In this conversation, 7investing Lead Advisor Matthew Cochrane once again sits down to talk dividend investing with Ryan Krueger, the co-founder and CEO of Freedom Day Solutions, a family-owned and operated financial advisory firm located in Houston. Krueger is also the founder of the Freedom Day Dividend ETF (NYSE:MBOX). The two discuss dividend investing and how to find great companies whose dividends can help power your portfolio's future growth.
May 9, 2023
In this conversation, 7investing Lead Advisor Matthew Cochrane once again sits down to talk dividend investing with Ryan Krueger, the co-founder and CEO of Freedom Day Solutions, a family-owned and operated financial advisory firm located in Houston.
Krueger is also the founder of the Freedom Day Dividend ETF (NYSE:MBOX).
The Freedom Day ETF is designed, as Krueger explains, to give investors growth of income, not growth or income. Krueger believes the ETF can accumulate a stable of quality companies that pay a rising dividend while avoiding many of the common pitfalls often associated with income investing, namely:
Cochrane listens to Krueger as he explains why he believes there’s a problem with the 4% rule, which suggests retirees can safely withdraw 4% of their retirement savings balance every year. Krueger believes a much safer bet is holding a portfolio of financial instruments that pay dividends in excess of one’s expenses.
Along the way, Cochrane and Krueger discuss several of MBOX’s holdings. Williams Companies (NYSE:WMB) and Enterprise Products Partners (NYSE:EPD) are two pipeline operators that transport and store natural gas. If global conditions don’t change, the two operate profitable companies that pay a nice dividend to shareholders. However, natural gas provides much cleaner energy than coal, and Krueger believes there is a real chance both can experience significant growth as the rest of the globe transitions from coal in the coming years.
Nexstar Media Group (NASDAQ:NXST) is the largest domestic television station owner and operator with almost 200 stations. Even as the world consumes more media via streaming apps, live sports and news still command more viewers than any other type of content. At just 12 times next year’s earnings and sporting a 3% dividend yield, Krueger believes Nexstar is undervalued as an operator of attractive and profitable assets.
As a father of five kids involved in youth sports, Krueger is well aware of the allure of Dick’s Sporting Goods (NYSE:DKS), a retailer that sells atheletic apparel and equipment. But Dick’s also owns the GameChanger app that allows little league games to be watched online, giving the big box store a digital growth channel.
Krueger can be found on Twitter @RyanKruegerROI and you can find more information on his advisory firm (and excellent blog) at freedomdaysolutions.com. For more information on the Freedom Day Dividend ETF, you can visit freedomdaydividend.com.
Matt Cochrane 03:26
Greetings fellow investors. I’m Matthew Cochrane, a lead advisor at seven investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone, listeners. Today. I am very excited to introduce Ryan Krueger. Krueger is the co founder and CEO of Freedom Day solutions, a family owned and operated financial advisory firm out of Houston, Texas. He is also the CEO and CIO of the Freedom Day dividend ETF ticker symbol m box. He is one of the most entertaining and informative follows on fin twit, but more than that, especially for Twitter. He’s gonna He’s one of the nicest most genuine people you’re going to find on social media. You can follow him at Ryan Kruger ROI where you can find him posting about everything from gratitude and five spread patterns to dividend and disruptive technology. Ryan, welcome to the show.
Ryan Krueger 04:29
I’ve been looking forward to this you know as as two dads of nine Angels we have so much in common and then the stock market stuff on the side kind of looks easy compared to what we just talked about getting through real life and and we are good friends in real life and I’m happy to share all of our work. I love doing it just like you we have a lot in common and this will be fun.
Matt Cochrane 04:54
Yeah, it’s definitely been too long. I think it’s been almost almost two years since we had you on Alright guys, and, and you’re right between us, we have nine kids usually on Fit to it when it comes to fit into it. When I talk to people, I have the most kids. And yet, when I interview you, you actually have more experienced than me when it comes to that because I only have four of those nine and you have the other five
Ryan Krueger 05:20
well, you I can just sub you and we go five on five full court hoops, I know you can still move a little bit to bring you in off the bench a
Matt Cochrane 05:28
little bit is the key word right there. So, Ryan, like I guess, let’s, let’s just start here. Um, you know, like, we’ve obviously experienced a whole lot of market volatility, the last 18 months or so, let’s call it and, you know, I think one way like I think, or one thing that might be coming back and style a little bit for investors to look to our dividends. And you know, if you’re just listening right now not watching on YouTube, I just threw up a headline from s&p global research, and it says s&p 500 dividend aristocrats the importance of stable dividend income. Dividends played an important role in generating equity total return since 1926. dividends have contributed approximately 32% of total return for the s&p 500 While capital appreciations have contributed 68%. Therefore, sustainable dividend income and capital appreciation potential are important factors for total return expectations. Ryan, were people not looking at dividends? Are they? Are they missing out on some real returns?
Ryan Krueger 06:43
I think so. And I, I’m to be clear, I’ll speak as an unbiased objective mathlete here because I sit inside a firm that provides every class of investment, size and style to every type of investor but dividend growth in particular, as the backbone have plans. But to be clear, this should never be about what any guest or portfolio manager likes or what they think or even what they believe. And that’s how all of us will get in trouble. If we’re not careful. With conviction. I’ve always said Curiosity will always beat conviction has a much better track record, to I just learned. I started out as a portfolio manager on Wall Street, then I finally escaped so I could speak the truth and talk directly to you and communicate, right individual investors. without any interruption. I think this shouldn’t be about what any guy like me thinks should happen. I think it should be a complete profound respect of what is happening. So dividend growth has a track record unlike any other that’s not specific to me that’s just objected. We’ll dive down into what I think and where I spend my time. But in general, I decided after I’ve been doing this almost three decades now, the best step of portfolio manager and advisor could take is recognition that this should not be about what we like. It should be about what stakeholders need. And in my humble opinion, with a variety of different ways to invest in better growth, or income funds strategies. What most individual families need now or will eventually need is growth of income. Eventually, they’re going to all have one question in common and I think our industry does a horrible job answering it, which we’ll get into later, with a very controversial belief that we’ve written extensively about why most financial plans are doomed. I think they’re gonna have one question, how much is enough in the most successful included? How much is enough? And I believe it’s not a number, it’s not an asset numbers. The studies have been pretty clear if somebody has a million dollars, I think it’s to somebody has five I think it should be 10. I don’t think it’s an asset number. I think it is a free cash flow income number exceeding needs and wants for somebody to really finally know how much is enough. And that can be a different answer for everybody listening to this, which is the beauty of dividend growth income, it can answer and solve problems at a variety of different stages and levels in my opinion, and I’ve just seen the math work.
