But individual stocks have been all over the place.

Look at Micron - it’s been anywhere from flat to +285%.

Source: Fiscal.ai

And that includes a 37% drawdown in the past month.

Source: Fiscal.ai

Micron is a company that at one point was worth $1.3 trillion - this isn’t some volatile microcap company.

What’s going on?

The answer lies in this chart, which shows the VIX and the VIXEQ.

• VIX (dark line): Measures the volatility of the S&P 500 based on options prices

• VIXEQ (green line): Measures the volatility of the average individual stock within the index

The main thing to take away from this chart is that right now, the average stock is much more volatile than the index, and the gap between the lines has been getting wider.

Earnings season is here, and it’s a great excuse for Mr. Market to change his moods very quickly, so I don’t expect the volatility in individual stocks to settle down any time soon.

Earnings have caused some volatility in our portfolio as well.

We’ve seen anything from +30% to -15% in the past week as earnings reports roll in.

Today I’ll give you an update on the first 3 companies that have reported earnings since Wednesday.

On Monday, I’ll update you on the two that had the most volatile earnings reactions.

British American Tobacco

When Mr. Market gets depressed, long term dividend investors get to go shopping.

We bought British American Tobacco when it was yielding nearly 9%, buying it when the market was worried about the debt load, and the negative earnings number that was brought down by non-cash charges.

Source: Fiscal.ai

Since then Mr. Market’ volatility has worked in our favor, with the stock up roughly 75% since we bought it.

The company just released its half-year 2026 earnings, and Mr. Market barely flinched.

Let’s give you an overview of how they did.

Financial Highlights

• Group Revenue: +1.4% to £12.24 billion

  • +2.9% at constant FX

• Reported Profit from Operations: -15.8% to £4.27 billion

  • This drop is mainly because H1 2025 and 2026 had several one-off events:

    • Litigation Credit: H1 2025 included a £575 million credit regarding Canadian litigation provisions, H1 2026 only had a £38 million credit

    • Asset Sales: H1 2025 had a £904 million gain from a partial sale of BAT’s stake in India’s ITC Ltd. and a £333 million gain from the demerger of ITC’s hotel business.

    • Restructuring Expenses: H1 2026 includes £370 million in Fit2Win restructuring charges (£228 million are non-cash to upgrade manufacturing assets and machinery)

• Adjusted Profit from Operations (Constant FX, Adj. for Canada): +3.5% to £5.42 billion

• Reported Diluted EPS: -28.6% to 145.3p.

  • This is affected by the same things as Profit from Operations

• Adjusted Diluted EPS (Constant FX, Adj. for Canada): +7.9% to 167.8p.

Segments

The most important piece of British American Tobacco’s earnings report was that the new categories keep growing faster and faster.

Their revenue grew 18% in the first 6 months of this year.

New category revenue is now 19.8% of the total Group revenue.

The strongest performer here is Velo, their tobacco pouch product.

It’s gaining market share in the U.S.

As well as globally.

Glo, the heated tobacco product was the worst performer with revenue declining 11%.

Management said the decline in revenue was a combination of inventory adjustments and aggressive value-segment competition in Japan, Italy, and Poland.

The surprise in the new categories was Vuse, the vapor product was back to growth in the U.S.

This is because the FDA as well as state and federal enforcement agencies have been cracking down on illegal single-use vapes.

BAT plans a national rollout of adult-focused Vuse flavor variants in H2 2026, so we may see even more growth here this year.

Guidance and Capital Allocation

BAT reaffirmed their full year guidance, and narrowed the adjusted diluted EPS growth towards the middle of the 5%–8% guidance range.

They also told us that they’re on track to complete £1.3 billion in share buybacks in 2026, and plan to continue to raise the dividend with the cash flows.

This is an earnings report every owner of the business should be happy with.

That’s It For This Free Preview

But I’m curious, if you owned British American Tobacco and currently had:

• A 9%+ dividend yield

• An unrealized gain of +75%

One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

But what drives long-term returns isn’t temporary spikes in profits.

It’s the ability to consistently generate growing cash flow, and then what management does with it.

Remember that management has 5 main choices.

We love when management can reinvest in the business, or make smart acquisitions.

But for large businesses that generate a lot of cash, they can’t usually reinvest everything at attractive rates.

Of course we love dividends, but when the market is underpricing a business, one of the smartest things management can do is buy back their own shares.

This increases your ownership of the business without you spending a single dollar.

It can also lead to very attractive returns.

Today, we’ll look at the earnings reports from two companies that are heavily buying back their own shares.

PayPal (PYPL)

We bought PayPal for the buybacks, but since our initial purchase, they’ve also initiated a dividend.

The market is fairly convinced that this is a dying business.

Let’s look at the Q2 earnings report and see if it’s right.

PayPal is growing revenue, processing more payment volume, and earning more from processing that volume.

A few numbers look ugly on the surface, mainly the decline in EPS, Operating Income, and margins.

But there’s very good reasons for these.

Why EPS Declined

• Investing for the future: PayPal is spending money today to improve its technology, add AI, and upgrade the business for the future.

• Investment losses: The company also lost money on some of its investments, including its crypto portfolio, which reduced earnings.

Why Margins Declined

• More lower-profit transactions: More customers are using services like Braintree and Venmo, which make less profit than PayPal’s main checkout button.

• Higher spending: PayPal is also spending more to improve the business, which is temporarily reducing profit margins.

These numbers actually came in ahead of management’s expectations, and they raised guidance on the call.

PayPal is still a major cash generator, with $1.8 billion in adjusted free cash flow this quarter.

Like I said, PayPal is heavily buying back their own shares, returning $1.5 billion to shareholders by repurchasing approximately 33 million shares.

In the past twelve months, they have bought back 111 million shares for roughly $6.0 billion.

They’re not slowing down either.

The company is guiding for at least $6.0 billion in adjusted free cash flow and $6.0 billion in share repurchases for the full year of 2026.

At the current stock price around $58 per share, a $6.0 billion buyback program means PayPal can take out 12% of its share count in a single year.

The Buyout Offer

Management did address the buyout offer from Stripe in the earrings call.

Here’s what CEO Enrique Lores had to say:

Sounds to me like Lores and the board think the offer is way too low, but if they got the right one, they would consider it.

The Transformation Strategy

Lores gave us a more concrete outline for his plan for the company.

The most important things in my opinion?

1. Moving more into financial services.

This makes a lot of sense.

This means more debit and credit cards, more Buy Now Pay Later, and possibly more.

It’s a fast growing and profitable part of the business.

• Venmo debit card monthly users are up 50%

• People who use both debit cards & Pay with Venmo have 9x higher Average Revenue Per Account

• Pay with Venmo and Buy Now, Pay Later continue to outpace the market, taking share from other payment methods and growing 44% and 26%

2. Focusing on the consumer side of the network

Again, this makes a lot of sense.

PayPal’s main advantage over competing payment providers is that their network is two-sided.

They have the data from both the merchants and the consumers.

This allows them to do things that nobody else can - like very quickly approve users for Buy Now Pay Later, or run an ads business.

Overall Impression

Overall, I think this was a good quarter for PayPal.

They’re showing impressive growth in Venmo and they continue to improve the profitability of Braintree.

Their plan moving forward makes sense, they say they’re on track for $1.5 billion in savings, and they continue to generate lots of free cash flow.

This of course will continue to be funneled into buybacks, which at this valuation should eventually drive serious returns.

The fact that Stripe is trying to buy PayPal shows that it’s both undervalued and not dying, despite what the market thinks.

Cannibal #2

Cannibal #2 bought back 10% of its total shares outstanding inthe first half of the year, and it’s not done yet.

Even better?

This company is moving from holding company to operating company.

Organic growth is accelerating, and the company has figured out how to cross-sell to existing clients, and pitch bigger deals to new ones.

If you want to know more about this high-yield cannibal, upgrade your subscription here:

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One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

The series where I teach you 5 things about dividend investing in less than 5 minutes.

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1️⃣ Defensives Are Cheap

The image shows the relative valuations of Tech stocks and Defensive stocks.

Defensive stocks usually include things like:

• Consumer Staples: Companies that produce everyday necessities like food, beverages, household goods, and personal hygiene products

• Healthcare: Pharmaceutical companies, medical device manufacturers, and healthcare providers.

• Utilities: Companies that provide essential, heavily regulated infrastructure like water, electricity, and natural gas.

So you can think of Defensive stocks in this image as dividend payers.

The last time they were this cheap was 2000.

2️⃣ Selling Everything Else to Chase AI

Here’s what the image below shows:

• The Left: Semiconductors (the AI trade) are shooting up, now making up nearly 20% of the S&P 500

• The Right: The weight of everything else in the S&P 500 is collapsing

Here is what is happening: Investors selling off anything that isn’t AI to chase AI hype.

That means they’re dumping established, cash-flowing businesses, like the cheap, defensive dividend payers from Point 1.

Not because there’s anything wrong with these companies, but just to speculate on AI.

3️⃣ An Investing Quote

It’s tempting to chase the crowd when it seems like everyone is making money but you.

But Howard Marks reminds us that’s usually the exact wrong thing to do.

4️⃣ Guide To The Markets

Popular stocks and sectors trade at higher prices.

Higher prices lead to lower returns in the long run.

The image below is from JP Morgan’s Guide to the Markets.

They just released the newest version, which you can get here.

5️⃣ Example of a Dividend Stock

Let’s look at a classic defensive stock: Kimberly-Clark ($KMB).

Kimberly-Clark makes money by selling essential, paper-based consumer staples like Huggies diapers, Kleenex tissues, and Kotex feminine hygiene products.

These products are everyday necessities that consumers purchase repeatedly, providing the company with highly predictable, recurring cash flow.

