trams are building up? But also what are the kind of recommendation that I applied to myself when I looking at cheap stocks that seem good in fact. So let's get started and coming back on this corporate lifecycle, you do remember that very often, the dividend payout zone, so companies do not pay our dividends in the beginning when they are in the lounge in the growth phase, but when they are on the maturity phase, still either growing or reaching the top of the growth curve. In terms of revenues, they indeed want to give a return to shareholders. As we discussed during the whole training, share buybacks, cash dividends, and those kind of things. You remember as well if you're unsure, go back to the lecture around corporate lifecycle that companies can potentially, they will have a decline a certain time. And if they do not innovate, they will see a very strong decline and even potentially die as companies. The, and this is where, this is where in fact value traps can happen so that the company is unable to start a new renewal face that we discussed in the corporate life cycle lecture. But that the company is declining and is still at the ends of the dividend payout zone. It looks cheap because it's an Decline Phase and the market has already been, let's say, reflecting the fact that they no longer, that the market is no longer let say following supporting the company. And you, a lot of metrics that will really look cheap. And this is where specifically as a value investor, but also as a dividend investor, you may end up putting your money into value traps and destroying your wealth. So, so as I was already commenting, surveil investors, they can be attracted by value traps. And the main reason for that, and if you go into my value investing, corals are gonna share a couple of metrics like price to earnings, price to book value. With that, in the value trap, they look really super cheap. I do have sometimes. And it happens, let's say a couple of times per year, that very good companies also have low valuation metrics. Having only looking at valuation metrics is a risk. And this is why I am explaining this in the value investing cause I'm also addressing this in this course as dividend investors, which is a subset of value investing. So the first attribute that could lead to valid trap is that the valuation metrics are very low, so price to earnings are below ten, price-to-book is below 1.5. And you have also a very, very high dividend here. I'm only seeing when you have a dividend here that is above 10%, there is something happening there. And in full transparency, I landed in a value trap. It's now whats a couple is around a decade ago. And I will explain this later on, but I was not, I did not respect all my rules of investing. I was little bit arrogant, but high wanted to invest as a year this company will come back and it never came back. So I went out, let's say early enough not to be totally wiped out. So low valuation metrics, but low correlation matrix, if you look on the short term, it can just be that the, that the market is depressive and that can happen. And this are the opportunities when you can buy a fantastic companies at cheap prices. But the first thing that we need to look into is if the evaluation metrics are low for very long periods. And I really mean here, a year, two years, five years, There's something going on probably even in the industry. I would say. I mean, we are today, September 2020, I think 22nd, 23rd. Just have look what is going on in banks, in oil industry. So the evaluation metrics are super low. And this means that something is going on in the industry, that industry come back. We don't know, for example, for me, as an investor, oil industry is out of my circle of competence, out of my investment universe, even if the valuation metrics look very low. And by that very cheap, I will not be investing into that because I know, or I think when I see and all the car manufacturers that they are building hybrid cars and even full electric cars. I know that the consumption of oil will go down. And oil is not linked just to car manufacturing, but also to the airplanes. They consume a lot of oil as well. But for example, not later than last week. It's pure coincidence of the schedule, but no, not latest. And last week, Airbus, which is a competitor to bullying, announced that they want to go for hydrogen engines by 2030 in order to have 0 carbon footprint for airplanes, there's something is gonna happen on oil, which explains that the valuation metrics are already very, very low for long period on oil. And so you need to do a thorough evaluation about the company, even if even the industry, you really need to look into it. And this is where I'm saying the value trapped happen to investors when they go into industries, into companies that are outside of their circle of competence, outside of the investment universe. This is definitely something that you need to, and this is why I'm really insisting. If it is in this training or the value investing training that there is a circle of competence. Define it for you if, if no longer remember, go back to the lecture on the circle of competence. But so that's really something that you need to define. Where are you good at? Where do you understand the business and when you don't? And having said that, then if you see companies that really look cheap, that look at really attractive prices, if they are outside of your circle of competence day already away from them. What causes a value trap to develop? In fact, it's a permanent change in the revenues and profits and even the cash generation power of the company. And I'm going to give you, in