Matt Cochrane 09:29
There’s a I was just looking through the notes and from our last talk, actually, and you know, you have this about your your ETF has named Freedom Day. And you said the name of it is Freedom Day dividend, which means a lot to us, because we want to completely turn upside down this notion of retirement planning have a date, and an asset number, rather the day when income through that mailbox exceeds the invoices going out. So that is our definition of Freedom Day.
Ryan Krueger 10:00
I have seen it work and I still break a tear every once in a while I did yesterday in the meeting when somebody reaches that Freedom Day. And to be clear, I don’t think it can all come from a fluctuating stock market account of any kind, including dividends. I think there needs to be secure, risk free streams as well which all of a sudden savers are being rewarded with lion’s share of my account, I share it with anybody who ever asked where’s your own money, I beautifully boring triple A rated tax free bonds as my bank account so to speak, and just take the bank out. Right, and the lion’s share of the pay raises that I want will come through dividend growth and and to answer your original question, and just with a little bit of data that I don’t take any credit for this is just the objective math of the factor of dividend growth investing since I was born with zero active management skill applied at all yet, because I wasn’t good back then. In 1973. The equally weighted s&p $100 has grown to 4000. Dividend growers $100 has grown to 13,000. So as a starting point and a backdrop if someone still is interested in total return, and how does it match up, which I long since ago left that race I again, I want to serve people in what they need. It happens also to accidentally have some pretty good tailwinds. And I do believe companies that treat stakeholders in a different way tend to outperform no different than portfolio managers and Morningstar has been pretty clear on this. Those with skin in the game have a consistent level of outperformance and actually the one factor that’s most compelling with the best track record as portfolio managers with skin in the game. I think companies that treat their stakeholders a different way have a pretty good track record with evidence. So this is a starting point before any active management or selection or quality control and sell disciplines, which I think is the best part of active management is not a bad tailwind to start with.
Matt Cochrane 12:07
Sure, absolutely. So, but what if some people heard this and they said, Well, you know what? A dividend aristocrat is a company in the s&p 500 index that has paid in increase its dividend every year for at least 25 consecutive years. And you know, you when you look at aristocrats, you’ll you’ll, you’ll quickly come up with like a lot of blue chip stocks, like Coca Cola target, Johnson and Johnson McDonald’s. Why not? Or what, you know, why not just invest in dividend aristocrats? Which I think like when I talked to like, income investors looking for dividends? It seems like that is like almost like the go to strategy for a lot of them is like, well just look at the dividend aristocrats they have such a great record and, and whatnot. What What Why would your why is your strategy, I guess, looking for dividend growth, better than looking at these stalwarts, you know, the blue chips?
Ryan Krueger 13:04
I think you could do a lot worse, by the way than
Matt Cochrane 13:06
just Sure. Oh, for sure. Sure, yes, for sure.
Ryan Krueger 13:09
And there is nothing in the world wrong with having a passive and indexing approach, you could do a lot worse, because I’ve spent a lot enough time in this industry to know most of those reasons that you could do a lot worse. However, just through process of elimination, and working backwards, again, with humility, leading in math, as opposed to what I like more about that. I look at it as if you could just eliminate fundamentally inferior companies that are in fact bleeding. Could you whittle it down and have a quality selection process with cell disciplines? And I’ll just give you the examples that stick out to me. So sometimes the aristocrats the tradition and name alone is a red flag. So when you have a company raising its dividend by half of a percent? Sure. So keep that streak alive. What is that really telling you? Are they interested more in that tradition? Or the math? And is it sustainable? Is it quality, and I just dug up this number, since inflation is kind of coming back and a topic again, just to give you an example, specifically of why I think you can whittle the list down and why we hold a concentrated portfolio rather than the entire basket. So when I say red flags, two thirds of the aristocrats, Matt, most recently in the last year, their dividend was raised at a rate below inflation rate. A third less than half 15 raises were less than 2%. Year over year, so I get a little nervous about that kind of nobility.
Matt Cochrane 14:48
Yeah, no. And you know you can see it if you went back a few years. You go back to like GE when you could tell their business was struggling and yet Like for for a long time, they stubbornly refused to wait, like, instead of reinvesting back in the business where they needed reinvestment and, and, you know, more more resources, they were like, they felt like they couldn’t cut their dividend because their shareholders would revolt or, you know, you see a bigger sell off or whatever. And of course, all that led to was years of not reinvesting in the business, and then eventually cutting the dividend anyway. And I think, you know, more recently, Intel would be like a good example of a company that was like, you could see as like, they’re getting behind, you know, some of these other Taiwan, Samurai and Samsung, they’re getting behind you their technology, and they could really use some more reinvestment in the business. And again, for a long time, you’re like, they pay a lot of that dividend. And they cut that back, they can reinvest it. And again, they’re kind of stuck in that like, well, we have to pay a dividend, because it’s our tradition. It’s what we do, our shareholders expect it.
Ryan Krueger 15:57
And to give you an example of what I meant earlier, by respect for what is happening, what what we think should happen, or in this case has happened, the tradition, you can I just believe in homework, and you can do some, where’s, where are those dividends being funded from and everybody talks about growth, and an advantage and an operating advantage and a moat, which I frankly, think is more often a lazy description of a portfolio manager that doesn’t want to do more work and stopped being curious and is hoping things just work out. So when you look at free cash flow, it may be growing. But what is the direction of that growth is the growth rate in fact declining, because all modes, no matter how big can spring, a leak, and all small creeks can get wider. So I’m looking at the direction of the advantage when we look at, you’d be surprised how many aristocrats and s&p 500 companies in general are not even growing their operating revenue, top line. And in order to pay a dividend, they may be paying out more than 100% of free cash flow. So just measuring the business operating advantage, and then the growth of that advantage and the change in direction, the rest or crash. For example, if you look at the declining growth rate, for those dividends, from 10, to five to three years has gone from seven to 6%. Again, you could do a lot worse, but direction of change is very telling to me. Whereas if you just simply apply a quality selection criteria and want to own fewer names, you can handpick and our particular, our average dividend growth rate currently, from three to five to 10 years is 15 to 18 to 20%. So it’s accelerating growth. And that gives you a lot of room for error. And when something changes, as an active portfolio manager, have a sell discipline, I think that’s more important than any selection criteria of what to buy is what to make room for and what to unlock. And to sell disciplines to get kicked out of the s&p or to get kicked out of the aristocrats. It takes a lot you have to go to zero or cut. And that’s why that’s waiting too long. In my personal opinion, Math, Math would back me up on this.