Key numbers from Fiscal.ai:

• Profit Margin: 9.4%

• Forward PE: 15.1x

• Dividend Yield: 4.5%

• Payout Ratio: 79%

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

One is a recent purchase, while the other was the second stock we ever bought for the portfolio.

Let’s look at how our new holding is doing, update why we bought the older one in the first place, and check if the investment thesis for both is holding strong.

Holding #1:

Our newest portfolio addition is shifting strategies to reduce risk and become more capital-light.

What are they doing with the freed up capital?

Buying back shares at low valuations!

They retired over 9 million shares this quarter.

Between the dividend and remaining buyback capacity, we are looking at a shareholder yield north of 7%.

Holding #2:

This holding is a toll bridge on global trading, protected by an incredibly deep moat built on scale and network effects.

More buyers and sellers create more liquidity, which lowers costs and attracts even more users.

How’d their second quarter go?

Very well!

• Record Activity: Second-highest Q2 trading volumes on record

• A Widening Moat: We bought this company because they save clients massive amounts of money. That moat is only getting deeper - the amount they save clients is tens of billions of dollars more per day then when we bought them.

• Capital Returns: Management targets returning 50% to 60% of cash earnings to shareholders via regular and variable dividends. On top of that, they’ve recently aggressively deployed cash into share repurchases.

Conclusion

Overall, nothing has changed about the long-term investment case for either of these compounders.

Both businesses are performing exactly as expected, and our investment thesis is fully intact.

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One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

The main takeaway?

Both businesses are performing exactly as expected, and our long-term investment thesis for each remains fully intact.

Here is a quick snapshot of how they performed this quarter:

Holding #1:

• Completed its 400th acquisition, continuing to grow through serial acquisitions.

• Delivered a record operating margins and a 106% cash conversion rate.

• Expanded its high-margin aftermarket business

Holding #2:

• Maintains the lowest costs in the industry, staying profitable while regional competitors struggle with inflation, close doors, or sell out to private equity.

• Gained market share with meaningful order growth and added more than 200 new locations globally.

• Returned a lot of cash to shareholders with a 15% dividend hike and a new $1.0 billion share repurchase program.

Want to see the full article?

Upgrade and see our exact portfolio holdings, read the full Q2 report, and get access to our community of amazing dividend investors.

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One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

He thinks that the market has changed and become much more driven by momentum.

Netflix and PayPal might be good examples of this - let’s show you why.

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Netflix

Netflix is down nearly 50% this year after reporting earning last week.

Based on the stock price, you’d think that something was seriously wrong with the business.

But since 2017, Netflix has been a consistent and impressive grower.

• Revenue has grown 17% per year

• EPS has grown 46% per year

But Netflix’s stock didn’t always go down.

From June 2022 through June 2025, Netflix gained nearly 600%.

Remember the FAANG era?

During that same period:

• Revenue grew about 11% per year

• EPS grew about 27% per year

Excellent results.

But nowhere close to explaining a 600% return.

What does?

Valuation.

Netflix's P/E expanded from roughly 15x earnings to 60x.

The business improved, but investors also became much more optimistic.

Remember, Netflix stock is down nearly 50% from this point.
That’s the market outcome.

Now let’s look at Netflix’s fundamentals.
They’re the business outcome.

Since June 2025:

• Revenue has grown about +15% per year

• EPS has grown about +47% per year

The business actually accelerated while the stock declined.

Why?

Because the P/E collapsed from 60x to roughly 22x.

Same business, better fundamentals, completely different stock.

PayPal

PayPal is much the same story, played out over a longer period, with more dramatic swings.

PayPal the business has been pretty stable over time.

From 2017 to 2021, the stock went up more than 400%.

Since then, it’s down 80%.

And it’s traded anywhere between 110x (!) earnings and 7x earnings.

Yes, PayPal’s growth has slowed in recent years.

We can argue about mistakes management has made, how much competition has increased, etc.

But it’s hard to argue is that PayPal was ever worth 109x earnings, or 7x earnings.

Both valuations seem far more driven by investor sentiment than by changes in the underlying business.

That's what momentum can do.

During one phase, investors become so optimistic that valuation seems irrelevant and stocks only go up.

Eventually, expectations become too high.

When sentiment shifts, valuation matters again, multiples contract, and momentum pushes stocks lower, even while the underlying businesses continue to perform well.

How Undervaluation Can be Resolved

If Smith is right, and momentum is a much stronger force in the market, then a few things are likely.

Prices will go much further above and below the intrinsic value of the business than in the past.

And will be able to stay that way for longer than in the past.

That means that a stock could stay undervalued for years.

But it doesn’t mean shareholders are stuck forever.

If the market refuses to recognize a company’s value, the company still has options:

• Pay dividends. Instead of waiting for the stock price to rise, the company can return cash directly to shareholders. As the dividend grows, the stock often becomes too attractive for investors to ignore.

• Repurchase shares. If management believes the stock is cheap, they can buy back shares. Every share they retire increases each remaining shareholder’s ownership of the business.

• Get acquired. Another company or private equity firm may see the undervaluation and buy the entire business at a premium, giving shareholders an immediate gain.

• Activist investors step in. An investor may buy a large stake and push management to make changes, like selling assets, spinning off a division, improving capital allocation, or even selling the entire company.

• Keep growing. As the company continues to increase earnings and cash flow, the gap between price and value often becomes too large for the market to ignore.

The Buyout Offer

PayPal has been putting buybacks to serious work over the past few years because management thinks their stock is undervalued.

But last week, they reportedly got a buyout offer from Stripe, and Advent International.

The offer is at $60.50 per share, valuing the company at $53 billion.

The initial reports are that PayPal’s board is likely to reject this offer due to:

• Undervaluing the company

• Regulatory uncertainty

• Financing concerns

• Confidence in PayPal’s long-term prospects

The market appears skeptical that a deal will happen at that price as well, with PayPal’s stock still trading roughly 10% below the offer when it closed last week.

So is the board right?

Instead of trying to figure out exactly what PayPal is worth, let’s ask an easier question: Does $60.50 make sense?

A Lazy Valuation

Estimating intrinsic value always involves assumptions.

Small changes in a discounted cash flow model will produce very different answers.

Instead of trying to predict the future, let’s see what Stripe’s offer assumes about PayPal’s future.

A reverse DCF using a 10% return suggests that $60.50 a share assumes that PayPal’s Free Cash Flow will decline by about 5% per year.

Here’s an even simpler way to think about it.

A business with no expected growth often trades around 10x free cash flow.

PayPal currently generates roughly $6 billion of annual free cash flow, and analysts project that to continue.

Put a 10x multiple on that, and you get a value of about $60 billion, or around $70 per share.

If $70 represents a reasonable value for a business that never grows again, then a $60.50 offer already looks difficult to justify.

Growth and Buybacks

Of course, PayPal isn’t standing still.

Management still has multiple ways to grow the business:

• Further monetizing Venmo

• Expanding Fastlane

• Growing the advertising platform

• Continued BNPL growth

How it ends up remains to be seen, but zero growth is far from the only possible outcome.

There’s also another important source of shareholder returns: buybacks.

With a market capitalization of roughly $50 billion and around $6 billion in annual free cash flow, PayPal is currently at a buyback yield of 12%.

Show Me The Incentives and I’ll Show You The Outcome

When new CEO Enrique Lores was hired, much of his long-term compensation was tied to higher share prices in 3 to 5 years.

This bonus is worth up to $62,500,000 if he hits the top target.

The lowest target is probably somewhere around $70/share based on Lores’ start date and the lowest PayPal traded in that time period.

None of this proves PayPal is worth exactly $70, $100, or $125 per share.

Valuation is never that precise.

But it’s difficult to build a reasonable case that a business generating roughly $6 billion in annual free cash flow, with continued buybacks and multiple avenues for future growth is only worth $60.50 per share.

So What Happens Next?

It’s hard to say, but I think PayPal accepting this offer is unlikely.

Here are some of the possibilities:

• A Formal “No”: PayPal’s board has signaled the $60.50 offer is too low, so an official rejection is expected. This will force Stripe and Advent to either walk away or come back with a higher bid.

• A Bidding War: We saw this happen recently when Netflix and Paramount started competing for Warner Brothers Discovery. A second bidder could appear, driving up the price.

• Upcoming Earnings: PayPal reports earnings on July 28. If the numbers show the business is improving, the board has the leverage to demand a higher price. If the numbers are weak, frustrated shareholders might pressure the board to just take the cash.

Conclusion

Here’s what you should remember from today’s article.

• Prices Move on Emotion, Businesses Run on Cash: Momentum can separate a stock price from the fundamentals for years. Both Netflix and PayPal prove that a company’s underlying business can grow steadily while Mr. Market sends the stock price much higher or lower

• Stripe’s Offer Prices a Declining Business: At $60.50, Stripe’s buyout bid assumes PayPal’s free cash flow will shrink by 5% every year.

• The Floor is around $70: Even if PayPal never grows again, putting a basic 10x multiple on its $6 billion in free cash flow makes the business worth $70 a share

• High Buyback Yield: PayPal’s 12% buyback yield puts a floor under the stock, forcing earnings per share higher even without any growth

• Follow the Incentives: The board and CEO Enrique Lores have zero financial reason to accept this. Lores’s performance bonuses don’t even kick in until the stock hits roughly $70, and his top target is at $125.

• What’s Next: I expect a formal “no” from the board soon. Earnings will either give the board more leverage to demand a higher price or give frustrated shareholders a reason to complain.

One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Over the last two parts (Part 1, Part 2), we unpacked how passive index funds now control the market, and the demographics of the U.S. retirement system that are setting up a future where forced selling could drive prices down dramatically.

It sounds scary for an investor.

But as you’re about to see, this structural nightmare for Wall Street could be a great opportunity for us.

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How to Survive

At this point, the U.S. stock market is the U.S. retirement system in a way that it wasn’t in 2000 or even 2008.