fact, I think it's the next slide you can see here. For recommendations I'm giving you to try to avoid value traps. I mean, obviously that would be my recommendation. Number 0 never puts. All your money into one company. I'm always saying that you can follow as a person maximum of ten companies. I'm not overdo diversifying too much. They are people that have rest successor investors in diversifying. I don't diversify too much, but I have currently my portfolio, eight companies that I'm able to follow, annual shareholder meetings, quarterly reports, quarterly calls with analysts and those kind of things. Because I want to understand what the company is doing. So in terms of recommendation. So having said that, don't put your eggs all into the same basket, but tried to be nonetheless specific in which companies you invest in because you like the best and you like the brands. And they do, and they are cheap and you did your homework to figure out that they are cheap, short-term, so it's buying opportunity. So asset First of all, stay in your investment universe, in your circle of competence. That's the first and most important recommendation I can give you is do not go outside of your circle of competence. You need to understand the business of the company that you're buying into. Remember that you should act as a business owner. Then obviously the second one is you need to check. And I'm going to show in the next slide, if there is a decline in the revenues, in the profits in the cashflow, and if that decline is consistent over the last five to ten years, then the chances are pretty high that this looks like a value trap, so be careful about it. And sometimes I'm, I'm not mentioning to you in writing, but sometimes what management does when they undervalue trap situation, they spend money for mergers and acquisitions. That happens as well. I'm not saying that every merger and acquisition is linked to a value trap company. But we do see sometimes bad capital allocation decisions and merger and acquisitions just to show to the shareholders of the company, that company continues to grow by doing external acquisitions. It's doing an acquisition is never easy. I want myself through couple of mRNAs At my scale, not large corporations. That's something, I mean, culture sometimes do not fit. You need to retain the talents and those kind of things. You really need to find the synergies and the process is to do cost savings. It's not straightforward as that, so we need to be careful with that. If there is a consistent revenue decline, cash decline over the last five to ten years, that you get not fooled by emergent acquisition strategy of the current management of the company. That is in fact a value trap. So the third one is, and this is kind of linked to my first recommendation. If you, if you see that the company is part of your investment universe, you need to be able to understand if the company isn't a renewal phase and how I do this. And you can look into my value investing course away that I have a perception. If there is a renewal Phase, I monitor what is a brand perception because it sometimes the Net Promoter Score, but also the brand ranking. There are some Because you know that you remember that my investment universe are the top brands in the world. Top brands in the, in the EU and the US. So I get every year, marketing agencies give me a sense like Interbrand, Brand Z, give me a sense. What are customers feeling? How do they feel about the brand? If the brand is declining in those brand rankings? And the net promoter score. The if the revenues are declining and the cash verdict is declining, and evaluation looks cheap, then very probably you are in a value trap. And executive, that company can turn the business around, you will probably be losing money on those companies. So just be careful of it. And if you are interested in having more information, mothers brand rankings. Again, it's not specifically promoting hidden value investing coast, but that's something when we discussed about the modes have been addressing in very shortly in one of the previous lectures in this training already. But that's something that is very important and there is a way through those brand rankings for net promoter score to see if customers, which are the ones that are gonna bring money to the company in terms of revenues, how customers feel about the company. And that's something that's again a sub look into my very invest in cost because I'm extensively discussing how to monitor the brand perception and the net promoter score of the customers. And yet the full recommendation is, if you see a combination of those attributes, so you have a consistent decline in revenues in cash and profits. It's outside of your circle of competence, even though the company looks cheap and their brands is losing ground compared to other brands, then I would recommend you. I mean, nobody is obliging you to put your money today into the stock market. A the weight for a bear markets, market correction. Continue piling up cash. I mean, Warren Buffett is doing this sometimes he says there is currently no good opportunity on the market even though I have cash available. So I'm going to wait. And I must say I'm doing the same Sometimes when I do my screenings on my 200 plus investment universe, sometimes there is, there is no good opportunity to invest and then I just continue piling up my cash. And then maybe a month later I'm gonna do reassessment or if there is a market correction, I will then jump into it because there are some nice opportunities and we are I'm just checking September 24th, Not Latest then 23 days ago, there was a close to a market