Matt Cochrane 18:17
So, Ryan, what do you look for when you’re including companies in your in your ETF? Like what are? What are the criteria or the factors you’re specifically looking at?
Ryan Krueger 18:30
So I start with when I talked about an operating advantage, just looking at the business, operating revenue, free cash flow, and I want to look at profit margins and return on invested capital and each one of those metrics. And then as I said, Well, we do a lot of that anybody can find, by the way, and some of that data, and standalone is great. What I do by hand then is we’ll go in and look at the rate of change over time to see if those moats are springing a leak or if there is a sudden even slightest turn in margin expansion all of a sudden, or why in the world. And we’ll talk about examples later if a consumer is slowing down. Why is some store that I’d never gone into necessarily. All of a sudden having record operating revenues I mean, what I’m looking for those changes in direction which is often located but confusion. Or and this is where I get really excited. undervalued, uncrowded spots because what the efficient market theory is and why I’ve ripped out all these chapters in my kids economics books would say if there is steady or fundamentally superior growth, then the market is going to reward those with premium prices. And I just think math and facts and nonfiction which is my version, I like those much better than textbooks. would argue every single day with that because not only are we able to achieve faster growth that is accelerating but we are underpaid. We are average valuation compared to the aristocrats or the s&p in general and our peers because I’m a competitive mathlete. We’re underpaying. So you can wait to find on average, lower valuation, and probably a lot less volatility there, although it’s no guarantee, and I don’t mind volatility. But if you’re under paying for faster, healthier growth that is supported, I talked about payout ratios, a lot of folks look at earnings payout ratio for dividends, I choose to look at free cash flow payout ratio. And I want to pay I want to get paid with less than half of the free cash they’re generating, giving much more dry powder to do more in the future, which is a huge factor. So we have more dry powder, on average on top of faster growth and cheaper valuations. And that gets me real excited as a stakeholder and why some of these pay raises year over year have been exceptional in any kind of market. Because I think what bulls and bears can both be wrong about what investor needs to think about more often than most of us would like to talk about is what about a market that goes nowhere for a really, really long time? Sure happened on my watch, it’s going to happen again, we might be in one of those now where it feels like it. Yeah, that day I got married 13 years later, the stock market was exactly where it was. So along the way, you want to be reunited with your money or live on. Right? There are companies that grew their dividend every single year during that period of time.
Matt Cochrane 21:40
Ya know, it’s a good reminder, like thought, like, if you, if you can see this chart behind me on the wall, it’s like, it’s a reminder, you know, it’s called the big picture. And it shows like, asset returns over 100 years. And it’s a great reminder that like, look over time, you know, a lot of asset classes are expected to go up. However, within that time, it’s also important to realize, especially if you’re retired and trying to live off your asset base, that there can be long periods of time, that looks small on 100 year chart. But big when you’re living through them, where the stock market doesn’t really go anywhere, like the 13 year, you know, the 70s is a great example. You know, but, you know, from the top of the tech bubble 99 to, you know, through the financial crisis, there was another time where it was, it was down and up a lot. But overall, it was like basically flat. Oh, yeah,
Ryan Krueger 22:35
we gotta live through those squiggly, little tiny lines on that. And I remember, I was on Wall Street, all those evictions that we’re paying behind the advisor. And they would always say, just hang in there. And I’ve told anybody who hires me, fire me if they ever hear me say those words. And a fun fact for all those plans that typically rely on those eight, nine 10% historical long term average rates of return for the stock market. And I think average is the most dangerous word in financial planning. In 100 years, the stock market has ever in an eight year well, we have to live through and see how this would sum it again, to answer the question, how much is enough land at any decimal point, in that big wide range of eight to 10%, the stock market landed between those numbers that almost every plant is based on one time in over 100 years. So the reality is we have to deal with a whole lot of other things which we like to talk about and gives all sorts of fodder for investors to be excited or worried about. But along the way, I want to know what is the One Investment metric that I could look anybody, no matter their sophistication level? And the I’d say the only metric that you can hold in your hand to know what is real, during any one of those years is what did you get paid as a stakeholder and the notion that dividends are only from boring companies that ran out of room for growth is also not true. There are plenty of course where and I don’t want to own those. But there are companies that have the ability to grow a dividend, add an increase r&d, pay down debt and buy back stock for future growth and rewarding stakeholders. So I think that I think that is a myth about dividends. That is pretty clear with a number of different examples.
Matt Cochrane 24:32
Sure, sure. Yeah. I totally agree. I mean, AI is the big hype thing right now and like I think it will be big. I think there’s a lot of changes coming out. I’m not trying to say it’s all hype by any means. But like the company in the lead, there might be Microsoft and guess what, they pay a growing dividend every year and they have plenty of money to do that. Without you know, without being a boring just a boring, slow growing company. money.
Ryan Krueger 25:00
And to be clear, I don’t think we had a great talk before we hit record. This shouldn’t be an either or about almost any topic in investing. So the idea, the reason I like to answer how much is enough first with rising free cash flow streams and with we all know, that’s one of the best ways to measure a business, why don’t more investors and advisors require that have their own plan? What is the free cash flow, I can generate the mailbox money so I can sleep. Because if you have that backbone, that really balance sheet, I call that sacred money, you’re gonna have to rip out of anybody’s hands. And not be it’s gonna be difficult in the worst of markets. And I’ve lived through two 50% market crashes, if you’re getting a pay raise, during a 50% market crash, good luck taking that company away from a true stakeholder. But what that kind of peace of mind should do is unlock the doors, Matt to do all sorts of speculation that you and I both also talk about on the side, all sorts of high risk manager with a small piece, because all of a sudden, you’re not using scared money to do it, giving yourself the ultimate advantage for the growth side of a portfolio.