So there is a reasonable argument that says the government can’t afford to allow another massive crash or lost decade.

But I prefer not to count on that.

Terry Smith still seems to think that the best defense is to own good businesses that you didn’t overpay for.

I tend to agree with him, but I’ll take it one step further and make the argument that at least some portion of your return should not depend on the market at all, and should instead depend on the business.

This way, the price of the business can go down, but cash keeps coming in to your account.

Market Outcomes vs. Business Outcomes

The passive indexing loops, momentum-driven algorithmic trading, and the inelasticity of the market we just looked at are all market problems.

They dictate the day-to-day price of a stock, but stock prices are a market outcome.

Remember that the best way to buy a stock is the same way you’d buy a local business.

You don’t buy a local pizza shop or hardware store hoping to flip it to someone else next week or next year.

You pay a price based on the cash that you’ll be able to take out of the business over time.

By getting at least a portion of your return from business outcomes, meaning dividends, you can protect yourself from some of this irrationality.

Dividends are paid out of a company’s free cash flow.

They are driven by the sale of actual products and services to actual customers.

They don’t care if a Vanguard Target Date Fund happened to take in a billion dollars last month.

Your Account Balance

When you rely on selling shares to fund your retirement, you are entirely at the mercy of the market outcome.

But if your portfolio generates enough dividend income to cover your living expenses, your account balance becomes largely irrelevant.

It doesn’t matter if your brokerage app says your portfolio is down 20% this year.

When your dividends are enough, you can just sit back and enjoy your cash flow.

You don’t have to worry about what the market says your business is worth today, or what others might pay for it in 5 or 10 years.

Always watch the business, not the stock.

As long as the business is doing well, ignore the stock price, unless you’re planning on buying or selling.

The Ultimate Advantage

Which brings us back to Terry Smith.

Why is one of the world’s greatest quality investors suddenly factoring momentum into his trades?

Because he has to.

Smith runs an open-ended fund.

When his investors get spooked by five years of underperformance and pull their capital to chase the latest trend, Smith is forced to sell his underlying holdings.

He didn’t change his strategy because he suddenly believes momentum is a superior long-term philosophy.

He changed it because if he didn’t, the fund would bleed capital until it closed.

We have a massive advantage over Terry Smith and Wall Street: we don’t have clients.

As individual investors, nobody is forcing us to liquidate our portfolios.

We don’t face redemption requests.

We can sit through volatility because our time horizon isn’t dictated by institutional capital.

Our ultimate advantage is the ability to be patient.

Defining Risk

If you let the market dictate your mood, the inelasticity and momentum loops we talked about are terrifying.

They can create immense price volatility.

Wall Street and the standard academic models define this volatility as “risk.”

But true risk isn’t price changes, it’s the permanent loss of capital.

For dividend investors like us, the main thing we need to worry about is the safety and predictability of the underlying cash flows.

As long as the business continues to generate cash and pay its dividend, the day-to-day stock price doesn’t matter.

Reinvestment

In fact, dropping stock prices can be a big benefit.

If forced selling from Target Date Funds or RMDs forces the price of a great business. down, it automatically drives the dividend yield up.

Lower stock prices are GOOD for you as an investor.

Declining stock prices are the best thing that can happen to you as a net buyer.

If you’re still in the reinvestment phase, you get to buy even more shares of those great businesses at a discount.

Reinvesting your dividends at low prices helps you build your cash machine even faster.

You get to turn the market’s momentum problem into your long-term advantage.

Conclusion

Over the past three articles, we covered a lot of ground.

Here is the short summary:

• The Market is Broken: Passive indexing and momentum trading now control the majority of trading, which drives prices

• U.S. Retirement Accounts Could Be A Time Bomb: The U.S. retirement system could eventually force massive selling, and with declining capital with active managers, there’s not going to be anyone to buy, driving severe volatility

• Wall Street Has to Keep Up: Institutional managers (like Terry Smith) are forced to abandon their strategies and play along to survive

For Wall Street, this is terrifying. For us, it’s an opportunity.

As individual dividend investors, we play a completely different game:

• We don’t have clients: Nobody forces us to sell. We have the ability to be more patient than professional fund managers.

• Business > Market: We can focus on the free cash flow a business generates, not the daily stock price.

• Low Prices Mean Highr Yields: When irrational markets drive stock prices down, dividend yields go up. Reinvesting our dividends lets us buy more shares at huge discounts.

Let the momentum traders chase the next shiny object.

Recently it’s been NFTs, until they collapsed in 2023.

Then Bitcoin got hot, and came back down.

That got replaced with AI, and now semiconductors are the hot trade.

Remember that momentum works in both directions.

Anything that can go up quickly, can come down the same way.

We will stick to buying wonderful companies, reinvesting our dividends, and letting compounding do the heavy lifting.

Want to protect your portfolio from the market’s madness?

Stop relying on unpredictable stock prices.

It’s time to focus on business outcomes, predictable cash flow, and financial peace of mind.

Join Compounding Dividends today and start building a portfolio that pays you regardless of what the market does.

When you become a Partner, you getL

• Full transparency into our real-money portfolio

• Deep-dive investment cases

• Access to the Community

I believe in this approach so much that I’m willing to give you $150 off your first year.

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One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

In Part 1, we looked at why Terry Smith, one of the world’s best quality investors, was forced to change his strategy

We also broke down how index funds are now driving prices by buying and selling without looking at business fundamentals.

Today, we’ll look at the volatility this is causing, and why the structure of the U.S. retirement system could make the problem much worse.

Let’s dive in.

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Passive and Increased Volatility

This passive or automated buying and selling could lead to a lot of volatility.

Smith makes the point that we’ve seen exactly that.

Here’s Dell’s three month run to a 174% gain in price.

There’s also the rise of concentrated ETFs to consider.

Let’s look at Cathy Wood’s ARK Innovation ETF ($ARKK) that became incredibly popular in 2020.

Here’s the flow of money into her fund.

Here’s the top 10 holdings of her fund in November of 2020.

Here’s how they performed against the Nasdaq 100 from 2019 to 2020 during that massive inflow of funds.

• Nasdaq 100: +102%

• Tesla: + 1,038%

• Roku: +921%

• CRISPR Tech: +412%

• Zillow: +347%

• Block (Square): +280%

The only stock here that underperformed the Nasdaq was Proto Labs.

You could argue that Kathy Wood is an amazing stock picker, and that the flows into the fund had nothing to do with it.

But here’s the performance of the fund from 2019 through 2024.

And here’s the Assets Under Management.

These charts look incredibly similar, and there’s not an obvious lead or lag between when AUM moves and when the performance moves.

Could it be that when a lot of money flows into a concentrated fund, that fund buys a lot of stock and the prices go up?

And that when a lot of money flows out, the fund sells a lot of stock, and the prices go down?

ARKK isn’t even the worst example here - it’s got something like 40 holdings.

There’s the Mag 7 ETFs that hold… you guessed it - 7 stocks.

There’s the VanEck Semiconductor ETF, with 20 holdings, and nearly 20% of the entire fund in Nvidia.

And if that’s not enough concentration in an ETF for you, there’s always options like the triple levered Tesla ETF from Leverage Shares.

Markets aren’t as elastic as we thought

A lot of investors assume that because stocks like Nvidia or Tesla are so large that flows in and out of ETFs or index funds wouldn’t affect them much.

And that’s the assumption the academics made for a long time.

Standard asset-pricing models assume that the market is elastic.

Meaning that it doesn’t react a lot to buying or selling.

These classic models use an elastic multiplier somewhere between 0.05 and 0.1 for the U.S. stock market,

With a multiplier of 0.05, a buyer of 10% of the stock market will lead to just a 0.5% increase in prices.

But a paper published in 2021 called ‘The Inelastic Markets Hypothesis’ found that the multiplier could be as high as 5.

In that world, a buyer of 10% of the stock market would cause prices to rise by 50%.

The volatility we’ve seen so far may be a small preview of what’s possible

So far we’ve only seen assets added to passive vehicles.

Part of this is due to the low cost, and the feedback loop that may have driven up the performance.

But part of it is also the U.S. retirement system.

In the U.S., most workers save for retirement using an account called a 401(k).

Instead of the company guaranteeing a pension, employees automatically have a portion of their paycheck deducted every single month to invest for themselves.

Because of legislation passed in 2006, when a new employee starts a job, they are automatically enrolled into this system.

If they don’t explicitly choose where to put their money, the system default to putting their investment into a Target Date Fund (TDF).

Assets held in TDFs have gone up every single year since 2006.

Target Date Funds are a mix of investments that automatically adjusts the risk level based on the year the worker plans to retire.

The vast majority are made up of some mix of passive index funds.

A worker that plans to retire in 30 years might end up in Vanguard’s 2055 TDF.

That would put them in a mix of 90% stocks and 10% bonds.

But someone retiring in 5 years might be in Vanguard’s 2030 TDF.

They would be in roughly 60% stocks and 40% bonds.

This all means that every single month, millions of American paychecks are automatically docked, and billions of dollars are put into these passive funds, regardless of stock valuations or market conditions.

It also means as the people who hold them age, there will be automatic selling of stocks to buy bonds.

The 401(k) hasn’t been around that long.

It came into law in 1978, and started to get popular in the 1980’s.

That means that most of the Baby Boomers have traditional pensions, and it’s really Generation X that will be the first to retire mainly on 401(k) assets.

Many of them may not be in TDFs, but there is another mechanism that will force selling.

The Required Minimum Distribution (RMD) says that when you turn 73, you must start taking withdrawals from your 401(k).

How much depends on your age, but let’s do some rough math.

Let’s say an investor is turning 73 this year.

• They started saving at 23, so they’ve been investing 50 years

• Initial contribution: $10,000

• Monthly investment: $800

• Rate of Return: 7% per year

That investor now has nearly $4.5 million in their 401(k).