correction of 10% and actually are reinforced my positions on some of the companies I do ONE because I took the opportunity that the market was depressed for 10%. I was having on, on one company, for example, BASF was having 605% dividend yield. Because of that market correction, I had piled up cash. I took the opportunity, I bought into it. So just be conscious of that. Do not be stressed. There is no urgency to put your money into the market weight and there's gonna be a correction, a bear market at a certain time, but please stay in your investment universe. Please look at if revenues are declining consistently, a longer period of time and cashflow as well. And if the metrics are low, the valuation metrics. So be careful about that please. Now, I really don't want you to be wiped out again at the very end of the day, it's your responsibility to decide where you put your money. And I mean, I'm just trying to share with you my learning that I had over the 20 years at a certain point in time, a decade ago I was little bit arrogance. Oil industry, I know oil at the very ends. It it I mean, the cause was small at that time. It was nonetheless, a couple of tens of thousands of US dollars that I had to compensate because I did a bad decision and not respecting my rules might checklists. So this is an example where you see, look at this company where you see that the revenues since 2014 are declining. And you see also that the pretax incomes are declining as well. So we were discussing this before. If the company is paying out dividends, it's, I mean, here we clearly see that if you remember the corporate lifecycle, it's at the end of the circle, revenues of the psychosurgery, revenues are going down, cash is going down, incomes are going down. At a certain moment in time. Either the company is able to do renewal face or it's going to be a valid trap. So this is the kind of thing that you really need to look into and to be conscious about. So be critical about what the market is telling you. Be even critical about what the people in the news, awesome, let's say analysts that are on TV are saying, yeah, you should buy this company, you know, this company will, will grow tremendously. So just be aware of that. And again, one very good example that is not a value trap example, but a trap example, Growth trap example is the wildcard scandal going into my value investing course and looking to the wire count scandal details. I mean, people have lost 99.9% of their savings because it was still believing that wire Carter would continue to grow. And I really recommend that you look into that as well. So wrapping up. And in the next lecture actually, which is the closing one, I will just conclude and share with you some kind of checklist. But I hope that you understand and I want you to be aware that you can see companies that look cheap, but they're, dividend yield is not sustainable or the total yield is not sustainable over time. Valuation metrics are very low, so please be careful about that. And I hope that my kind of list of principles of recommendations will help you to avoid doing mistakes that even myself, I did one of those mistakes like ten years ago, Libyan less than ten years ago in the oil industry. With that, thank you for tuning in. And let's go for the last lecture, which is a concluding lecture. Thank you. 16. Dividend investing checklist & conclusion: All right, dividend investors, we, at the end of this training. So this is the last lecture, which is a concluding lecture. And I'm going to give you some kind of training assignments, practicing what you hopefully have learned in this training. But before doing that, one of the things that I like and I'm also reflecting on this in my value investing training is a very interesting interview of Charlie Munger with BBC. You may know Charlie Munger, he's a partner of Warren Buffett. And if there are four things that I really like always to come back, being a serious investor and other speculator are those four quotes that are coming out of the BBC interview that was done with Charlie Munger in 2012. So circle of competence. So he was indeed saying, we have to deal with things that were capable of understanding. And this is the way that Buffett and Munger invest. They do not invest into industry. They don't understand. For example, before the investments that's Berkshire did into Amazon and that was not them. Neither Warren Buffet, not Charlie Munger that did that investment. Buffett was not investing into tech industry. He tried it once with IBM, but he made a mistake and went out of it a couple of years later on. And really speaking here, that was in the last decade that he spent a lot of money in IBM. And at the very end, it turned out to be a bad investment. And I'm not judging if IBM is bad or good one, I'm just giving you the example factory speaking that he went out of the IBA IBM investment. Obviously keep in mind that even as dividend investors, in order to have sustainable, sustainable yields over time, the business has to have some characteristics that give it a differentiate a mode, and that different cheetah will sustain a sustainable over a long period of time. Remember when we discussed Dividend Aristocrats, dividend kings, they have, very often they have those capabilities or having this intrinsic carrier stearic characteristic that they have a mode they have read is differentiator over a longer period of time is competitive advantage as manga is stating it in the interview. Obviously, this is not directly part of the dividend investing cause, but more of the value investing course. Manga was saying he likes to have management. That is, that is