Confluence of Ideas – Deja vu for Dividends?

History is rhyming. The last time dividend stocks were this out of favor, the dot-com bubble was peaking. Portfolio Manager Tom Dugan joins Director of RIA Relationships Emily D'Agostino to discuss why that dynamic looks a lot like 1999, what the historical data says about what comes next, and why the Confluence IDEA strategy's quarter-century of consistent philosophy and construction may be precisely what this moment calls for. If history is any guide, patient investors may be about to be rewarded.

What is Confluence Podcasts?

Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays), and a new monthly Q&A format called the Confluence Mailbag.

Emily D'Agostino: 00:08

Welcome to the confluence of ideas from Confluence Investment Management. I'm Emily D'Agostino, one of sales the directors here at Confluence. I'm joined today by Confluence portfolio manager, Tom Dugan, to talk about a piece they've just published called Deja Vu for Dividends, which I have to say is a fantastic title.

Tom Dugan: 00:24

Thanks. It's a topic we feel pretty strongly about, So any chance to talk about it is a good one.

Emily D'Agostino: 00:28

Let's start with the title itself. What's the deja vu?

Tom Dugan: 00:31

The deja vu is really about where we are in the market cycle right now relative to where we were in the late nineteen nineties. Back then, dividend paying stocks were significantly out of favor. Many investors wanted to own fast growing tech companies, which are businesses that didn't pay dividends because they were plowing every dollar back into growth. And if you look at the S and P five hundred's dividend yield today, it's back down at those same trough levels. So we're seeing the same dynamic play out again, driven this time by AI and the companies enabling it.

Tom Dugan: 01:01

So history is rhyming. Exactly. And what happened after the .com bubble is instructive. When the euphoria faded, dividend growers came roaring back. The data we cite in the piece goes back to 1973.

Tom Dugan: 01:13

And over that entire period, dividend growers and initiators have dramatically outperformed every other group, non payers, dividend cutters, and even the S and P 500 itself.

Emily D'Agostino: 01:23

Now walk me through that data because those numbers are pretty striking.

Tom Dugan: 01:26

They really are. If you had invested a $100 in 1973 and tracked it through May of this year, dividend growers turned that into over $18,000. The S and P 500 as a whole turned it into about $5,500 And dividend cutters? Well, you'd have a lot less than you started with in real terms, about $63

Emily D'Agostino: 01:46

Wow. So the penalty for cutting dividends is severe?

Tom Dugan: 01:50

It's brutal, and it makes intuitive sense. When a company cuts its dividend, it's usually a signal that something is fundamentally wrong. Earnings are deteriorating. Cash flow is under pressure. The market punishes that, and rightly so.

Emily D'Agostino: 02:02

So, Tom, tell me more about the Ideas strategy. What does it actually stand for?

Tom Dugan: 02:07

Well, the Ideas name stands for increasing dividend equity account. The strategy has been running since 2009 at Confluence, but the investment philosophy focused on owning quality businesses with growing dividends actually dates back even further. Members of our team developed a similar strategy with the same philosophy and criteria at a predecessor firm. So we're talking about over twenty five years of history with this approach.

Emily D'Agostino: 02:29

And the core idea itself is fairly straightforward, which is to own companies that grow their dividends.

Tom Dugan: 02:34

That's right. But with some important guardrails, we don't just screen for any company that's raised its dividend. We require ten years of continuous dividend payments with increases in at least seven of those ten years and critically no cuts during that entire period.

Emily D'Agostino: 02:48

And why is that no cut requirement so important?

Tom Dugan: 02:51

Well, that's because a cut is a data point. It tells you that when times got tough, management chose to reduce what they were going to return to shareholders. We want companies that have demonstrated the discipline and financial strength to keep growing that payment even through recessions, market dislocations, whatever the cycle throws at them. Our initial universe in 2009 identified 130 companies that had done exactly that through both the tech bubble and the great financial crisis, two brutal cycles in just one decade.

Emily D'Agostino: 03:20

So beyond the commitment to paying and growing dividends, can you touch on your yield requirement?

Tom Dugan: 03:25

Yes. You know, we require a minimum 1% dividend yield at the time of purchase. And I know that sounds low in absolute terms, but the purpose is to screen out what I'd call token dividends. There are large well known companies paying dividends that are essentially symbolic.

Emily D'Agostino: 03:39

Any examples that come to mind?