Now let’s figure out what they have to withdraw this year.

This investor’s RMD is roughly $170,000.

If we apply the 5x elasticity factor, to all of the RMDs, they could have significant impacts on the market.

And the older you get, the higher this number goes.

Here’s what happens when that same investor turn 83.

So at some point, we’ll have Generation X automatically selling stocks because of RMDs and Millennials automatically selling stocks as their TDFs buy bonds to reduce risk.

If the younger generations aren’t doing enough passive buying to offset this, we could see passive flows shift negative.

At that point, the feedback loops that have driven the U.S. market up could start to work in reverse.

How do we survive this?

If the U.S. stock market is driven by an automated retirement machine, and passive investing is taking the capital from active investor, who’s going to be around to buy when passive investors start selling?

In Part 3, I’ll show you what I’ve done to protect against this.

I’ll show you why Terry Smith had to panic, why you don’t have to, and how to actually turn this market distortion into an advantage.

Keep an eye on your inbox.

One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

He doesn’t typically trade much, but in the first 6 months of 2026, he turned over more than 50% of his portfolio, and announced a shift in his investment style.

It seems dramatic, and it is.

Terry is making these huge changes because he believes the underlying structure of the market is changing.

This will be the first of a three-part series where we’ll talk about what Terry is seeing, if he’s right, and most importantly what you should do about it.

Let’s dive in!

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Who is Terry Smith?

Often called “the English Warren Buffett,” Terry Smith is one of the world’s top Quality Investors.

He’s typically been a very straightforward and independent investor.

Here’s a quick bit of background on Terry.

• Grew up in East London, was at the top his class in history at Cardiff, and entered banking at Barclays in the 1970s.

• In 1992, he wrote Accounting for Growth, a book that exposed corporate accounting tricks and was so controversial that it got him fired.

• Launched Fundsmith in 2010. Today, it manages £12 billion and has achieved an impressive 13.1% CAGR after fees since inception.

His Investment Style

Terry Smith’s philosophy is simple.

He boils it down to three steps.

1. Buy Good Companies

Terry Smith looks to buy high-quality businesses that dominate their markets.

• High ROCE: Looks for a Return on Capital Employed of 15–20%+

• Wide Moats: Focuses on companies with pricing power and high gross margins

• Cash is King: Prioritizes strong organic growth and businesses that convert a lot of their net earnings into free cash flow.

“I am constantly amazed at the number of people who talk about investment and spend most or all of their time talking about asset allocation, sector weightings, economic forecasts... and never mention any need to invest in something good.” — Terry Smith

2. Don’t Overpay

While quality comes first, valuation still matters.

He is willing to pay a fair premium for an exceptional business but tries to avoid overpaying.

3. Do Nothing

Minimizing trading keeps fees low and lets compounding do the work over time.

Patience has been one of Terry’s main advantages.

His Performance

Fundsmith does hold a portfolio of companies with great fundamentals.

And over the long term it has allowed the fund to outperform, with a CAGR of 13.1% after fees.

But it’s been underperforming each year for the past 5 years.

Which brings us to the letter Terry Smith recently wrote to his investors.

You can read it here. (I recommend that you do.)

His Letter

There are two things I want to focus on from Terry’s letter.

1. Why he thinks he’s underperformed

2. How he’s shifting his strategy

Why he’s underperformed

The letter says that the fund has underperformed because the market has shifted away from caring about business fundamentals and being driven by momentum.

I think that’s true and we’ll go into the argument Terry makes in a minute.

How he’s shifting strategy

Because of that, Smith says that the fund will be changing strategy and taking momentum into account.

That means it will be doing more buying and selling than it has historically.

In other words, Buy Good Companies, and Don’t Overpay are still in effect.

There will be a little bit less ‘Doing Nothing’ going forward.

The interesting part here is why Terry is making this shift.

It’s not because he thinks it’s the right investment decision.

It’s because if he didn’t do something, the fund would go out of business.

Passive Investing and Momentum

Terry has been talking about the markets becoming increasingly more momentum driven for quite some time.

And there’s no argument that he’s wrong, look at how momentum has been outperforming everything else lately.

He sets up his letter by saying that the shift to ETF investing and the excitement around AI means that the market no longer cares about the underlying businesses.

What’s the point of passive investing?

Passive investing was popularized by John Bogle, who founded Vanguard.

Bogle’s argument was pretty simple:

• Most active funds don’t beat the index, and they charge you fees which drag on your returns

• By removing the cost and taking the average performance, investors wind up with more money (based on the cost savings)

Makes sense, but if that argument holds true, then shouldn’t the index and the average manager perform similarly?

They used to, but that’s started to change:

Some people argue that this is evidence that the average fund manager is terrible, and this is evidence on why everyone should just switch to passive.

Passive is now driving the market

Maybe, but Terry offers another explanation - a momentum driven feedback loop.

• Passive fund does well → becomes popular → takes in more capital → buys more of what it already owns → drives share price up → passive fund does even better → takes in more capital → buys what it owns → prices go up → etc.

There’s pretty good evidence this is correct.

Here’s the performance of the S&P 500 vs Hedge Funds from 2007 to 2016.

I’d say that’s a pretty good representation of passive vs active performance.

They run close together until somewhere in 2012 or 2013, then diverge and widen.

Here’s flows of capital for active and passive funds from 2000 to 2022.

Flows into active funds peak somewhere around 2012 or 2013 then decline while flows into passive funds keep going up.

So there’s really 2 feedback loops here:

• Passive takes in money → buys more of what it owns → funds go up → more capital come in

• Active loses money → sells what it owns → funds go down → more capital flows out

So the things passive funds own get more expensive, and the things active funds own get cheaper.

Which makes passive performance better and active performance worse, just from the shift in capital.

Passive now has more than 60% of the total Assets Under Management.

Trades set prices

The stock market is an ongoing, fast-paced auction.

That means prices are set by buyers and sellers when a trade happens.

Every Trade Needs Two Sides

You can’t buy a stock unless someone else is willing to sell it to you, and you can’t sell a stock unless someone else is willing to buy it from you.

It sounds simple, but it’s important.

When stock prices change, what you’re seeing is the price of the very last transaction that two real people agreed on.

How the auction works

To make trades happen, the stock market uses an ongoing list of offers called the Bid and the Ask.

• The Bid: is the highest price a buyer is currently willing to pay for the stock

• The Ask: is the lowest price a seller is currently willing to accept

The difference between these two numbers is called the spread.

It’s all tracked in the order book, which looks like this:

In the image, there are a lot of people willing to buy at $37.37.

But the lowest price anyone is willing to sell is $37.38.

No trades can happen right now.

How the Price Actually Moves

For a stock price to move, someone has to blink.

• If buyers are aggressive: They’ll decide they don’t want to wait, and buy at $37.38, which will push the current price up to that number. If more buyers keep buying at the Ask, the price goes up.

• If sellers are anxious: They’ll agree to take the buyer’s price of $37.37. A trade happens, and the price drops. If more people sell at the Bid, the price goes down.

Who’s making the trades?

If trades set prices, then we need to understand who’s making the trades.

Terry Smith tells us:

When Jack Bogle rolled out index funds, the plan was for them to be a small minority that piggybacked off the research carried out professional stock pickers.

Back then, they made up nearly all of the market.

But that’s not the case anymore.

Now the market is made up of some combination of index buyers, ETFs, quant funds, and momentum traders, with something like 10% of the volume being traded by people who are actually reading reports and doing company research.

Index funds and ETFs run on a very simple model:

• Money comes in → Buy

• Money goes out → Sell

They don’t care at what price - so go back to the auction model.

If a lot of flows come in, and there aren’t a lot of sellers, the price will go up a lot.

The same is true when funds flow out.

What happens next?

When index funds blindly buy and sell regardless of price, it fundamentally changes how the stock market operates.

But what happens when this automated trading meets a market that isn’t as liquid as we think?

In Part 2, we are going to look at the massive volatility this is already causing, and show you the time bomb that could be hidden inside the U.S. retirement system.

Don’t miss it.

One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Each month, I’ll give an overview of my favorite stocks of the month.

Let’s dive into this update and show you some of my favorite stocks.

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June 2026

The S&P 500 fell -1.6% in June.

Investors are fearful today according to the Fear & Greed Index:

Best & Worst Performers

This overview shows you the best and worst performers in our investable universe.

Worst performers

The cheaper we can buy great companies, the better.

The biggest decliner this month? Oracle, losing 35%.

Oracle provides enterprise software, cloud infrastructure, and database management systems.

It’s been seen as a beneficiary of the AI buildout, with the stock up 70% from April to the start of June.

But Oracle fell hard last month because of rising debt levels and continued spending.

• Massive Spending: Management announced plans to raise another $40 billion through a mix of debt and equity to aggressively build out its AI cloud infrastructure

• Debt Concerns: Oracle already has more than $130 billion in net debt, so investors are worried that the hyperscaler buildout will slow down before the debt is paid off

• Dilution: Investors didn’t like the planned $20 billion equity issuance that will dilute existing shareholders

Best Performers

Newell Brands was this month’s best performer, increasing by 80%!

Newell Brands is a consumer goods company with a portfolio of well-known household brands, including Rubbermaid, Sharpie, Coleman, and Yankee Candle.

This month a combination of improving consumer demand, automation investments, and a guidance raise caused a short squeeze.

Semiconductors

Perhaps more interesting are the other 4 stocks on the list.

They’re all related to semiconductors, which are the new hot stocks in the AI hype.

• Applied Materials (AMAT): Makes the machines that add microscopic layers of materials onto silicon wafers to build the chips.

• Lam Research (LRCX): Makes the machines that carve out (etch) those layers to create the tiny circuits.

