Why Kevin O’Leary Loves Dividend Stocks | OUSA ETF
Hook- Investor Kevin O’Leary is incredibly successful
and estimated to be worth over $400 million dollars. He’s best known for his role in
the hit show Shark Tank, of which I am a big fan. However what you may not know, is that
Kevin loves investing for dividends. So much so, that he launched his own ETF focused around
quality dividend paying companies. Throughout this video, I will explain why Mr. Wonderful
loves dividend stocks and analyze his O'shares Dividend ETF.
(Intro Vid) Intro-
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video. Today, I want to show you why Kevin O’Leary prefers investing in dividend paying
stocks and give an overview of the ETF he designed specifically to do so.
Content- Rather than have me explain Kevin’s philosophy
it’s better to hear from Mr. Wonderful himself. (5 minute Kevin Vid)
Let’s summarize Kevin’s major points. Cash flow is a priority when making an investment
decision. This makes sense because cash flow is the only real way to return capital to
shareholders. As Warren Buffett likes to remind people, “a stock is just a small part of
a business”. Therefore, the principles that apply when buying a stock are the same if
you were to own a whole business. You need to produce a profit and get a return on invested
capital. If you can’t generate positive cash flow then you have no way of making money
while owning the business. The only other way is to try and sell the business to someone
else for more, who themselves would hope to eventually see a return, or sell it again.
As Kevin says, this is just speculation. Ultimately, if your business has no path to generating
cash flow then it has no value to long term shareholders. Kevin uses this line of logic
to support investing in dividend paying stocks because a dividend is the only vehicle through
which a shareholder can see a return without selling some of their position. He also uses
the statistic that 71% of total market returns are from dividends, not capital appreciation.
On top of this, a lot of what Kevin looks for in his investments is stability and diversification.
It’s for this reason that he designs his dividend ETFs with this in mind. I got a lot
of comments on my most recent monthly portfolio update video, asking about potential dividend
ETFs. So Let’s take a look at Kevin’s U.S Dividend ETF, OUSA.
(Kevin Video) As Kevin alluded to earlier in this video,
Dividends are responsible for the lionshare of market returns. Why is this? It has to
do with the principle of compound interest. Albert Einstein once stated, “Compound Interest
is the most powerful force in the universe”. This is shown in the following chart. Since
1957, the price return of the S&P 500 is over 6500%. The total return, which includes the
impact of dividends and compounding is over 46,000%. This means that approximately 80%
of the hypothetical total return that an investor would have earned over this long period is
attributable to dividends and compounding. To make this even better, profitable dividend
paying companies have the ability to maintain and grow their dividend payments overtime.
From 2010 to 2019 the dividends per share paid by the companies in the S&P 500 have
more than doubled, a growth rate of nearly 11% per year.
Alright so let's take a look at what companies are in OUSA. If you’re a fan of my channel,
then you may recognize some of these names. OUSA’s top holdings, as of December 2020,
are Microsoft, Johnson & Johnson, Home Depot, Procter & Gamble, Merck & CO, Verizon, Pfizer,
Apple, Cisco, Honeywell, UnitedHealth Group, Amgen, Coca-Cola, Lockheed Martin, Pepsico,
and 3M. In total, the ETF has 101 holdings and is curated to include high quality, large
market cap, dividend paying companies. It’s heavily diversified and you can see the breakdown
by sector: Healthcare at 22%, Information Technology at 21%, Consumer Staples at 16.5%,
Industrials at 14.8%, and so on. Since the fund's inception in July 2015, it has seen
a 52% price return. Additionally, it pays out monthly dividends to shareholders that
vary by amount, based on the dividend return of the portfolio generated that month. Here
you can see the most recent distributions per share. The annual dividend yield tends
to be 2.08%, which is pretty low, but higher than indexes like the S&P 500. OUSA has an
expense ratio of 0.48%, which means you pay an annual fee of 0.48% your assets in that
fund. This is meant to pay for management fees, administrative fees, operating costs,
and all other asset-based costs incurred by the fund.
It’s here where we get to the crux of why I don’t like ETFs and managed funds. You
lose a portion of your assets every year to fees, even if the fund loses money or did
no better than you could have on your own. In the long term, these fees could be a big
cut to total returns. Also, I like to have greater control over my investments. In these
funds you have no say about what they choose to invest in. On top of this, I feel that
their obligation to make short term money for their investors leads to them not thinking
long term. For example, in December 2019 OUSA had 9.34% in the energy sector, with 5% in
Exxon Mobil and 3.24% in Chevron. In 2020, they sold out completely and have 0% energy
concentration in their portfolio. Now I know this sector was hit badly in 2020 and their
value decreased dramatically. However, I think companies like Exxon and Chevron will bounce
back in 2021 and beyond. They have strong balance sheets and were able to hold their
dividends through the worst year in the history of oil. If anything they should have reloaded
at a lower cost per share. They felt so strong about these companies just at the beginning
of this year. ETFs are unwilling to take short term losses for long term gain and have little
risk tolerance. The reasoning is because they must maintain and grow value for their clients.
If they take large short term losses, then their clients will pull out and it send their
fund spiraling down. This is not necessarily a shot at OUSA and more just ETFs in general.
I think OUSA is a fine dividend ETF and is ideal for investors who want to start dividend
investing, but don’t want to do the research and pick stocks themselves. If you’re not
interested in ETFs there is still value to doing some research into dividend funds. You
can look to see what their holdings are and it could give you a good reference point and
ideas for your own portfolio.
Bonus- Although Kevin expresses his love for dividends
and a significant portion of his net worth is invested in OUSA, he does break his rule
about not investing in stocks that don’t pay a dividend. (video). Some may call him
hypocritical, but I think growth stocks have a place in your portfolio as well. I’ve
been an investor in Tesla since 2016 and it’s by far my best performing stock. Additionally,
Kevin has another ETF called OGIG. This focuses on Global Internet Giants like Amazon, Alibaba,
Facebook, Alphabet, Microsoft, Shopify, etc. This fund is up 112% this year alone. Dividend
Investing is by no means a religion you must follow exclusively, but it’s a good addition
to your portfolio and can help you build a passive income stream.
Call To Action-
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