Tom Dugan: 03:41

Well, we named Nvidia in the piece. Their quarterly dividend is only a penny per share. That works out to an annual yield of point 02%. Now technically, that's a growing dividend. They've raised it over time, but it does nothing for an investor looking for meaningful income.

Tom Dugan: 03:55

Alphabet and Meta only started paying dividend yields in 2024, and their yields are a fraction of a percent. That level of dividend eliminates these companies from inclusion in this portfolio.

Emily D'Agostino: 04:05

What I'm hearing is that the yield floor is about intent. Is management actually committed to returning capital?

Tom Dugan: 04:11

Exactly right. A minimum of 1% yield signals genuine commitment, and our portfolio currently yields 2.2%, which is roughly double the S and P 500 at 1.1% right now.

Emily D'Agostino: 04:23

Moving to portfolio construction. You're equally weighted, which is a differentiating factor.

Tom Dugan: 04:27

That's right. And it's a deliberate choice. We hold 49 stocks, each initiated at a 2% position. We trim around 4%. The idea is that no single stock should dominate your returns or your risk profile.

Emily D'Agostino: 04:40

And, of course, that's in pretty stark contrast to the S and P right now.

Tom Dugan: 04:43

That's dramatically so. Five of this magnificent seven companies pay dividends and together make up about 28% of the S and P 500. Nvidia alone is over 8%. Apple is over 7%. We're just not comfortable with that level of concentration even if those are great businesses.

Tom Dugan: 04:59

And of that group, only Microsoft actually meets our idea criteria. So we do hold Microsoft, but at 2%.

Emily D'Agostino: 05:05

If all five of those companies met your criteria, how would that be represented in strategy?

Tom Dugan: 05:10

We'd still hold each at 2% for a combined weight of 10 instead of the 28%. The discipline doesn't bend for popularity.

Emily D'Agostino: 05:17

There's a section in this piece called discipline over temptation. What's the temptation you're warning against?

Tom Dugan: 05:23

Temptation is always there in a momentum driven market. When a narrow group of stocks is dominating returns as we've seen with these AI names, there's pressure to relax your criteria so you Some managers do just that. They shorten the required dividend history, lower the yield threshold, and let position sizes run.

Emily D'Agostino: 05:41

And you don't change your criteria?

Tom Dugan: 05:43

We don't. Our experience over a quarter century has been that the criteria exist precisely for moments like this. Consistency through the cycle is what delivers for clients over the long term. You can't time when the rotation happens, but history shows it does happen.

Emily D'Agostino: 05:57

What does the performance record actually show?

Tom Dugan: 06:00

Well, since inception in October 2009 through the first quarter of two thousand twenty six, Ideas gross performance has been in line with the Russell three thousand value, our primary benchmark. The growth dominated S and P five hundred has outperformed in that window, but our clients are typically not benchmarking against the S and five hundred. They're looking for income growth and capital preservation. And on those metrics, the track record is strong.

Emily D'Agostino: 06:23

And how about the dividend income side of that story?

Tom Dugan: 06:26

The last chart in the piece says it all. A million dollars invested in inception has generated over 900,000 in cumulative dividend income through the end of 2025, with annual dividend payments in an account of this size rising from about $26,000 in 2009 to over $90,000 last year. That's real income that has more than kept up with inflation. That's purchasing power being maintained and grown, which is exactly the objective of the strategy.

Emily D'Agostino: 06:52

Last question. What does the near term backdrop look like for dividend strategies?

Tom Dugan: 06:56

Honestly, we think it's quite attractive, though for some uncomfortable reasons. The Iranian conflict that started in late February has rattled markets and pushed investors back towards AI enablers as a perceived safe haven during times of uncertainty. But it's also elevated inflation concerns. And when inflation is a real risk, you want assets that can grow their income. That's dividend growers.

Tom Dugan: 07:16

We saw some early rotation toward quality and value in late twenty five and early twenty six. We expect that trend will resume once the geopolitical picture stabilizes.

Emily D'Agostino: 07:26

So the deja vu may be coming full circle.

Tom Dugan: 07:29

You know, that's our belief. The setup looks a lot like prior periods when dividend growers were overlooked and then reasserted themselves. We've been patient, and we think that patients will be rewarded.

Emily D'Agostino: 07:39

Tom, thanks so much for joining and walking us through this. The piece is called Deja Vu for Dividends, and the full report can be found on our website at confluenceinvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Emily D'Agostino: 08:00

Our audio engineer is Dane Stoll. I'm Emily D'Agostino.