• KLA Corporation (KLAC): Makes the inspection tools that check for defects to ensure the chips actually work.

• Corning (GLW): Supplies the ultra-pure, specialized glass used for lenses and mirrors inside chip-making equipment.

So far after the big run up in June, all 4 have fallen at least 20%.

Spotlight: Cboe Global Markets ($CBOE)

Cboe Global Markets runs options exchanges across multiple asset classes.

It was trading as high as $366 per share in May, but has quickly dropped by 33%, putting it at the number 5 spot on our Worst Performers in June.

How Cboe Makes Money

Cboe makes money in three main ways:

• Transaction Fees: Fees on every contract traded across its options, futures, equities, and FX platforms.

• Proprietary Products: Holds exclusive rights to institutional hedging staples like S&P 500 Index (SPX) options and the Cboe Volatility Index (VIX)

• Data & Access Fees: Recurring revenue from charging institutional firms for real-time market data feeds and low-latency system connectivity

Why Cboe deserves to be in the spotlight:

• Strong Network Effects: Institutional traders need liquid markets. They’ll go where the most trading is already happening. For a lot of products, that’s Cboe. This self-reinforcing loop makes it difficult for competitors to steal volume from its core index products, keeping operating margins high.

• Strong Dividend Growth: Cboe has gown its dividend by 12% per year over the past decade, and generally maintains a low payout ratio.

• An Interesting Portfolio Hedge: When markets drop, most stocks drop right along with them. Cboe sees higher trading volumes and higher fee income during times of more volatility.

Why the stock got knocked down

The recent drawdown was triggered by two main issues.

1. Crypto Perpetual Futures Approval: The CFTC approved crypto perpetual futures trading on Kalshi at the end of May. Investors are nervous that these could expand beyond crypto and structurally threaten or erode Cboe’s monopoly over traditional proprietary options and futures.

2. Declining Revenue Per Contract (RPC): Cboe logged record-breaking volumes in June (averaging 23 million contracts per day), but its preliminary Q2 guidance showed more activity in lower-margin, multi-listed options, which diluted total options RPC down to $0.317 (from $0.343 in March) causing investors to be concerned that this number will keep declining.

The Bottom Line

Cboe is a high quality business that’s starting to look more reasonably valued again.

The dividend yield is heading back up to the long term average after more than a year below it.

Uncertainty may keep pushing the price down, making Cboe a stock that dividend growth investors might want to keep their eye on.

July Best Buys

I scanned our Buy-Hold-Sell List for great quality compounders and dependable dividend payers trading at attractive discounts.

Let’s dive into 5 of our favorite income ideas for this month!

5. Sage Group ($SGE.L)

How does Sage make money? Sage Group provides back-office software (like accounting, payroll, and human resources) for small and medium-sized businesses globally.

Sage has very high switching costs. Once a business integrates its accounting software and builds workflows around it, switching providers becomes a nightmare. It carries massive risks of data corruption and operational downtime.

The cost for Sage’s software and services is also a very small portion of a business’s total revenue.

That means it’s not worth the risks that come with switching just to save a few pennies if the product works.

You can see this in the very high Renewal Rate by Value.

This measures renewal by existing customers only, and shows that they tend to spend more with Sage as time goes on.

The company has successfully shifted to a subscription-based cloud SaaS model.

The vast majority of their revenue now comes from subscriptions, and their Annual Recurring Revenue grows every year.

That stability and recurring revenue has allowed Sage Group to become a reliable, slow dividend grower.

4. SBA Communications ($SBAC)

How does SBA make money? SBA operates as a real estate investment trust (REIT) that owns a massive portfolio of roughly 46,000 wireless cell towers across North America, South America, and Africa. They lease antenna space out to top mobile carriers like T-Mobile, Verizon, and AT&T.

The majority of SBA’s leasing revenue comes from North America.

That’s despite SBA having more towers internationally.

The U.S. business is more profitable and more stable, but the international business has more potential for growth.

Both businesses have strong moats.

Moving equipment off of SBA’s towers risks network disruptions and dropped calls for the wireless carriers that lease them.

It’s also expensive and difficult to move wireless equipment from one tower to another.

That means that wireless companies leave their equipment right where it is.

Another great thing?

Operating leverage.

The cost to run a cell tower is almost entirely fixed.

Once it’s built, adding a second or third carrier costs SBA virtually nothing, so that new lease revenue is nearly all profit.

That’s how SBA has been able to grow its dividend by more than 30% (!) per year, while keeping a conservative AFFO Payout Ratio.

Want to see the top 3 Best Buys?

Our #3 pick is a retailer with a 40-million-member loyalty program, protection from e-commerce competition, and the stock recently dipped by more than 50%.

Our #2 pick is a healthcare duopoly that looks to be on sale.

Our #1 pick is a software provider with virtually impenetrable switching costs, and rising revenue.

Upgrade your subscription to read the full analysis on our top 3 Best Buys for July, and get full access to the complete every single month!

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One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Our investable universe currently contains 176 stocks rated ‘buy’.

Last month there were 173.

Let’s look at this month’s Buy-Hold-Sell list update and see what interesting opportunities we can find!

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Buy-Hold-Sell List

The Buy-Hold-Sell List filters our very large Investable Universe.

We look for cheap Dividend Stocks based on three valuation methods:

1. The PEG Ratio

2. Current Yield vs Historical

3. Reverse Dividend Discount Model

Based on this, we give each company a Buy, Hold, or Sell recommendation.

Update June 2026

Some Interesting Stats:

• 176 companies total receive a ‘buy’ rating

  • That’s up from 173 last month

  • And 157 the month before

• 34 moved from ‘hold’ to ‘buy’

• 33 have moved up from ‘sell’ to ‘hold’

• 10 made the jump from ‘sell’ directly to ‘buy’

Recommendation Changes

30 companies went from Buy to Hold due to increasing stock prices.

Here’s a sample of a few:

• The Hartford Insurance Group (HIG): A leading provider of property and casualty insurance, group benefits, and mutual funds. They announced in June that they would sell The Hartford Funds to Wellington Management, driving up the stock price.

• Snap-on Inc (SNA): A global innovator, manufacturer, and marketer of high-end tools, equipment, and diagnostics for professional users. Their direct sales channel and strong brand loyalty provide excellent pricing power.

• GE Aerospace (GE): A provider of jet engines, components, and integrated systems for commercial and military aircraft. Global flight hours keep gpiong up, and so does the need for both engines and aftermarket services.

• Yum! Brands (YUM): A global quick-service restaurant powerhouse operating iconic brands like KFC, and Taco Bell. They announced the sale of Pizza Hut to a private equity group in June, and the market reacted positively.

You want to see the whole list?

Upgrade your subscription here 👇

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One Dividend At A Time,

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

I hope everything’s going well with you!

This Thursday at 1:30 PM ET (7:30 PM CET), we’re hosting the last webinar before the summer break.

Here’s what you can expect:

• Which stocks are the most interesting today?

• Which stocks am I investing ALL of my own money in?

You really don’t want to miss this.

We’ll also be giving away plenty of exclusive bonuses for free:

You want to sign up last minute?

You can do so here:

Register for the webinar

Everything In Life Compounds
Pieter
PS: The webinar is completely free. Register here and receive all the exclusive bonuses.

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

It’s certainly news-worthy - he’s the first trillionaire in history.

Today I want to put a trillion dollars into perspective and what it really means for Elon.

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How much is a trillion dollars, really?

I don’t think people really understand what a trillion is.

We use it to describe company valuations, and now individual net worth and it just seems like a regular number.

It’s not.

Consider this:

• One million seconds is about 11 and a half days

• One billion seconds is 31.7 years

• One trillion seconds is 31,709 years

How about this graphic?

A trillion dollars isn’t just ‘a lot’.

It’s orders of magnitude bigger than millions and billions.

What’s wealth for?

Some people probably view wealth as a way to keep score of your success.

Some use it as an ego boost, to measure themselves against others.

But I like Charlie Munger’s description of what wealth is for.

He was asked in an interview if given the choice, he’d go back into the investment business.

Here’s what he said:

For Charlie, the point wasn’t to be rich.

The point was autonomy and freedom.

When you hear ‘trillionaire,’ you probably picture someone who has that.

A man who can do whatever he wants, whenever he wants.

Where is Elon Musk’s wealth?

Look at how Musk’s wealth is actually structured:

• Tesla salary: $0

• SpaceX salary: $0

• Tesla dividends: $0

• SpaceX dividends: $0

100% of his wealth is tied up in stock.

And most of it is now in SpaceX, which is currently trading at a massive valuation.

On paper, he is the richest man in the world.

In reality, he has a massive cash flow problem.

When Musk wanted to buy Twitter, he couldn’t just write a check.

He had two choices:

1. Sell his shares: This panics the market and crashes the stock price.

2. Borrow against his shares: This means taking on massive debt from banks.

He chose debt.

But when you borrow billions of dollars against a volatile stock, you aren’t free.

The banks hold the power.

If Tesla’s stock crashes, he gets a margin call, forcing him to sell shares at a low price.

And back to those SpaceX shares (which remember, are the majority of Elon’s wealth)...according to the registration statement, he and other top insiders are forbidden to

• Sell

• Lend them out

• Borrow against them

...for 366 days after the IPO.

Should they count as part of his net worth until those restrictions are lifted?

Munger knew that net worth is just a scoreboard.

True wealth is independence, the ability to wake up and owe nothing to anyone - no banks, no lenders, no venture capitalists.

What if Elon was a dividend investor…

In 2004, Musk invested $6.5 million in Tesla.

What if he had invested that same $6.5 million into a high-quality dividend stock like Realty Income (O) instead?

Yes, it would have been much less exciting than revolutionizing electric cars and shooting them into space…

But Realty Income has been raising its dividend for more than 30 years.

And it pays monthly.