Matt Cochrane 26:04
Great point. So like, while we’re kind of talking on this topic, um, you know, traditionally, you’ll hear people will hear like the 4% rule, which is basically the rule that retirees can safely withdraw 4% of their savings in, you know, every year, and you can adjust that amount for inflation in subsequent years. And that’s, you know, that guideline is based on like historical stock and bond market returns, like assuming a well diversified portfolio. And that’s mostly what you hear people say, yeah, 4% rule. So if you have like, a million dollars, you know, you can take out 40,000 Or, you know, however, that math works out. But like, I know, in, like on your blog, you’ve talked about, like, there might be problems with that 4% rule.
Ryan Krueger 26:52
That’s a more polite way of putting it, but I I like to have fun with these facts, too. And I give a ton of respect to the godfather of the safe withdrawal will, especially because he’s humble and honest to say himself, a professor at Trinity University, I didn’t ever say this was supposed to be a rule. Right, right. Right, all Street grabbed it, because advisors could very easily express. And when I started, I saw plans leaving the door that was based on a Peter Lynch model, another great stock picker that I have profound respect for. But he said if you markets going to eight to 10%, like we just talked about every year, why do you own any bonds are worried about income, just withdrawal from that, and I saw plans walking out the door where if you could pull if you make 10%? You pull 7%? What’s the problem, and these were the best wealth managers at the time. And all of and I just did the simple math. And at that time, one of my last meetings before I escaped Wall Street, I just simply ask a roomful of those advisors. Take a guess million dollars you make 10% a year on average, no funny math and you’re pulling out 7%? How much is it worth at the end of the 30 years? And I used that last period right before I left 68 to 98? And the answer was you’re bankrupt in 13 years making 10% Pulling out seven no funny math because real actual returns mattered more than an average rate of return. So I give the professor for the safe withdrawal rate a lot of credit, because at least four is better than seven. Right? Right. The problem, Matt, I think is that most of these families that have worked their tails off, to achieve more peace of mind did not sign up for this actuarial confusion of how to adjust this every year. And inflation rates and interest rates that the safe withdrawal rate, we’re living in unprecedented times in a lot of ways. So there’s no rule of thumb that is going to work. And the Godfather himself, humbly admitted, I didn’t stick with it. He is not using it anymore. And he actually signed up for a market timing newsletter. And he is a great investor. Great academic research has all of this at his fingertips. So rather than talk about what could go wrong, and why 4% is too optimistic, because now you’re going to have years and years and years safe prediction here of is it really 3%? Or is it five, and they’re going to try to adjust this and it’s all avoiding the real issue, in my opinion. So rather than use a bare market example, or an interest rate example of what could go wrong, there’s plenty of those. Right? I like to use the example of what could go unbelievably right. And so I use the example and it’s on the blog of if you could be dark brown and getting the time machine and go back and retire right before the best technology growth stocks that were also fascinated with. So 2000 to today, and I have all the examples of the most disruptive, unbelievable technology and you got them all in the NASDAQ the best period in history for technology growth and your average annualized rate of return was 3% through the end of last year, you get the best run and all of tech, isolating tech, and you’re below the supposedly safe withdrawal rate. So that’s not even including all of what could go wrong. That’s what could go right. And I would just say my, my rule of thumb is next time you hear that, and again, I know I’m offending more than nine out of 10 advisors and an entire industry that I escaped with a simpler truth, but I call it wo W. H O A. Next time you hear about a safe withdrawal rate that is confusing, and people go Google safe withdrawal rate and see what a poor investor is LED, there’s more questions than their answers. That’s not what a rule is supposed to do. Right? Whoa, is withdrawing hopes of appreciation. Whoa, is not a plan. It’s a prediction. I would much rather be able to hold in my hand and know what’s real with free cash flow. And any appreciation? Is just that it’s upside. It’s not counted on it’s not planned on. Go enjoy it, but don’t count
Matt Cochrane 31:00
on it. Right, right. Let’s, let’s talk about some of the stocks in your portfolio. Um, you know, I you have some natural gas companies in your portfolio like Williams or enterprise products, that’s probably unfamiliar with at least most of my listeners unfamiliar to me. What? What do you what do you what do you see in in natural gas in like these companies in particular?
Ryan Krueger 31:30
I think it might be the most uncrowded opportunity I’ve found in my career. It controversial politics, all of the ESG debates, throw all that aside, although I think that set up this opportunity in Saigon to be clear, even though I’m in Texas, I mean, there was a recent 10 year period where I didn’t own an energy stock, not one, I almost got kicked out of Texas, right, it almost had to come near you in Florida. To me, this is all about math. So Z, there’s nothing here that is about, again, what I think should happen, but a profound respect for what is happening because of these cycles. Now, if I had to guess what’s being most under appreciated, is all these guys are going to do it again, there’s going to be boom and bust cycle. These companies learned their lessons. And they’re conservative now and their balance sheets are better than ever. And all of a sudden, what I think we’re most afraid of we’re ignoring the facts. And I’ll just give you a couple from William’s recent update and their own disclosure after we got more dividend pay raises for more cash generation. So what’s quietly happened and I don’t have any politics here at all. But carbon emissions have already been reduced in this country dramatically. So all of this environmental debate, which is set up this opportunity, I think in the stock market is misguided to begin with. And we have an economy that has grown substantially in the last decade and a half, and carbon emissions are way down. And natural gas specifically is responsible for more than half of that just simply using the cleanest burning fuel for power generation in this country. Has Matt done more to reduce carbon emissions, then all of the stuff we debate about to give you a specific example, it would be the equivalent, just using natural gas to replace a cleaner burning fuel would be the equivalent of removing 111 million gas guzzling automobiles off the road. So as a backdrop, if we were smart in this country and politics, which I’m not betting on, right, right, we would actually be not a good bet, we would be leaning into using this now to have the same effect around the world and using our natural gas abundance. And shipping more LNG because 2022 set a new record, again, for coal fired plants around the world. So all of the debates we’re having in this country about plastic straws, I put up a picture in the blog about it’s the equivalent of, you know, I don’t fly first class, but I like I took a picture of this teeny, teeny, tiny little curtain that separated first class from the rest of us, right, that curtain was doing about the same job as our debates on the environment in this country when the rest of the world is burning coal. So an infrastructure, and Williams and EPD are a couple of my favorite examples of pipelines transmission and storage. That is sorely under built I mean, we can’t even and all sorts of our goofy rules and regulations. We can’t send natural gas to my sister in Boston from Texas because of our goofy. So there’s all sorts of reasons that we’ve made it difficult for these guys to operate already in our own country. If we were to unlock some opportunities around the world, I think there’s extraordinary upside. But meanwhile, if not a lot changes the generating enormous free cash to do what we all rely on. And any electrification or renewables requires natural gas to begin with. So it is among the safest bets, and I think most misunderstood and pays us while we wait, whether they figure it out or not. And the politics is goofy. I mean, you go one year, they’re wanting to tax on profits, the next year, they’re writing them letters begging for more. Think about how the CEOs are dealing with that sitting in the middle of that storm, it’s they couldn’t have had a more difficult backdrop. And they’re still printing cash because of real reality.
