What's in Your Portfolio Wallet?

By John Mauldin

Rethinking Portfolio Construction

For the past five years, I have been thinking deeply about my own portfolio construction. It was admittedly complex—a combination of various alternative funds and private placements, with a few stocks thrown in. Not something I would recommend anyone try to duplicate.

I remain concerned about the potential for a serious generational crisis later this decade, one that could profoundly impact all markets. That concern became deeply personal after the events of 2020, when I realized my portfolio was far too complex for my younger wife, Shane, or even a trustee, to manage if something were to happen to me. While alternative investments and private placements have their place, they require continual monitoring—and that is no easy task.

A Friendship That Changed My Strategy

I have had the privilege of being David Bahnsen's close friend for 15 years. We met on the set of Fast Money in 2011, and I was immediately impressed with him. Afterward, I introduced myself and casually said, "I recognize the name Bahnsen. I published books by a theologian named Greg Bahnsen." David replied that Greg was his father. We began corresponding regularly and meeting for what became epic dinners with a few friends. (I think he was just happy to find someone who knew what presuppositionalism is.)

David wrote a book on dividend investing that became a bestseller. I bought it when it was released, but it wasn't until 2020 that I sat down to read it seriously. The book forced me to rethink my views on how to navigate the coming crisis and how to increase the odds of getting through it with my portfolio intact. Even more importantly, it made me consider how to ensure Shane had someone to look after her financial well-being. The worst thing I could do was pass on a complex portfolio to her with no one to monitor and keep it current.

As long-term readers know, a few years ago I shifted my portfolio management to The Bahnsen Group—essentially a portfolio built around dividend growth and alternative investments, plus a few other strategies they manage.

David has just completed a major rewrite of his book, titled Profit from the Profit: The Past, Present & Future of Dividend Growth Investing. An enormous amount of research over the last eight years has confirmed the power of dividend growth investing, and David shares that research in his very readable and brilliant style. David asked me to write the foreword, and I was honored to do so. The book is available later this month.

This weekend, I am spending time with my son Trey and a few friends, so I asked David to give us a taste of what the book covers. What follows is worth your five minutes.

Dividend growth investing is not merely a strategy for equity investors—it is a philosophy of ownership and a mentality. At its core, it brings to minority ownership of public equities the same business attitude that majority ownership of a private business involves: Profit is paramount, and those profits belong to the risk-takers who own the business.

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Profit from the Profit

By David Bahnsen

I became a dividend growth investor in the aftermath of the 2000–2002 bear market. It was not that my first bear market as a professional investor scared me into dividend growth investing—not exactly. Rather, some of my assumptions about investing were called into question during that period. I believed then, rightly, that long-term exposure to equities had been a winning play for most investors. I still believe that today. But what "long-term" meant, what "exposure to equities" meant, and how these interacted with investors needing to withdraw capital—all of this required deeper study. So study I did.

A few years later, the Global Financial Crisis would do far more damage to financial markets and the U.S. economy than the tech crash of 2000. Yet the things I cared most about as a wealth advisor were validated.

Outcomes and Peace of Mind

What are these things I care most about? Above all, I care that client goals are successfully achieved. We run an outcomes-based planning firm. If a client has an accumulation goal or a withdrawal goal—practical, tangible, measurable goals—I care deeply about not failing in their achievement.

From the 2000–2002 crisis, I learned that many investors could achieve the long-term returns of equities but still fail to meet their goals because of withdrawal needs and their interplay with sequence-of-returns risk—the danger that market losses early in a withdrawal period permanently impair a portfolio, even if markets recover later. The recovery of market indices over time after severe bear markets was not helpful to investors who had dramatically drawn down their principal while withdrawing funds for cash flow needs. This dynamic of negative compounding was real, it was not a rare outcome, and whether or not I wanted to predict it would happen again, it had just happened. That gave me intellectual, empirical, and practical reasons to counter it in the strategies we enacted for clients.

The other thing I cared most about—besides achieving successful outcomes—was maintaining peace of mind for clients as much as it depended on me. A global financial crisis is not an ideal time to maintain peace of mind, especially when anxieties extend far beyond stock market returns. The anxieties of 2008 encompassed the complete implosion of the U.S. housing market bubble (a bubble of irrational insanity that far too many people have forgotten), the existential state of our entire financial system (banks, brokerages, insurance companies), and the very jobs and wages that tens of millions of Americans relied upon.

It was as exhaustive a debacle as one can imagine. The only way to "maintain peace of mind" during a period rife with fat-tail risk events was to: (a) communicate thoroughly and empathetically, (b) deliver on promises, and (c) communicate thoroughly about your delivery of promises. When one of those promises was that "in a period of really bad market activity—a brutal bear market—we will not have to take a pay cut"—it pays to deliver when markets are down over 50%, unemployment exceeds 10%, and house prices have fallen 40%.