correct. That has integrity, that respects shareholders and customers as well. An asset. Look into the value investing course two when we are discussing CEO stewardship. But that's something that is very difficult to, to monitor and to measure. And the most important one, even for yes dividend investor. This is what we were discussing two or three lectures ago when we were discussing the Gordon model and the intrinsic value calculation or the valuation methods, is that whatever, how wonderful the business could be, it's not worth an infinite price. This is what Mongo is saying. So remember we were discussing the margin of safety and never come back to it during their final checklist. And I can tell you being a good, let's say start or to have that checklist even as a dividend investor. But they are also saying Buffett and Munger that And there are fantastic businesses out there, but they're not worth an infinite price. And what they are saying, if you listen to that podcast and enter shareholder meetings, they would like to have this margin of safety of 20-25, 30% before buying into the business. So if we kind of wrap up with like a checklist of everything that we have seen through this multiple lectures. And first of all, I would like to thank you for the patients that you had. I hope it was maybe eye-opening that you learn stuff. Maybe you knew already somethings and I hope that I was able to complement those things. And maybe if you're new in investing, That's it. You are starting from scratch. And that you, and I hope that I gave you some reflexes, methods, attributes, criteria not to be directly wiped out when you invest into the stock exchange. But the other way around that you are able to develop a passive stream of revenues that will even have an impact on your life. Because you, hopefully after ten, 20-30 years of doing this, this passive stream of urbanism will able to pay your holidays, pay maybe your, your works at home, some nice dinners with your family. And maybe I certainly time it will be it will allow you to pay off your needs and you that you no longer have to work in order to get a salary, but that passive stream of revenues will do that on your behalf. And then you're going to have an nicer life of being able to do your hobbies every single day. But so if we come back to the dividend investing checklists, so the first thing you remember when a company pays our dividends that I hate when the company raises depths or uses its reserve to pay out dividends. I believe that the best companies pay out dividends, share buyback. If it is cash dividends or script or Warren's whatsoever, they pay this from the profits that they earn. The first thing that's very important, the second one is dividends consistency. So if you want to build this principle and this is what I am doing since many years now of passive stream of revenues of income coming in, redo check that the company is paying out dividends for at least five years in a row or even ten years. And some, you will find some companies that are not Dividend Aristocrats, dividend kings. But even on top of that you have, when you have cash available that you can buy Dividend Aristocrats, dividend kings that you like because you understand their business that's even stronger because you're going to have that snowball effect. So look into dividends consistency. Then remember, and this is kind of linked to the first one. So payout ratio and the coverage. So companies should not raise depth, should not pay out dividends to their shareholders from his reserves. But companies should take a good portion of their profits between, I believe 30, 70% that is, so above 30. Remember, that is a fair share of written to the shareholders but below 70, so that they can maybe pay off debt that may, can maybe reinject part of that money into the business to grow even further the current market share. So that's a good payout ratio coverage to have that the total yield is between 30 to 70% of the total profits of the company. The yield by itself. Remember the conversation around inflation, GDP growth, capital allocations that we were discussing, the bank savings account 0.5. percent yearly return. So I believe that the total yield should be somewhere between at least above three to 5%. But I'm also seeing a below 10% because very often when the yields and the dividend yield are above 10%, most probably you're going to be having the characteristics of a valid tribe. It does. It's not necessarily always the case, but I believe nonetheless, from my experience of 20 years of investing, when I saw dividend yields above 10%, it was like look at the attribute and I was seeing the Indian, the corporate lifecycle that the company was going down. Remember the Intrinsic Value calculation that we did, that the share price should be 25 to 30% below the real value of one share that you have calculated. And in this course we have been using the golden formulas of dividend discount model or the Gordon Growth Model Formula. So remember, you need to have that margin of safety because at a certain point in time and you have cycles in the market, the market will reflect if the attributes of the company have not changed. And it's just that the market is now short-term depressive. The market will come back and you're going to see not only revenues coming in from the dividends, but you're also gonna see a share price appreciation. This is why we have this safety margin and Buffet uses this as well, and manga as well. Very important. Please stay in your circle of competence. If you have not designed your circle of competence, then you need to design, define it first and decide what it, what it looks