Dividend investing is! sustainable investing

Dividend investing was “sustainable” decades ahead of the current frisson of ESG-based sustainability. Think about it. The attraction of an income stream—whether of a publicly traded or closely held asset—is its value over time. Whereas a “price only” asset can be bought or sold tomorrow with the intention of profiting from a change in price a week or month from now, an income stream-based asset delivers its worth over many years. Investors might agree or disagree as to the current value of that income stream—and put a changing, daily price on it—but the NPV of the income stream is measured in decades. If the cashflow is not sustained, or is deemed unsustainable, the math falls apart immediately.

So dividend-focused investors are expecting their real estate, private enterprises, and even publicly traded companies to be operating for years to come. That means we also expect the businesses to evolve along with their customers and society in general. For instance, a forecast for the Coca-Cola company a hundred years ago when the shares began trading on the NYSE might not have had original fountain Coca-Cola mostly replaced by bottled or canned Coke, but over time that happened. More recently, the original full-sugar version was supplemented by Diet Coke which has been further revised by Coke Zero. Did the investor in Coke a century ago know what the company would be selling now? Of course not, but they knew that management was trying to move along with society’s demand for and definition of desirable beverages. They have to. Major manufacturing facilities can take years to build and are expected to last decades. If the company spends hundreds of millions on the Fresca-flavored popsicle line, they have to have a reasonable belief that Frescapops (made up) will be around for a long time, or that the line can be repurposed to follow consumer tastes. They may be right or wrong in that judgment, but all capital asset deployment is, by definition, long-term in nature. Stranded assets are a risk, of course, but that comes with the territory in any business.

While I can’t be certain that the Coca-Cola Company will be around 50 years from now paying robust dividends, I do know two things. First, all companies are trying to get to Gretzky’s “where the puck is heading to” point. Few large enterprises paying dividends to shareholders consciously and intentionally allow business to dry up without trying to sustain it. There are certain exceptions, such as self-liquidating enterprises, where it is not realistic to have 50-year forecasts. But such exceptions rarely dominate serious dividend-focused portfolios. Second, when either company management or investors make a mistake—such as Kodak or Avon during their respective declines—having a diversified portfolio offsets the risk of having an unsustained income stream, or even a few of them.

Now it is absolutely the case that what ends up being considered a sustainable business model changes over time. Indeed, the goalposts have moved a lot in recent years with the rise of ESG investing. Within the current sustainability framework, Coca-Cola is facing a new series of challenges regarding its packaging, water usage, and carbon generation. While this agenda is (mostly) new and comes with the explicit ESG name, the need for this or any other company to come into line with societal shifts is as old as business itself.

The still young ESG framework has had more than a few dead ends and false premises. In regard to the carbon transition, there is a wide variety of opinions. Post February 24, there is even more to disagree about. To put it in finance theory terms, the ESG market is highly inefficient from an information and outcome perspective. That makes it even more interesting and creates big challenges and opportunities. But wherever investors or company managements stand on defining sustainability, they all want to follow Gretzky’s dictum, and not just for the game being played today, but also for seasons and seasons to come.