If he bought Realty Income and reinvested his dividends, here is what his life would look like today:

• He would own 1.1 million shares.

• He would receive $3.5 million in pure cash every single year.

• He would do absolutely zero work to earn it.

Even if he spent the dividends instead of reinvesting them, he would still own 330,000 shares and collect over $1 million a year in passive income.

Conclusion

Paper wealth looks great in Forbes magazine.

But if you don’t have cash flow, it forces you to sell your assets, take on leverage and answer to bankers, or work every single day.

• Net worth increases your ego

• Cash flow increases your freedom

I know which one I’d rather have.

One Dividend At A Time

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Today we’re looking at another company that’s about to go through a big change.

It’s Comcast ($CMCSA).

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For years, Comcast has said that the combination of the media and connectivity (broadband) businesses has advantages.

But now they’re planning on separating them.

Let’s look at if this could be an interesting opportunity.

Company Overview

Today, Comcast is huge.

They own:

• Xfinity, the nation’s largest broadband network

• NBCUniversal

• The NBCUniversal theme parks

• Sky

• The Peacock streaming platform

• Movie and TV studios like DreamWorks, Illumination, and Sky Studios

The connectivity business includes broadband for homes and businesses.

• This is almost like a utility business, with very steady revenue

The media, studio, and theme park businesses aren’t as stable as broadband.

• The theme parks are growing quickest

• Studio revenue has been steady

• Media doesn’t have a lot of data (yet)

Overall, the business shows slow, steady revenue growth and a lot of FCF.

That's allowed Comcast to pay a growing dividend for 18 years now.

Comcast’s Problems

The company wouldn’t be splitting itself up if things were going well.

Let’s talk about the main issues with Comcast.

1. Broadband

The broadband network is the main cash generator.

But it’s losing customers to aggressively expanding fiber networks (like AT&T) and 5G fixed-wireless options (like T-Mobile and Verizon).

The competition has forced Comcast to compete on price, and incentives like giving away a year of free wireless to keep accounts.

This is hurting their profit margins.

2. Streaming

Streaming is taking traditional cable TV subscribers.

To fight back, Comcast is burning massive amounts of cash on the Peacock streaming service and expensive sports rights (like the NBA).

Peacock is still losing money, and is small compared to most competitors.

Investors aren’t happy that Comcast keeps pouring broadband cash into a streaming war that Comcast isn’t winning.

3. The Conglomerate Discount

Investors always have a hard time valuing complex businesses.

Investors have been viewing Comcast as a slow growing broadband business that pours cash into movie and streaming studios.

The stock price started declining in 2021, and hasn’t stopped.

That’s driven Comcast’s dividend yield up to record levels.

Investors seem to be pricing in the worst-case scenario for both halves of the business at the moment.

That’s why management is looking to split the business.

It will let investors value the broadband and media businesses independently.

It will also let the businesses operate independently, which should simplify capital allocation and business strategy.

The Split

Management will use a tax-free spin-off that’s expected to close in about a year to split the businesses.

• ‘New’ Comcast: will keep the connectivity business, including residential broadband, Xfinity Mobile, and Comcast Business.

• NBCUniversal (SpinCo): will take the media assets: the film and TV studios, Universal theme parks, broadcast networks, Peacock, and Sky.

Let’s briefly look at each business.

‘New’ Comcast

The cable and broadband business is what generates most of Comcast’s cash.

• It has significant scale advantages over competitors

• Even with a slow decline in the number of subscribers, Comcast has been able to maintain stable revenue from this business

This business has been essentially subsidizing the media side’s expansion.

As an independent business, ‘New’ Comcast will be completely focused on returning capital to shareholders and defending its network.

NBCUniversal

The main profit drivers for NBCUniversal will be the theme parks and its iconic intellectual property (like the Jurassic World franchise, The Office, and Minions).

But this business will still continue to consume a lot of capital.

• The traditional TV networks are losing subscribers

• And the Peacock streaming service has been operating at a loss (management expects it to hit profitability in the next few years)

There’s probably more growth opportunity here, but there’s also more risk.

As an independent company, NBCUniversal will be able to consider mergers, acquisitions, or partnerships as the media space continues to consolidate.

It would not have the same opportunities if it were still tied to a telecom company.

Could Comcast Be Interesting?

I’ve already showed you that it’s at a very high dividend yield relative to its own history.

From here, the story gets really interesting.

To find out if Comcast is truly a screaming buy or a value trap, we have to run the hard numbers.

In the rest of this deep dive for Premium Partners includes:

• The Reverse Dividend Discount Model (DDM): See exactly how low the market’s dividend growth expectations are right now.

• The Reverse DCF Model: What kind of FCF growth (or not) the market is currently pricing in.

• The Sum-of-the-Parts Valuation: We break down the standalone earnings for both ‘New’ Comcast and NBCUniversal, pick some peer multiples and figure out if you’re really getting a discount today.

📈 Unlock the Full Comcast Valuation Breakdown

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One Dividend At A Time

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

The Berkshire Hathaway panel got asked a very interesting question this year:
’What should Berkshire Hathaway buy with all their cash?’

Let’s see what the 4 panelists answered!

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Berkshire’s Cash Pile

At the time of the event, Berkshire Hathaway had nearly 30% of its assets in cash.

That’s around $397 billion.

It’s hard to get your head around such a number, so let’s look at some of the public companies Berkshire could buy outright with that kind of cash pile.

• Home Depot: $325 billion

• McDonald’s: $192 billion

• Booking Holdings: $130 billion

• Moody’s: $78 billion

Berkshire has most of that money parked in short term treasuries.

At 4% to 5% interest, simply letting the cash sit there generates $15 to $20 billion a year in pure interest income.

Again, to put it into perspective, here’s the revenue of a few well-known companies:

• AutoZone: $19 billion

• Texas Instruments: $18.4 billion

• Kimberly-Clark: $16.5 billion

• Markel Group: $16 billion

• Door Dash: $14.7 billion

Here’s a few companies with Net Income around the $15-$20 billion mark:

• Comcast: $18.7 billion

• MasterCard: $15.5 billion

• Coca-Cola: $13.7 billion

So Berkshire makes more profit than Coca-Cola does just by buying short-term Treasury Bills with its cash.

Deploying that much capital is very difficult.

The sheer size of the investments required to move the needle for Berkshire eliminates almost all publicly traded companies.

The target must possess an exceptional moat, outstanding management, and a valuation that makes sense.

Let’s see what companies each of the panelists thought Berkshire should buy.

Christopher Bloomstran

President and Chief Investment Officer, Semper Augustus Investments Group, LLC

Bloomstran is known as a disciplined, fundamental investor.

He founded Semper Augustus in 1998, and runs a concentrated portfolio of well-run, well-capitalized businesses.

He’s also known for his deep analyses of Berkshire Hathaway.

He suggested 2 dominant, cash-generating businesses for Berkshire to consider:

Microsoft

Why Microsoft would fit Berkshire’s Portfolio

• Microsoft has a very strong moat - the Office products like Word and Excel are standards in corporations across the world, there are switching costs to move away from Microsoft as your cloud provider, and LinkedIn is the only social network focused on professionals

• It’s a great business - Microsoft generates a lot of Free Cash Flow, high ROIC, and has a strong balance sheet, all things Berkshire typically loves

S&P Global

Why S&P Global would fit Berkshire’s Portfolio

• It operates in oligopolies – The credit rating industry is dominated by just a few players, indexes are dominated by S&P and MSCI, S&P Global has limited competition in every segment

• It’s capital-light – The business requires very little capital to operate and grow, which means massive, highly predictable free cash flow that would go back to Berkshire for them to deploy - S&P Global is small enough, Berkshire could buy the whole thing

Adam Mead

CEO and Chief Investment Officer, Mead Capital Management, LLC

Mead is the author of The Complete Financial History of Berkshire Hathaway, a massive 880-page chronological analysis of the company.

He also runs Mead Capital Management, which he founded in 2014.

He suggested Berkshire adda dominant family business to the portfolio.

Copart

Why Copart would fit Berkshire’s Portfolio

• The moat is impossible to replicate – Building out a comparable network of salvage yards, alongside deep, decades-long relationships with major auto insurers is impossible, which means very limited competition

• It aligns with Berkshire’s culture – Copart is a family-run business that dominates an unglamorous niche while generating huge amounts of cash

Brett Gardner

Author, “Buffett’s Early Investments”

Gardner’s book went back to the original documents Buffett used in the 1950s and 1960s to make his first millions through lesser-known, highly concentrated early bets.

He suggested Berkshire buy the rest of a business that’s already in their portfolio.

Occidental Petroleum

Why Occidental would fit Berkshire’s Portfolio

• Path of least resistance – Berkshire already owns a massive stake in the company, understands it, and already fully acquired the chemical division. Buying the rest of the company is just finishing the job they’ve already started.

• It’s a better private company than a public one – OXY’s results are volatile due to oil price fluctuations. Operating OXY under the Berkshire umbrella protects the business from the emotional swings and short-term pressures of the public markets.

Pieter Slegers

Founder, Compounding Quality

Does Pieter need an introduction?

He stayed true to his Quality philosophy and suggested a very well run, founder-led business that would fit very well in Berkshire’s portfolio.

Kinsale Capital Group

Why Kinsale Capital would fit Berkshire’s portfolio:

• It add more float to Berkshire’s insurance engine – Kinsale is a conservative underwriter and would add more high-quality, profitable float to the broader Berkshire insurance operations

• The culture matches – It’s a founder-led business with extreme discipline. Like Berkshire’s own insurance operations, Kinsale’s management won’t chase top-line growth if it means writing unprofitable or risky policies.

Conclusion

Here’s what you should remember from today’s article:

• Berkshire Hathaway holds a massive $397 billion cash pile, nearly 30% of its assets

• That is enough cash to buy companies like Home Depot or McDonald’s outright, entirely in cash.