Matt Cochrane 35:40
Now, what would you say to like people who ask, Well, what factors go into the price of natural gas? Like, I’ll just say, for me, it always makes me a little nervous, at least to like, Well, if there’s factors outside that company’s control, like the price of a commodity that they sell, it just like, it makes me a little hesitant to, like invest in that company. So what would you say to people like me, like wondering about the commodity price that they sell, and transport and store and all that
Ryan Krueger 36:11
you’re not wrong, and the speculation and price dependent companies, unlike these transmission and storage, and pipeline businesses, enormous risk and fluctuation, I think that’s quietly, the best dividend we’ve gotten in the world over the past year is the price of natural gas, having plummeted with an abundant supply thanks again to technology in this country. They get fee based revenue, the pipeline, so they’re not at all dependent. As a matter of fact, if it makes it even clearer that this cheap, abundant source could be used and leaned on, it would be yet another compelling reason to build out and improve the infrastructure which we need. I think the better example of price, confusion. And this opportunity we have hiding in plain sight with cheap, abundant, clean natural gas would be, you know all the attention on electrifying and renewables. To give you an example, that kind of maybe blow your mind on price to just electrified New York, for one day of demand with solar, that natural gas is needed to build all this stuff, by the way, would require 528,000 football fields of solar panels, about 600 times more than they have today at a total construction cost of a trillion dollars. So price, to your point in a different second order thinking here is a more compelling reason to let’s have a dialogue, not an either or of using traditional sources in transition to a much brighter future with better climate, which we’re already going there. I call it our ESG post that’s on the site energy smuggling goods. There’s all sorts of good news already happening and who better to find and help with the problems than the guys with the blueprints that caused them. I think that’s the most underestimated upside of some of these traditional energy companies. They have kids and grandkids also show they want to be good stewards. And the ones that don’t,
Matt Cochrane 38:15
they’re not they’re not villains in dark rooms, dimly lit room, smoking cigars, thinking about how they can destroy the planet,
Ryan Krueger 38:23
and the ones that are and capitalism does a better job at regulating them, they wipe them out. They get to speculate they have too much debt, they get wiped out. That’s the beautiful thing about the stock market in capitalism, and why it has a longer track record than any politician or rule or regulation.
Matt Cochrane 38:39
Yeah, no, I totally agree. That’s, that’s interesting. I’ll have to have to look more into those companies. Let’s What about NexStar? So this is more like with all digital, you know, everything’s digital. This is kind of a throwback to tell us what NexStar does and why their business model can survive in our digital age.
Ryan Krueger 39:02
Well, I hope that most listeners had to rewind that and say, What in the world that what is next are because I like when somebody that we work for doesn’t know, all of their holdings, it it means we’re doing some original work. And this is a company that a lot a lot of people have heard of, and it’s certainly in the world of virtual reality. Most folks would probably snicker at this idea, which delights me because our annual picture book, we made a simple call with a bunch of data and pictures and charts, but a peek around the corner. I think we’re going to return to real reality, which has two dads. We’re a little biased, I kinda like it. I think it’s better than virtual reality. So NexStar is the largest owner of old fashioned television stations and I mean I still need help now finding a television station with all of our buttons or multiple monitors one of my kids. And I just think about why some things will not go away. And that’s a great dinner, separate conversation that I think is better than any MBA. If you ask your kids, what’s one business that will be in the same business? When you’re talking to your kids, and I think that’s a pretty decent start. That’s my kind of moat. And at worst, it’s a great conversation starter and some funny answers. Right, right. So the last last year, out of the top 100, broadcasts 96 or live sporting events. A couple of other word politics, an old fashioned television network, now more than ever, for an advertiser with an abundancy of choices, with all sorts of content that I can’t keep up, I don’t have time anyways. Right? I actually think that has become a feature not a bug. So we’re not lost in a sea of digital confusion. Those live primetime events are now more valuable than ever. It’s the only thing and advertiser will even know what works. And so I thought just and again, that the Simple Stories hiding in plain sight. So talked about the metaverse, the king of virtual reality, up almost 100% this year. Great performing stock, a lot of great fun things happening. All sorts of room, I think in somebody’s portfolio for speculation on what will happen next, the game changers. I just love the game on changers. And I think they do shockingly well. And would surprise and I share this with any it’s not a specific recommendation by any stretch. There’s all sorts of game changers. I think they’re more rare and more profitable than the game changer. So I share this with anybody the next time they hear and if only statement if I’d only gotten in meta at the IPO or if I’d only gotten this technology and we shared Doc Brown’s example of real math a minute ago. So if I’d only gotten in Metaverse at the IPO up, I think more than 500% As we talk here today, man, it’s a good run. That old fashioned real reality television network operator over the same time is up 3,000%.
Matt Cochrane 42:23
That’s including, like, you know, I definitely did not know that. You know, I wouldn’t I don’t know if I would have guessed it even outperformed. So it’s an unchanged or like its business model is the same like and why do you I guess? So I’m not familiar with this talk at all. So like, I’m that guy who’s like, I vaguely knew what they did. But like so why, but why will this business? I mean, we have live sports, but don’t we watch out on streaming apps now or won’t that happen in the future? Why do we think this will stay the same, I guess.
Ryan Krueger 42:59
It won’t stay the same, and we will have new choices and it might not continue doing as well. I think it has a lot of good tailwinds for reason. I also think it’s a business that not a lot of people can or want to get into. So again, uncrowded is a healthy part of this discussion. I personally, will still be probably watching and I watch less TV than ever before. But there’s a few things that are must see. And I think they’ve carved out and bought up all sorts of fragmented business, which I love rolling up, fragmented, individually locally owned and operating some mismanaged. And I think they’re at a premium. And I’m guessing even though I personally don’t like to be in politics, I’m guessing there will probably be a couple of political shows over the next year that they will pay be paid more than ever to broadcast. And some of those streamers and new content providers to your point, some of them will work. And some of them are paying more money to produce the content and they’re receiving from a very fickle customer and they’re bleeding. Cash Flow. Well, the old fashioned real reality guys are printing, right? Yeah, so I find an unusual opportunity here.
