America's Favorite Pastime. Baseball or Dividends?

By: Philip "Flip" O'Toole

“I see great things in baseball. It’s our game. The American game. It will repair our losses and be a blessing to us.

-Annie Savoy, Closing Scene of Bull Durham (1988)

Is Bull Durham the greatest baseball movie of all time? Ron Shelton’s 1988 classic stars Kevin Costner as career minor league catcher Crash Davis and Susan Sarandon as Annie Savoy, a local Durham, NC baseball fan who chooses one minor-league player from the Durham Bulls each season to help with (ahem) the mental side of the game. What makes it potentially the best baseball movie of all-time was it hit the trifecta: great writing, great acting, great baseball. The final line of the film highlighted above was delivered by Sarandon’s character as she allegedly quoted American Poet Walt Whitman. Her final quote concludes with her saying “you could look it up”. 

Like baseball, I believe dividend-paying companies are truly a blessing. I believe there are multiple corollaries between baseball and stock dividends, and three I would like to explore further. The first is math in the sense that the most important statistics are sometimes lost in the fanfare of Homeruns and Strikeouts. The second are the subtle differences inherent in both baseball and dividends that can, by order of magnitude, separate top performers from bottom performers. And third, the important role that volatility plays in both baseball and dividends. Let’s look closer with a little help from three of the best quotes from the movie and three charts from a Hartford Funds White Paper…

“Just one more dying quail a week… and you’re in Yankee Stadium.”  – Crash Davis

One of the great scenes in Bull Durham is Crash Davis going through the math that informs the audience of the difference between a player stuck in a minor league career and one who gets called up to the major leagues. Crash explains that over a 6-month baseball season where an everyday player accumulates around 500 at-bats, the difference between a .250 hitter and a .300 hitter is only 25 additional hits. He concludes that a player who can somehow muster “just one more dying quail a week” could result in the quantum leap of being called up to the major leagues, and all the spoils that go with that promotion.

There is also some interesting math when it comes to dividend paying companies. According to a publicly available white paper published by Hartford Funds titled “The Power of Dividends: Past, Present and Future”, 69% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding. How does something as seemingly minor as reinvesting dividends, like getting one extra base hit per week, result in a quantum leap? Chart #1 below powerfully illustrates the difference between the price return of the S&P 500 compared to the total return when accounting for reinvested dividends. Which begs the question, does it not make sense to have at your core a portfolio of great dividend-paying US companies that you reinvest in on a regular basis?

“I was in the show for 21 days once – the 21 greatest days of my life. You never handle your luggage in the show, somebody else carries your bags. You hit white balls for batting practice, the ballparks are like cathedrals, the hotels all have room service…”  – Crash Davis

In minor league baseball parlance, “the show” is a moniker for making it to the major leagues. As the elder statesman of the Durham Bulls, one of Crash Davis’s jobs is to impart wisdom to his younger teammates, particularly the physically talented, yet mentally weak Nuke Laloosh played by Tim Robbins. Davis launches into the above gem on the team bus after Nuke sarcastically reacts to him with “how would you know; you’ve been in the majors?”

Not all dividend-paying companies are created equal. Some have delivered minor league performance over time, while other companies have outperformed at a major league level. As Crash describes in the above quote, there are certain characteristics which clearly separate the major leagues from the minor leagues. With dividend paying stocks, one important characteristic seems to be companies who initiate and/or grow their dividends versus companies whose dividend is not growing or companies who do not pay a dividend at all. A chart #2 below shows, dividend growers and initiators have clearly outperformed the field. If playing in the majors was the greatest 21-days of Crash Davis’s life, how would he describe 50 years of focusing on dividend growers and initiators?

“He walked 18. New league record! Struck out 18. Another new league record! In addition, he hit the sportswriter, the public address announcer, the bull mascot twice. Also new league records…”  -Durham Bulls Coaches after Nuke Laloosh’s first minor league start.

Nuke Laloosh’s pitching debut for the Durham Bulls resulted in one of the most volatile stat lines in minor league baseball history. While he struck out 18 batters, he also walked 18 batters, not to mention the number of wild pitches he launched throughout the ballpark.  While his talent was undeniable, until he got his wildness under control, Nuke was going to have a difficult time getting promoted to the next level.

Like baseball managers, investors generally seek a lower level of volatility from their core, particularly when one is moving closer to the distribution phase of one’s life. Once again, Hartford Funds provides a great chart to illustrate this point (see chart #3 below). The risk metrics, Beta and Standard Deviation, show that dividend-paying companies not only have delivered superior performance, but have done so with lower levels of volatility. If the goal is to win, then great, but consistent performance is required. With that said, should US dividend-paying companies with a history of growth be part of your core investment strategy?

 
Baseball and Dividends, Two American Pastimes

Like Annie Savoy says at the end of the film, “I see great things in baseball. It’s our game. America’s game. It can repair our losses and be a blessing to us”. Each spring brings baseball fans the start of a beautiful 162-game season that, along with the playoffs, can extend into November. Some say “baseball is boring” and prefer sports with a little faster pace like basketball. But for those who have an acquired taste for the game, baseball is truly as good as it gets.

Similarly, owning boring companies that pay consistent, rising dividends is certainly not as sexy as owning high-flying growth stocks or, dare I say it, Bitcoin. But for those of us who understand the math, magnitude and volatility around dividend-paying companies, it is hard to argue with the strategy being part of a solution for investors over the long haul. To paraphrase Annie Savoy, I see great things in dividends. They will repair our losses and be a blessing to us. You could look it up.