• Deploying this much capital into high-quality businesses with strong moats is incredibly difficult

• Here are the five companies the panelists suggested:

  • Microsoft: A strong software/cloud moat with recurring cash flows.

  • S&P Global: A capital-light oligopoly that serves as a toll bridge for global financial markets.

  • Copart: A family-run cash cow with a network of physical salvage yards that is virtually impossible to replicate.

  • Occidental Petroleum: A natural choice to “finish the job” on a massive existing stake

  • Kinsale Capital Group: A disciplined, founder-led specialty insurer that would feed high-quality float directly into Berkshire’s core machine.

One Dividend At A Time

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

The series where I teach you 5 things about dividend investing in less than 5 minutes.

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1️⃣ Regulated Cash Flows

Utility companies can be very attractive dividend payers.

They provide essential services like electricity, natural gas, and water to homes, businesses, and now, massive AI data centers.

They also let you invest in critical infrastructure while earning reliable, regulated dividend income.

To qualify as a top-tier utility dividend stock, a company must have:

• Regulated rate base (guaranteed returns approved by state regulators)

• Stable demand (everyone needs power, recession or not)

• Decades of consecutive dividend increases

This visual clearly breaks down the entire process:

2️⃣ Boring Stability

Utilities tend to be very stable.

No matter what’s happening in the economy or the market, their returns are almost fixed.

This makes them defensive, but it also makes them pretty boring.

But as AI infrastructure scales rapidly, power demand is surging.

U.S. electricity consumption is now expected to grow around 3% annually, which is almost double the historical pace.

That’s brining some excitement to this often boring sector.

3️⃣ An Investing Quote

When you own a utility company, you own the power lines, water pipes, and infrastructure that keep businesses and households running.

Every month, the customers pay their bills, and you collect steady income.

In these types of businesses, it’s very easy to understand what your money is doing.

I think Warren Buffett would definitely be interested, as he says:

4️⃣ The AI Power Boom

One of the biggest trends in 2026 is AI-driven electricity demand and utilities are the direct beneficiaries.

According to the International Energy Agency’s Energy and AI report:

• Data center electricity demand is growing ~15% annually nearly 4× faster than overall power demand

• Global consumption from data centers is expected to double by 2030

You can access the full report here.

5️⃣ Example of a Dividend Stock

Let’s look at NextEra Energy (NEE).

Its a Dividend Aristocrat (they have raised dividends for over 25 consecutive years)

Their business is split into two parts:

• FPL (Florida Power & Light): This is the regulated utility side. It provides the stable cash flow that supports the dividends

• NextEra Energy Resources (NEER): This is their competitive clean energy side. It powers the data centers and makes them the world leader in renewables

Key numbers from Fiscal.ai:

• Profit Margin: 23.5%

• Forward PE: 23.3x

• Dividend Yield: 2.4%

• Payout Ratio: 58.8%

• Total return (CAGR since 2001): 14.7%

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

But that doesn’t mean the companies building it will make you money.

I’ve been thinking a lot about how big tech’s spending on AI is changing their business models, and what the implications could be.

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The Mag 7 were wonderful businesses

Many of the businesses in the Magnificent 7 have been historically wonderful businesses.

They’ve steadily grown revenue at very attractive rates:

• Meta is the fastest here with a 33% CAGR

• Apple is the laggard at a still attractive 11%

They’ve grown their profits just as fast.

• Google leads here at 32% (!) per year

• Apple is again the slowest at 22% per year

Nearly all of that profit has historically been turned into cash.

They’ve been capital light businesses.

That management has been able to reinvest in at high rates of return.

It’s no wonder they became called Magnificent.

It’s a much better name than the old one - remember FAANG?

They Rewarded Shareholders

Because they made so much cash, and didn’t need much to run the business, management bought back more and more stock every single year.

A lot of the businesses did issue a lot of share based compensation, but the diluted shares outstanding shrunk by about 1% per year for most of them.

Apple was the execution, buying back about 5% of its shares outstanding every year.

And as the profits rose, and the share count shrunk, the stocks went up.

Concentration

Now they make up a huge part of index.

It used to be they were somewhat diversified:

• Meta mainly sold ads, ands was tied to consumers

• Google ran a diversified business, with ads, cloud computing, YouTube, etc.

• Microsoft was very tied to corporate spending, selling office subscriptions and cloud services to businesses

• Amazon was also diversified, with AWS, e-commerce, logistics, revenue from Prime subscriptions, etc.

Then OpenAI released ChatGPT.

And things changed quickly.

AI spending

These companies went from capital light cash machines to CapEx heavy companies building data centers and all of the infrastructure to go with their transition into AI.

The amounts of money being spent are enormous.

To put it into perspective, the hyperscalers are projected to spend 2% of U.S. GDP on AI CapEx in 2026.

At the peak of the 2000 dot-com bubble, CapEx spend was only about 1%.

Even though these businesses are incredibly profitable, they’re outspending what they earn, and are increasingly turning to debt to finance the AI buildout.

This increases risk, and it means that all the buybacks we talked about earlier either go away, or are financed with more debt.

Required Returns

These companies are all terrified of being left out of the AI revolution, and that fear is fueling the spending.

But I’m also going to assume that they’d like to make a return on their CapEx.

This year, Microsoft, Meta, Alphabet, and Amazon are projected to spend about $400 billion on AI.

These companies are used to making a 20% to 30% return on capital.

That’s probably not going to happen with AI, so let’s say they’d like to make 15%.

If that’s the case, you’ll need $60 billion in net income.

Last year, if we’re generous and include China, AI revenue was only $110 billion.

But there’s a problem - those chips and data centers don’t last forever.

There’s a debate as to whether the right depreciation schedule is 4 years, 6 years, or more.

Let’s be generous and use a straight-line 10-year depreciation schedule on them.

At $400 billion of CapEx, you’ve got $40 billion in depreciation.

So after accounting for depreciation, you need $100 billion in profit from about $110 billion in revenue.

So far, we’ve spent somewhere around $1.3 trillion in AI CapEx.

There are projections now that we could spend $7.6 billion on AI between now and 2031.

I won’t do all the math, but you can see that the revenue required to justify this kind of spending is enormous.

Revenue Growth

The argument of course, is that AI revenue is growing very quickly, and that’s true.

And that’s what they want you to focus on, because most of these companies aren’t yet profitable.

We know xAI is losing massive amounts of money from the SpaceX S-1.

Open AI is projected to lose $17 billion in 2026 on $20 billion in revenue.

Anthropic did make an operating profit in Q2 of this year, but it may not remain profitable for the year.

The reported operating profit number also excludes stock based compensation, which I would expect to be high.

Expectations vs Reality

The expectation is that revenue will keep growing at triple digit rates, spending will slow down, and eventually all of these companies will make massive profits.

But this is all set against the backdrop of companies starting to slow down their AI spending.

Like the company that accidentally spent $500,000,000 on Claude in one month.

Or Microsoft who cancelled 100,000 Claude licenses because of the cost.

Or Uber, who spent the entire 2026 AI budget in 4 months, and isn’t sure it was worth it.

At the same time, competition is rising.

OpenAI is reportedly considering cutting the price to compete with Anthropic.

That would of course further hurt profitability, and make it even harder to get a return on trillions of dollars of CapEx.

And it’s not just the models where competition is increasing.

Google and Amazon are both considering selling their own custom AI chips to outside firms.

That threatens Nvidia’s margins and profitability.

And Nvidia is actually helping finance the massive buildout that requires its chips.

Bringing It Together

I’ll be very clear here.

This looks very much like the internet bubble to me.

Back then we spent 1% of GDP on fiber.

By 2021, only 4% of the fiber we put in the ground was being used.

The companies who laid the fiber couldn’t support their debt, and they went bankrupt.

If we didn’t lay all that fiber you wouldn’t have Youtube and you probably wouldn’t be reading this article right now.

It went great for consumers. It went terrible for the businesses.

AI is a world alternating technology.

That doesn’t mean that the companies who build it will do well, and it certainly doesn’t mean their investors will make money.

Based on the Forward P/E alone, the 1 and 5 year returns for the S&P 500 look like they’ll be below average.

Even though the long-term track record of the index is impressive, we’ve had decades with no returns.

Once after the dot com bubble burst, and once during the high inflation era of the 70’s.

Not only do we have what looks like a massive capital cycle going on with AI, we also have inflation rising back up.

I’m not predicting doom, a crash, or a lost decade.

But, should one happen, having some of your return tied to cash coming directly from businesses in the form of dividends is a great idea.

• In the 1970’s, 73% of the index’s total return came from dividends.

• During the lost decade of the 2000’s, dividends were the only source of positive returns

If you don’t want to miss out on the special focus on high yield coming, make sure you’re on the VIP list.

We start tomorrow.

You’ll also get the following just for joining the VIP list:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

Join the VIP list

One Dividend At A Time

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Something special is happening on June 23rd that you won’t want to miss.

If you want behind-the-scenes updates and early access to our upcoming high-yield reports, join the High-Yield VIP List, and you’ll get the following immediately when you join for free:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

Get on the list by leaving your email here.

Selling a stock is way harder than buying it.

The opportunity costs are potentially much higher.

The stock can only go down 100%, but the upside you might miss out on is unlimited.

In general, there are 4 possible reasons to sell:

1. The facts no longer support your thesis, or the initial thesis was just plain wrong

2. The position has grown to be so large that you can’t sleep well at night.

3. A more attractive opportunity deserves the capital

4. The price gets so far ahead of the business results that future returns have been pulled forward already - this is by far the hardest to determine, and we try very hard not to sell based on price alone.

Today, we’re selling a stock for reason #1 - the facts no longer support the thesis.

We’ll use the proceeds from this stock to add to some undervalued stocks we already own, and to build our cash position for future buys.