Matt Cochrane 44:16
So I know for this next stalker and talked about with five kids, you’re probably in there more than me, but for Dick’s Sporting Goods is another one in your portfolio. And I can’t tell you, and unfortunately, when I go there, it’s usually like this, Hey, Dad, this season starts tomorrow and I need this mouthpiece, you know, anything from a mouthguard to jockstrap to, to, you know, like a baseball bat or I need this tomorrow, by the way, and it’s like son of a gun. You know, what time do they close? Like, we got to get there right now. Gotta leave like, you know, two minutes out the door. You know, I know All your kids are involved in sports. So I know you’re always at Dick’s. Why is Dick’s Sporting Good and attractive opportunity?
Ryan Krueger 45:07
Well, it’s a, this was like picking amongst my kids, I mean any that none of these holdings are more compelling than another. To me, they all tell different stories. This one I’ll just share humbly, is an example of an area if I relied on my own retailing instincts, and again, when you listen to tech experts, or retail experts, or I wouldn’t have made a nickel in this business. I’m the world’s worst shopper. I can’t stand going to any stores. And by the way, Amazon was supposed to put them all out of business. So why all the sudden are people going to some stores like this? The math led me there. So we hold a tournament of stocks every weekend. And just look at the objective nonfiction of what is happening, not what I think should happen, because it relied on what I think should happen. There should never be a retailing stock in my portfolio. But what started to emerge years ago was a very compelling and different path of while the consumer was supposed to be slowing down and we have every reason and headwind. How in the world did this little store generate all time record operating revenue last year, and it took them a long time, by the way that minutes start, the history of the story is compelling as dads, I mean, one store to 50 took 50 years. Wow. And what they’re doing and all of a sudden, their delivery is quicker and more reliable than even Amazon. So what they do during pivots and when the games are supposed to be changing. Here’s another game unchanged, you have a good old fashioned sporting goods store. When again, competition has dwindled and melted away. actually started as a fishing and tackle store where a kid and you and I have this in common to the old fashioned summer job and working, which I think all of our work will have a heart higher ROI than any of our portfolio ideas. Spoiler alert, I’m sorry, but that’s more important than any investment podcast. His kid, teen a summer job told his boss I think we should add fishing and tackling ball said you’re dumb kid you don’t know what you’re talking about. Went home with an idea. Ask his mother who had just lived through the Depression and had little to no extra income at all. pitched the idea she reached in her cookie jar $300 to back this kid to open a phishing attack from score that became Dick’s who his son later took over hard work has good dividends too. And the family, right? And it took off from there. And where it really really took off. Matt was when the sun and an act of great team sports the best move you can make as a coach is self scout. He said what could we build across the Street that would put us out of business? That’s a great question for any of us to ask about our own and board investment portfolio to buy the 100% What a great question. And he studied it. And he said what we don’t have that most do as a team. And that’s another good question with skin in the game. So he built an operational team of excellence around him another good tip for any investor. And he’s done exceedingly well. They also pivot and they continue to remain curious. So Matt, when they raised their dividend and here’s a good example of a low yield or that’s not going to appear and a lot of dividend portfolios, not certainly not an aristocrat yet an uncrowded opportunity, I think and it only yields a little less than 2%. And I call it the old fashioned Yogi Berra math of 285. Was his career batting average, if all you have is the back of an envelope, and you want to be all of Wall Street advisors, plans, which we just have been chopping up on this show. Sure. Yogi Berra batted 285 If all you do is have a low yield of 2%. And that dividend grows, let’s say 8%. Over eight years, then your yield on cost. I call that met mailbox, man. Your yield on cost is now 5%. And rising if nothing else happened, no, not a penny of appreciate from stock market. 5% I think is better than 4%. Matt, if we just talked about the safe withdrawal rate, a free cash flow, no help no appreciation whatsoever. And that 8% is conservative I shared personally we like companies that are growing double. That index by itself just announced a 100% dividend payers but that 285 math a Yogi Berra math of the low yielders, which some people ignore, and they buy these high yields that end up not growing. This is why I love dividend growth math more than any other right and add up quickly. And so all the sudden that $300 From a cookie jar, they just distributed to stakeholders $300 million in dividends. And I promise you every time we talk I’m My track as you always give one to me but the belly laugh as a dad that I’m always have as a special dividend for you what I learned because this is what I love about this business I don’t know what’s gonna happen every day and I don’t have on clock I race in here so what I learned that they didn’t know the history of the game changer when your your little league game next time. So Dix Owens game changer and they used to be. I do know that Yep. So they used to be just for the pitch count and the innings.
Matt Cochrane 50:27
Well explain. So explain what it is. So for people who Yeah,
Ryan Krueger 50:30
it’s an app where the old fashioned scorekeeper now on their phone could log the score. And the innings pitch because we were supposed to protect little kids arms. Right now there is nothing on that app that prevents the lunatic parents from going and being on three different teams and pitching. So if nothing else, I have a little division of my own personal research that I call PNC insurance, Matt, and you’re gonna love this line because you’re a policy owner in many ways, too. So some of these businesses that were forced to pay for like property casualty insurance that ended up being gold mines and print profit. As dads, you need a different kind of PNC insurance, in my opinion, it’s profiting in craziness. So to profit in the craziness of lunatic sports parents, I noticed that during the pandemic, brilliantly a game changer pivoted for families and grandparents that couldn’t go to the games. They added live streaming. Yep. Which should have just been the parent and maybe the grandparent out of town. And that is a sweet idea. But because Americans and profiting in craziness right here of all the consumer resilient expenses, what their kids are doing when you and I were on the team, we shared a bat now they all go by the $300 bat. Yeah, maybe an extra one. I had no idea what their
Matt Cochrane 51:58
coach had like three bats. The coach had three baseball bats and he picked which one you liked the best, you know, and so that’s how I remember it.