The 2008 Crucible

The financial crisis of 2008 was a career-defining moment for me, but that is not to say it was enjoyable. I was paid for 18 months to absorb the anxiety of a couple hundred clients, and I did my job. I would do it again. But it was emotionally grueling, psychologically challenging, and financially stressful. I had two babies at home and a brand-new house. I was a Managing Director at a Wall Street firm whose stock had dropped 87% since I arrived—and we were doing better than our competitors.

Yet I believe the things I care about most were validated during this period because of dividend growth investing. The "right investment philosophy" alone is not sufficient for the wealth advisory profession. It is necessary, but not sufficient. I happen to believe we coupled the right investment approach with the behavioral dynamics that really matter—massive communication, empathy, planning, hand-holding, and ledge-talking. Together, they represented the value proposition we were paid for, and I believe it was money well spent by our clients.

From 2000 to 2009, the S&P 500 was dead flat—a lost decade bookended by two brutal bear markets. A dividend growth investor emerged from that decade with their cash flow needs fully sustained and their principal more than just "intact." They survived and even thrived. This does not mean their portfolio values did not draw down in the 2008 crisis. But they had positive cash flow they could withdraw without impinging on the corpus of their portfolio. I know of no other portfolio strategy that could say the same.

The key takeaway I adopted post-2000 and pre-2008 was this: withdrawing the fruit of a tree rather than the tree itself made me far more insulated from the price fluctuations that inevitably affect the tree. And so we—and by "we," I mean the clients of The Bahnsen Group—survived 2008. The philosophy proved more than theoretical. It worked when it mattered most.

Dividends That Grew Through the Crisis

We did not have a single client who had to take a pay cut. The portfolio generated more income in 2007 than 2006, more in 2008 than 2007, and more in 2009 than 2008. Dividend growth, well, grew—even as stock prices around the globe got pummeled. The Dow 30 had 28 stocks decline in 2008, but the only two that rose—McDonald's and Wal-Mart—were among our biggest exposures (up +8.5% and +20%, respectively). Many great dividend growth names were down that year (Procter & Gamble, Exxon Mobil, Johnson & Johnson), but their dividends were not down. In fact, they grew—just as they had every year for decades before and for nearly two decades since.

Lessons for the AI Era

I bring up 2000–2002 and the 2008 crisis because, as a professional investor, I cannot get through a single day right now without someone asking me: "Are we in an AI bubble?" "Do we face a repeat of the tech crash?" "Is the AI risk systemic the way housing risks were in 2008?" There is so much rhyming in history that these questions are perfectly logical.

I happen to be a generally optimistic person, informed by history. But regardless of one's temperament, there are plenty of reasons to be concerned about market rationality, investor excess, and the potential for malinvestment in one area of the economy that may well experience a "purge" in the years ahead.

Michael Burry recently pointed out that the S&P 500's real total return was +12.09% per annum over the last fifteen years. In that period, the dividend contribution was just 1.76% per year—so low that it falls in the bottom 1st percentile across 145 years of every possible 15-year window. Never before has the S&P returned so much with its dividend contributing so little. For historical perspective, the S&P 500's average dividend yield has been approximately 4% since 1871; today it sits near 1.3%, a fraction of the long-term norm. Index investors should be petrified.

Some argue that "stock buybacks" make up the difference, making the low dividend yield an apples-to-oranges comparison with historical yields. This is mathematically and factually untrue. Paying Restricted Stock Units to employees—which is what stock buybacks ought to be called—is not an alternative way of generating shareholder yield. It is a decision to replace a payment to an investor/owner with a payment to an employee. Those payments to employees are not counted against earnings and are not reflected in free cash flow calculations. Voila.

A Generation That Hasn't Seen a Bear Market

We have a massive generation of investors—trillions of dollars worth—who began their investing lives well after the lost decade of 2000–2009. They have lived comfortably off a 1% dividend yield in the S&P. They have witnessed the 20%+ CAGRs of FAANG, the Magnificent 7, and whatever other alphabet-soup concept you want to include. But they have not experienced a bear market, a multi-year drawdown, or any meaningful re-pricing. They have seen multiple expansion and even organic earnings growth, but not a real recession, a real contraction, or a real market consolidation.

I believe some of the most powerful weapons investors have historically deployed to counter such events—a lower market beta, a higher dividend yield, less reliance on multiple expansion, less levered balance sheets—are all available to investors today. They are available inside the framework of a well-constructed dividend growth portfolio.

What About the Good Years?

"But what about the good years?"—a fair question. Does a dividend growth investor have to sacrifice the upside of good years (think 2009–2025) to enjoy a more defensive portfolio during the bad ones?

My answer is twofold: (1) No. And (2) Do you believe the outcome of 2009–2025 is the most likely outcome in the years ahead? Not only do I believe it is almost incomprehensible that market indices will compound at another 15% for the next 15 years—starting at 22x earnings instead of 13x fundamentally changes the math—but I also believe the internal dividend growth over the last fifteen years has been remarkable. Companies like Blackstone, JPMorgan, and McDonald's are now paying 20–30% yields on the original investments made fifteen years ago, and those yields are still climbing. Unlike the index world's reliance on multiple expansion, this continued growth of dividends is not cyclical or aspirational—it is the essence of the strategy itself.