Ready to find out what changes we’re making? Read on!

Locking In 10 Years of Dividends

We initially bought this major position back in May of 2025 and scaled it up to a full position by October. Since then, the stock has rallied significantly and is up more than 30% over the past year.

As it stands today, we are sitting on a gain equal to roughly 10 years’ worth of the company’s current annual dividend payment.

While the business has performed well, the shifting political and regulatory landscape has changed the original thesis.

At the same time, the stock’s valuation has gone past its historical average.

When political risks rise and a core thesis changes, we don’t hold on just for the sake of holding on. It is time to secure that 10-year dividend gain and redeploy that capital into ideas where the wind is at our backs.

Where We Are Reinvesting the Capital

On Monday, we are taking those proceeds and adding to three high-conviction businesses we already own.

These are strong companies, but short-term market fears have given us a great entry price.

1. The Low-Cost Market Compounder

• The Situation: Macroeconomic headwinds have temporarily slowed down this entire space, causing weaker competitors to close up shop or sell out to private equity.

• Why We’re Adding: This company boasts the lowest operating costs and highest profit margins in its industry, allowing it to aggressively take market share during tough times. Management still firmly believes this business has room to double its retail sales, and we want to build our position before the economic cycle turns.

2. The Wide-Moat Innovator at a Historic Discount

• The Situation: The market has severely punished this stock due to a temporary lull in its product launch cycle, creating a massive disconnect between its price and its long-term earnings power.

• Why We’re Adding: This undisputed market leader has a massive pipeline of potential blockbuster products that will face zero competition upon release. It is currently trading at its lowest valuation level ever, and company insiders have been buying up shares with their own money.

3. The High-Yield Dividend King

• The Situation: Broad market anxieties over artificial intelligence replacing software, combined with a cooling labor market, have dragged this incredibly resilient business down.

• Why We’re Adding: The switching costs for this company’s platform are massive, once an enterprise integrates them, leaving is a massive operational headache. Thanks to the recent sell-off, this iconic Dividend King now locks in a rare yield of over 3% for us.

One Dividend At A Time

-TJ

P.S.

On June 23rd, we are kicking off a series all about high yield investing.

If you want to maximize your portfolio’s income without sacrificing business quality, jump on the VIP Waitlist.

You’ll get behind-the-scenes updates and the very first invite to download our brand-new high-yield special reports the minute we go live.

Join the VIP list

Don’t forget that you’ll also get the following just for joining the VIP list:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

Join the VIP list

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Something special is happening on June 23rd that you won’t want to miss.

If you want behind-the-scenes updates and early access to our upcoming high-yield reports, join the High-Yield VIP List, and you’ll get the following immediately when you join for free:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

Get on the list by leaving your email here.

Some of the best investing strategies are the simplest.

Lowell Miller’s The Single Best Investment boils investing down to three things that really matter: quality, cash flow, and time.

Here are 8 lessons from the book to help you build a compounding machine.

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1. The Single Best Formula

Compounding wealth over time boils down to a simple equation:

When you can find a company with all three, you have three engines working to build your wealth.

This kind of situation usually happens when Mr. Market gets very depressed about a temporary problem at a great company.

An Example:

In 2019 Mr. Market got very depressed about AbbVie’s top-selling drug, Humira, losing its patent protection.

The stock price went down and the yield went up to 6.5%.

Management replaced the revenue with new drugs, and investors who bought then now have:

• Total returns of around 375%

• A yield on cost of nearly 11%

• A Dividend CAGR of more than 7%

2. Dividends Don’t Lie

Earnings are always an estimate, but to pay dividends, a business needs cash in the bank.

There are lots of ways for accountants to make a business look more (or in some cases, less) profitable on paper.

But Miller says that “Dividends are the only thing you can truly know about a stock.”

3. Rising Dividends Pull Prices Higher

In the short term, the stock market is a voting machine driven by emotion.

In the long term, a stock’s price is tied to its dividend.

For a company to consistently raise the dividend, it has to be generating more and more cash.

That rising cash flow is like a magnet that pulls the value of the business higher too.

4. Bonds Aren’t As Safe As They Look

Fixed income feels safe.

But when you’re getting the same interest payment in 10 years, inflation reduces the purchasing power of that money.

High-quality companies that pay growing dividends compound your real purchasing power over the long run.

5. Financial Strength is Non-Negotiable

A dividend is only as safe as the balance sheet that supports it.

Never compromise on financial strength.

Make sure to have low debt levels and high free cash flow.

Strong balance sheets let your companies keep paying dividends, and take market share from weaker competitors when times get tough.

6. Embrace Volatility

Volatility isn’t risk.

It’s the price you pay for the higher returns of equites.

Stock prices are guaranteed to fluctuate wildly.

Focusing on the income stream and not the stock price makes it much easier to hold great companies through market ups and downs.

7. Time is the Most Powerful Force

The magic of dividend reinvestment is heavily back-loaded.

Remember that it’s exponential growth, so it doesn’t look like much is happening…at first.

But when compounding takes off, it does so quickly.

For those of you who like math, here’s a reminder of the exponential growth formula.

The amount of time invested is the exponent in the formula, meaning that it’s the most powerful driver of your returns.

8. Boring is Beautiful

The greatest compounding machines are usually boring and predictable.

Look for companies with products or services that customers are forced to buy no matter what the economy is doing.

Here are the Dividend Kings that have raised their dividends for at least 50 years in a row:

It’s full of industries with predictable, repeating sales that create predictable, rising dividends.

That’s It For Today!

Building a compounding machine takes time, but the rules are simple.

Here are the 8 lessons from The Single Best Investment we went over today:

1. The Single Best Formula: High Quality + High Starting Yield + High Dividend Growth = High Total Returns

2. Dividends Don’t Lie: Earnings are estimates, but it takes real cash in the bank to pay a dividend.

3. Rising Dividends Pull Prices Higher: Steadily growing cash flows (and dividends) pulls the value of the business up over the long run.

4. Bonds Aren’t As Safe As They Look: Fixed interest payments lose their purchasing power to inflation, growing dividends protect it.

5. Financial Strength is Non-Negotiable: A reliable dividend needs a solid balance sheet with low debt and high free cash flow.

6. Embrace Volatility: Price swings are normal, focusing on your growing income stream makes it easy to ignore Mr. Market’s mood swings.

7. Time is the Most Powerful Force: Compounding is exponential. The longer you leave your money alone, the faster it multiplies.

8. Boring is Beautiful: Predictable businesses selling essential products often make the most reliable wealth-building machines.

One Dividend At A Time

-TJ

P.S.

On June 23rd, we are kicking off a series all about high yield investing.

If you want to maximize your portfolio’s income without sacrificing business quality, jump on the VIP Waitlist.

You’ll get behind-the-scenes updates and the very first invite to download our brand-new high-yield special reports the minute we go live.

Join the VIP list

Don’t forget that you’ll also get the following just for joining the VIP list:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

Join the VIP list

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

Something special is happening on June 23rd that you won’t want to miss.

If you want behind-the-scenes updates and early access to our upcoming high-yield reports, join the High-Yield VIP List, and you’ll get the following immediately when you join for free:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

Get on the list by leaving your email here.

Today is Dividend Day.

The series where I teach you 5 things about dividend investing in less than 5 minutes.

Subscribe now

1️⃣ High Yield vs. Dividend Growth

When you invest for dividends, you face a fundamental choice:

Do you want a big paycheck today, or a smaller paycheck that keeps growing?

That’s the high-yield vs. dividend growth tradeoff in a nutshell.

Both strategies pay you income. But they do it differently.

This visual puts it in a very simple way:

2️⃣ Dividend Growers vs High Yielders

Is it better to own companies that grow their dividends or those that already offer high yields?

Tough question right?

Lets answer this with the help of the index performance.

• VIG invests in companies with a history of consistently increasing their dividends.

• VYM focuses on stocks with the highest dividend yields

Both are Vanguard funds and both charge the same low 0.04% expense ratio, but their approaches are very different.

In recent years, high yield has had the upper hand.

VYM outperformed VIG in 2021, 2022, 2024, 2025, and remains ahead year-to-date in 2026.

But over the long run, dividend growth has been the winner.

Since the launch of both funds, a $10,000 investment grew to $69,540 in VIG compared to $56,850 in VYM.

The lesson? Both can perform well, but the longer the time period, the more dividend growth matters.

3️⃣ An Investing Quote

Dividend growth investing rewards patience.

A 2% yield that grows 10% per year becomes a 13.5% yield on your original investment by year 20.

You just have to wait for it. That waiting is the whole strategy.

As the legend Warren Buffett says:

4️⃣ The data goes back to 1960

Dividend growers have dominated the market over the very long run.

Hartford Funds has done excellent research in this area.

One of the most interesting findings?

From 1960s, 85% of the S&P 500’s cumulative total return can be attributed to reinvested dividends and the power of compounding.

You can access their full report here.

5️⃣ Example of a Dividend Stock

Let’s look at Visa (V).

Visa operates the world’s largest payment network, processing billions of transactions every year.

The company earns a small fee on every card swipe and has increased its dividend consistently over time.

Key numbers from Fiscal.ai:

• Profit Margin: 51.7%

• Forward P/FCF: 24.1x

• Dividend Yield: 0.8%

• Payout Ratio: 21.9%

P.S.

On June 23rd, we are kicking off a series all about high yield investing.

If you want to maximize your portfolio’s income without sacrificing business quality, or dividend growth jump on the VIP Waitlist.

You’ll get behind-the-scenes updates and the very first invite to download our brand-new high-yield special reports the minute we go live.

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Don’t forget that you’ll also get the following just for joining the VIP list:

• My high-yield stock watchlist

• A Checklist of Dividend Investing Mistakes

• The Highest Yielding Dividend Aristocrats

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Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

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