Ryan Krueger 52:06
So while I’m still looking at that old vintage Yogi Berra card, and remembering the good things about the old vintage baseball game changer in one spring month, this year has more hours watched of live games then in the entire history of Major League Baseball games combined.
Matt Cochrane 52:32
We see that again we
Ryan Krueger 52:35
Matt Cochrane 52:36
that is not what I thought we were that’s not what I thought I was gonna hear.
Ryan Krueger 52:40
And I use it a crazy example of instead of people watching literally games
Matt Cochrane 52:44
on this app the hours exceeded say to see it again the
Ryan Krueger 52:49
way we we gave away about 280 million hours last year watching game changer in one month. On game changer. There will be more hours consumed watching games, then in the entire history of Avery every major league baseball game combined. How’s that possible? And I should, like I told, I told you we’re gonna have this P and C division, profiting and craziness. But I use it as example of brilliant curious, open minded, they saw this, this wasn’t a retail sporting goods store idea. This was using technology, not viewing it just like we talked about the environment, I’m going to go not doing it as an either or, or technology is going to kill us it is what could we build that would put us out of business? Or what can we build and pivot and use for our business and good companies are doing this every day that are curious, and they are pivoting and when they reward stakeholders along the way to create and foster a better environment. Capitalism is a really, really wonderful place to continue to develop and disrupt in good ways. And so that’s that blew me away.
Matt Cochrane 54:00
That’s that blows me away, for sure. For sure. We were all you’re talking about low dividend. We have an illustration for this, but we’re talking about like low dividend yielders, low dividend yield companies, you know, versus like high dividend yield companies. But how over time if those low dividend yield companies are growing their dividends more than it in a short amount of shorter amount of time, then you would think or suspect, you know, you’re getting paid more for those low dividend yields that are growing faster than the high dividend dealers.
Ryan Krueger 54:34
So that example that you’re showing, and why I’m a YouTube you’re of Matt got some great stuff here. And I’m happy to contribute just a little bit. So that previous slide, it just shows the actual current yield every year, and there is a considerably higher yielding stock. And these are two real examples that attract a lot of income seeking investors and portfolio managers and was an aristocrat. And the next year, by the way, cut their dividend for the first time again, that’s a red flag to me, but look underneath. And they’re in the same industry, by the way, a lower yielding stock to that Yogi Berra math about 2%. And any one of those years, you would have bought a you to only made 2%. But to me, and the next slide, what matters most to an actual stakeholder what they are holding in their hand. And the real magic of dividend growth underneath those yields, is you made considerably more on the lower yielder. And that mailbox math, as I affectionately call it, and where the inbox ticker comes from, it’s just not discussed enough. And again, it goes back to where we started, not what I like, or what looks good, or what the market is doing, but what an actual individual investor for their family needs. And I think more than another growth or income product, there’s certain we have plenty of each would be growth of income to be able to answer the question of how much is enough and those that are counting on you, to one day not have to work for all the earned income, earned income and to be paid while you sleep? is a wonderful thing.
Matt Cochrane 56:11
Yes, no, that math can definitely be favorable to the retail investor. Investor. Ryan, I don’t want to I don’t want to keep you too much longer, but like, you know, like, well, I got Yeah, like, how do you? You know, we have a lot of parent listeners and watchers, how do you try to teach your kids about financial lessons if you’re in the financial industry, and I think we we both agree, like, this is like, I grew up like, and I knew nothing about money. Like I remember getting out of the Navy. And I mean, I would struggle to write a check. You know, it was just like, investing was something rich people did. And that’s not what you know, that’s not us working people. That’s not what we concern ourselves with, or, you know, we don’t have enough money to invest, you know, you have to be rich to invest. So like, obviously, I don’t want to raise my kids that way. So when you’re, you know, when you’re teaching your kids, financial lessons, how do you go about that?
Ryan Krueger 57:13
One of my favorite questions that you and I talked about all the time, and as I was leaving this morning, I told him, I was excited, I get to talk to a detective and a stock market ace, and I don’t have it, I get excited every day I leave the house, I’m screaming with them. We’re going to attack this day with a relentless enthusiasm unknown to mankind. And the teenagers, as we both agree, kind of maybe roll their eyes a few times. But that’s just it’s not optimist. It’s not certainly not a pessimist. It’s a realist. It’s a possible list. And I’m enthusiastic about it. And I think that’s one of the answers to your question. I think they need to see us be excited about working, and I and who we’re with, I think that’s more important than porn part of any plan is who you’re with, not what you’re invested into watching. Because I do believe and I’ve seen this from folks that we serve your ROI on your craft, and is going to have a bigger bang for your investment buck than anything you invest in why we have a dysfunctional relationship with the market. It’s what we’re expecting the market to do for us, as opposed to nose down, loving what you’re doing, to earn it to then Save. And then if we employ people around the world in these businesses to get paid while we sleep, all the better. But Matt, it comes down, we talk at the supper table, I will put that against any MBA, I really will and to be curious and to a now more than ever read aggressively. So now everybody has an opinion. And they’re going to be bombarded with right you and I used to be able to assume kind of that what we’re reading or shared as a truth, even by a teacher. Like I don’t know what the teachers agenda is even so reading aggressively and original source fact checking. That’s why we need to have a background, whether it be detective or investigative journalism, like I want to go deep, deep, deep. While that may not be an answer, that’s not a stock market chart yet. But I think it’s the key ingredient to how to remain curious what is something that you want to dive deeper and let’s fall down one of these rabbit holes together. And also as a parent, let’s invest with our kids, not for them. I don’t personally have 520 nines or funds or trust, I have an account with each one of their names and they have something that interests them that we have looked at together right or wrong. No Portfolio Manager on that part. We’re just going to look at it together. So that maybe just maybe it lights from a spark of something that they might find more interesting if it does work. And then some safe, beautifully boring stuff next to that. But I’ve learned more investing with them and tripping down some of those rabbit holes. I mean, Peter Lynch used to say follow your daughters to the mall. Well, I mean maybe now it’s seeing what they’re doing on the couch and what I’m there’s some lessons
Matt Cochrane 1:00:00
that I’ve learned or what app they have on their phone or whatever. Yep.