like. Remember that we had one lecture on the circle of competence where I was giving you the attributes, geographies, industries, and those kind of things, even the type of securities. So I'm a pure stock investor, share investor. So define that please and stay in that circle. It doesn't mean that this circle has to be frozen for the next 40 years, but expanded through learnings, through reading a lot, reading magazines of that industry. So you can get knowledgeable in industry, but it takes time. It doesn't come from one day to the other just because you run a screen and you see chip company that it makes you a specialist in that area. So be careful about that. And then there was now in the previous lecture, just please be aware of value trap. So there has to be. And over the last five to ten years, just check before you put your money into the company. That the earnings and the income so that the revenues and profits at ESA increasing that they are not negative. We discussed about that as well in one of the lectures. So I think this is kind of a very good checklist and you're gonna see that a lot of companies will fail on those tests depending on your investment universe, on your circle of competence. But yeah, it's not that the test are strict. And you're going to see that the very end of the day whenever you're going to run the screen, I mean, when I run my screens on my investment universe of 200 companies or little bit more than 200. I end up very often with two or three or four companies that fill the criteria for me as an investor. So run those screens, run them on a quarterly basis. Be aware what is going on in the market because there's going to be every couple of years is going to be a bear market, a market correction. And if you have piled up cash, that's maybe they're an opportunity to buy cheap companies and do, start doing profits and having developing passive stream of revenues. So before I wrap up, and so what you can do and what I would recommend you that you take one of those five companies are very big brands, BMW, Coca-Cola, marks of dismay and AT and T. And that you try to run the screens that we just discussed in the checklist on those companies. And I've even pref Bad for you lipid, okay, what are the kind of tasks that you should do? The very first fundamental screens that you should run is determining, are just checking if the revenues and the profits are consistent. So being able to determine are we in a valid trap situation? Are we in a cycle, corporate life cycle where the company is still growing, calculated total yields be able to determine or lookup on sites like Morningstar, what is the total yield between cash dividend yield and chair buyback deals, share buyback yields, and determine if with that you have the return that you are expecting. My return is between five to 7%, hopefully, and this year-over-year. And then also we've got the dividend payout ratio are the dividends, is the yield expressed in US dollars or expressed in percentages if it is a ratio, is that sustainable over time? And indeed, I would say the level to which is a little bit more complex is used the formulas, the dividend discount model, the Gordon, remember that those formulas only work for companies that pay out dividends are Duchamp by banks. They do not work for growth companies that don't pay out dividends for that, you need to go into my value investing because there are other formulas like discounted cashflow, discounted future earnings, book value, and adjusted book value that exist as well. And then if you are able to calculate an approximation through the dividend discount models or the Gordon model and my formula, my extended formula on the Gordon determined and look what is intrinsic value and how does it compare to the current share price? And maybe you're going to find this 25 to 30% margin of safety with that. And again, I mean, I'm just sharing here the value investing cause as specifically on the modes, the intangible metrics, I'm going deeper into that and in this dividend investing because it also longer course. But I hope that I was able to share with you my experience as invalid invest as a dividend investor as well. And I hope that even though the responsibility remains euros to this Anwar, You put your money. That's with the help of this training. It's will allow you avoid u to be wiped out or losing your shirt because you did bad investment decisions. And so and again, you will need to practice and keep in mind that you're gonna do mistakes. But what is important is that those mistakes do not wipe you out and this is really an important thing. So keep this in mind. So that's obviously, there's always a disclaimer related to those financial trainings. Because I would say the market evolves every single day. So always, please be so kind and read this disclaimer as well. For the rest. I mean, what is for me more importance? Again, the intention of doing those trainings is that I share my experience with you because I I realized a couple of years ago that not a lot of people knew those things around value investing, dividend investing, even talking to people that are working in banks. They do not have those kind of reflexes. And for me it was important to share this knowledge with you in the hope that you will become a better investor and invest that we'll be able to develop those passive streams of revenue or income for you and have a better living. So again, thank you very much for your patients and enjoy, enjoy the, let say practicing in real life the investment process. Thank you. And you have my contact details as well here if needed. Thank you very much and talk to you very soon.