My new book, Profit from the Profit: The Past, Present, and Future of Dividend Growth Investing, lays out real-life scenarios from the last 25 years to make the case for dividend growth investing as an antidote to market volatility. It argues against accepting a 1.5% dividend yield in the market index. Most importantly, it makes the case that companies stewarding their resources toward the social contract of annual dividend growth prove to be superior companies over time. It tackles the objections and red herrings some raise—a dividend is just a company with less cash than before; stock buybacks are more tax-efficient; companies that pay dividends don't know how to reinvest their own cash—and in each case turns them on their head.

I have written before about my earnest belief in having a cogent investment philosophy. I stand behind that conviction completely. But what must reinforce what we philosophically believe is the empirical demonstration of its efficacy. The last 25+ years have done that for me with dividend growth investing. And truth be told, I think the next 25 years will do so even more.

—David Bahnsen

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Creating Your Philosophical Investment Strategy

There is no one-size-fits-all individual investment strategy. We all have different needs. Once I decided I needed a portfolio that would work today and also take care of Shane if something happened to me, I undertook extensive research. There are many excellent money managers available. Philosophically and operationally, The Bahnsen Group fits our needs.

Choosing a wealth manager is not straightforward. The first priority is ensuring they are philosophically aligned with you and your needs, and that they employ a coherent, well-thought-out systematic approach to meeting those needs.

I was able to conduct more due diligence than most because of my relationship with David and the time I had available. I knew his philosophy intimately. Fortunately, there are multiple ways to reach that comfort level. Beyond the book, there are podcasts, interviews, and reports. I highly recommend subscribing to David's daily newsletter, Dividend Cafe, especially his Friday commentary. He also hosts a weekly podcast for National Review called Capital Record. He appears on financial television four to seven times per week and is regularly listed as one of America's top wealth managers by Barron's, Forbes, and other publications. He is one of the most disciplined individuals I have ever met—both intellectually and in his daily personal life.

The Bahnsen Group now operates 12 offices around the country, all grounded in his philosophy. He is highly transparent, and through his published materials, interviews, and commentary, you can get to know the man and his approach.

The book ships August 25 and is available on Amazon. The Bahnsen Group can also be contacted directly for a copy, along with additional materials.

While I do not want to diminish the impact of what you will discover reading the book, I will say that I became convinced a dividend growth portfolio should be the core of my long-term investment strategy—not an addition, but the core. David is right. The companies that make up his dividend growth portfolio will still be operating in 2035 and beyond. And while these are U.S.-listed companies, many of them generate more than half their profits internationally, making it a globally diversified portfolio.

As David sometimes cheekily reminds me: What if there is no real crisis? What if we as a country decide to address our debt issues and resolve our current political difficulties? Even if a financial crisis as severe as 2008 or 2020 were to occur, we can already see how a dividend growth portfolio performed during those serious financial events—just as it did in every prior crisis. It is, in essence, Graham and Dodd value investing taken to its modern conclusion. Benjamin Graham and David Dodd established the intellectual foundations of value investing in their 1934 work Security Analysis, arguing that investment decisions should rest on a margin of safety and a focus on intrinsic business value rather than market sentiment.

For those managing their own investments, there is an ETF run by The Bahnsen Group that mirrors his dividend strategy. It trades on the New York Stock Exchange under the ticker symbol TBG.

(Full disclosure: For new readers, my business model has always been a referral business, and right now The Bahnsen Group is the only group I work with. I don't see that changing. That said, I receive nothing from the ETF.)

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On the Road: Philly, NYC, Cleveland, Washington DC, Austin

A month ago, I didn't see many trips in my future. That has changed significantly. My son Trey and I are currently on a "secret mission" with friends and family. Trey now has his drone pilot's license, and I'll get to watch him in action.

Sunday night, I will be in Philadelphia, meeting with Steve Blumenthal and other business associates before flying back to Puerto Rico. A group of us is trying to arrange a trip to New York sooner rather than later. I will likely need to be in Washington, DC, in September and again in November, and then Austin at some point soon.

On a more personal and less comfortable note, my daughter Abbi experienced what doctors initially thought was a stroke about two years ago. They discovered a small benign tumor in the center of her brain. It turned out the real issue was a heart problem, and she underwent open-heart surgery within six months. At her regular annual scan, her neurologist found that the benign tumor had grown much faster than expected. Her doctor in Tulsa said the tumor's location in the middle of the brain was beyond what they could treat locally and recommended a major medical center such as the Mayo Clinic.

Through my connection with Dr. Mike Roizen at the Cleveland Clinic, her scans were sent to their top neurologist, and she is scheduled to see him in mid-August. The tumor could still be benign, and hopefully it is. But given its growth, it needs to be addressed, as it could cause major complications sooner rather than later. The good news is that she is in the right hands.

And with that, I will hit the send button. Have a great week, and remember how important family and friends are.

Your somewhat overwhelmed analyst,

John Mauldin
Co-Founder, Mauldin Economics