Ryan Krueger 1:00:03
And then what what can we both learn together? What might we take granted for? Let’s get outside and talk about Let’s go on a walk. When we’re traveling, we’re talking about businesses, they can’t help it. But just remaining curious and talking about this stuff. Without any right answer. Don’t worry about having all the right answers. Don’t worry about being a CFA just talking about the art of a business. That’s why I share the $300 in a cookie jar. That’s not balance sheet. That’s the start. And that’s what’s most important, I think. And then the hardest thing of all, with all these distractions now with school and sports is get a job because if you work for it, it’s going to mean a lot more to you. I mean, my first investment was at 13. You’re more careful with it, and it was given to you. So it sets up a different relationship with money.
Matt Cochrane 1:00:54
Yeah, no, 100%. What I said that was the last question. I actually have one more question. You mentioned earlier, and I meant to follow it up. And I’m going to kick myself if I don’t you think you have a tournament of stocks? Every week? Or every weekend? Is that what you said? What is this tournament of stocks? So what does that mean? Like, what what are you doing there?
Ryan Krueger 1:01:14
So well, this is a whole other episode. So let’s go. Let’s do it again. Party idea. And I’ve done this since I started was when the market is closed, when the phones are not ringing all of the data for 1000s of stocks, and they’re actually less than when I started, believe it or not. And I know you know that. But the selection criteria, the market does that for us in some cases, but I don’t want to wait till they go bankrupt to be removed in the SP so I believe in active management, mainly, Matt, because I believe when the inputs change, so will the output. So what that means big picture is since the prices of the stocks move, and the fundamentals might not have, it sets up a new risk reward scenario. So it shouldn’t be whatever we like we should always like because it’s a great company. What if the odds have changed, the valuations have changed, or that 105% New dividend growth from a company or an industry you haven’t ever even looked at lead you down one of these rabbit holes. So I dumped every single ticker, all objective math based with three dozen different variables that we use to measure the rate of change. And I score I literally rescore every single stock on an ongoing basis. It also keeps me humble. What if we fall in love with our best ideas, which I don’t allow myself to? Because I just look at the math. What if a sell discipline, that guy on the end of the bench wants to work his tail off and you could underpay for him to go take the starters job. So I make these stocks compete against each other? Because that’s a common thread. We talked about some of the most successful businesses looked at competition and self scouting, how could we beat ourselves? I do that to the portfolio as well.
Matt Cochrane 1:02:58
Do you? Do you separate by industry? Or you know, do you say like, well let kids know fair that this company is obviously going to have a higher return on invested capital or a higher margin or whatever? Because they’re in this industry and this, you know, do you separate by industry, or it doesn’t matter?
Ryan Krueger 1:03:15
That’s a really great key point that anybody could benefit from, whether it be dividend growth, in my case, or somebody that looks like technology, you cannot accidentally get overweighted in what you think you want to look for like and you end up with heavy concentration, that is how the best money managers all get carried out on their shields eventually, conviction and or leverage. And if you put both together, that’s who always ends up through every cycle of getting carried out on their shield, we’ve seen it time and time again. So by rule, I want to be in every single sector. So they are different, you’re right. And every single tournament for different I will never lean to one side of the boat or the other same way I look at growth and value. I don’t want to be an either or I want both. So it’s your balance by rule that roster construction, Matt, which is what you’re getting at as a key piece. It can’t just be a selection process. And you buy a list of stocks that might actually all look a lot like your roster construction. And we limit ours to 50. That to us is an optimal number. It’s not the answer for everybody. But we can be completely diversified in every sector in every size, small, mid and large in both styles, and with revenue sources from around the world. So I’ll put that balance in only 50 names up against 1000s of diversified portfolios of funds that are overlapping oftentimes that’s a big deal for anybody to look at in their own process.
Matt Cochrane 1:04:43
RYAN It’s always a pleasure to talk to you if people want to follow you or find out more about you Where Where can they go?
Ryan Krueger 1:04:51
Well, we love sharing our work as an open playbook. As we go with with our partners and our friends that the picture book which you and I chopped up you can go to our website freedom to isolutions.com and sign up and see some of what we share. And we love doing it. We chop up a small, quick hitting podcast each week mailbox money. My partner Jackson would nudge me to do that he’s young, I’m the Digital dinosaur. He pushes, he pushes all the buttons, I give him all the credit in the world. I’m having fun sharing. And we both learn from really smart people that we’re surrounded by. And I’m grateful to live in that small, beautiful world of abundance to know people like you. And so that we post blog posts up there, I love chopping it up on Twitter as well. And we’re happy to share because we I’ve never had one single negative experience on social media and I don’t understand it’s just by choice i,
Matt Cochrane 1:05:47
it your your, your personality makes it very hard to be negative towards you. But it’s out there. Just take my word for it. It is out there. People are making that up.
Ryan Krueger 1:05:58
I get it. I just I’m just selective. I just rather talk to you right now that ignore all of them. And I do think that that world exists, and it can be the small beautiful world if we want it to be and that last one last little bonus piece of advice. One of those podcasts, the only one I’ve ever sent to one of my kids was titled PTO and everybody that wants a job and I always asked me to pay time off and it was about permission to obsess taking an uncrowded path. If you really love your craft, you will naturally find people like I found you to share and enjoy you whether you’re online or offline. I’m offline a heck of a lot more than I am online. When you when you surround yourself with people that really really love what they do and who they are with, and who they get to work for. I never want to stop where this is. This is a gift and I feel lucky to attack these days with relentless enthusiasm,
Matt Cochrane 1:07:00
permission to obsess
Ryan Krueger 1:07:02
PTO. It’s a different path. And I just told him, I said what if you go in there, we’re getting ready for job interviews. What if you’re the only one that goes into a job interview and doesn’t ask about benefits? I didn’t I didn’t, I went to a job interview that didn’t exist. That was another piece of advice. I offered to work for nothing. I started in the mailroom on Wall Street, take uncrowded paths. It’s still working for me. Now, as a portfolio manager, I just have a lot more math to back it up. But for kids and anybody listening that I do believe in that. And so it was just a little my that’s that’s the way I deal with frustration of different versions of PTO, and ESG. I’ll turn PTO into permission to obsess. I’ll turn ESG into energy sustaining goods, smuggling goods. And so we just will, will keep turning and smuggling those goods with you together.
Matt Cochrane 1:07:50
Gotcha. Well, Ryan, thank you so much for coming on and for your time,
Ryan Krueger 1:07:55
it was my pleasure.
Matt Cochrane 1:07:58
I’m Matthew Cochrane. We’re seven investing where it is our mission to empower you to invest in your future. Have a great day, everyone.
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