I recently had the pleasure of sitting down with Jonathan Nurick, the Chief Investment Officer and founder of DivGro. Our conversation was a deep dive into the world of dividend growth investing, a strategy that’s not only rooted in academic research but also shaped by Jonathan’s unique upbringing in a family steeped in investment wisdom.
Jonathan’s journey into finance began early, shaped by his father, Matthew Nurick, a director at the London-based Momentum Group. Growing up, Jonathan was handed stacks of dividend statements, each one a lesson in the “secret language” of dividends. He described how these payments, often arriving in thick envelopes, revealed a company’s health and growth potential far better than volatile stock prices. This early exposure inspired him to co-found DivGro in 2019, a fund built on the philosophy that dividend growth drives long-term share price appreciation, a concept backed by Myron Gordon’s Nobel Prize-winning research and the Gordon Growth Model.
So, what are dividends? Jonathan explained them as a company’s way of sharing profits with shareholders. After earning profits, a company can reinvest in growth, pay down debt, buy back shares, or distribute cash to investors as dividends. The key, he emphasised, is not just receiving a dividend but finding companies that consistently grow their dividends at a high rate. These companies, often in stable, predictable industries, offer a smoother investment journey, reducing the emotional rollercoaster of daily price fluctuations.
We explored why DivGro focuses on “boring” businesses, like Cintas, the world’s largest provider of uniform rental solutions, and Watsco, a leading distributor of HVAC equipment. Cintas, started by circus performers during the Great Depression, now serves over a million businesses with uniforms and safety solutions, growing its dividend at 19% annually for 42 years. Watsco, family-controlled and based in Miami, dominates the air conditioning parts market, growing its dividend 108-fold since 2000. These companies aren’t flashy, but their predictable cash flows and reinvestment strategies make them ideal for dividend growth investors.
While diversification is crucial, he advocates for heavier position sizing in high-conviction investments. With only about 30 companies in DivGro’s portfolio, he focuses on deeply understanding each business, treating them like true business owners rather than just ticker symbols. This concentrated strategy, paired with weekly dividend progress updates, keeps investors engaged and emotionally grounded, helping them stay the course even during market dips.
We also touched on why DivGro primarily invests in the U.S. rather than Australia’s ASX. Australian companies, like banks, often have high payout ratios, distributing most profits as dividends, which limits reinvestment and growth potential. In contrast, U.S. companies like Cintas and Watsco maintain low payout ratios (10-30%), reinvesting heavily to fuel rapid dividend growth. The ASX, Jonathan noted, has few companies that meet DivGro’s stringent criteria of sustained, high-rate dividend growth at reasonable valuations.
One standout insight was the psychological benefit of focusing on dividends. Jonathan shared a story of a client who used to check stock prices obsessively, even in the middle of the night. By shifting focus to dividend announcements—checking if they’re higher than last year’s and by how much—this client found peace, needing only four key dates a year to assess progress. It’s a powerful reminder that dividends provide a tangible, less volatile metric to anchor your investment decisions.
Dividends matter. They’re not just about immediate income but about signaling a company’s long-term health and growth. By targeting companies with low payout ratios and high dividend growth rates, investors can achieve outsized returns while enjoying a smoother ride.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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EPISODE TRANSCRIPT
The Secret Language of Dividends | Jonathan Nurick
Phil: Thank you very much. So in 2019, Jonathan Co founded DivGrow, an investment fund built on the same philosophy his family office has applied for decades. His father, Matthew Nurick, was a director at the prominent London based hedge fund Momentum Group. The fund'approach is rooted in academic research led by Myron Gordon, father of the Gordon Growth model that links long term dividend growth to share price appreciation. So tell me Jonathan, what's it like starting your own fund? It's obviously not a simple, simple thing to do.
Jonathan Nurick: Thanks again for having me on the podcast, Phil. And again, lovely to be here. Uh, starting your own fund felt like a natural evolution. You mentioned my father. I grew up in a household where my father was a founder of an investment funds business himself and was one of the, let's call it, early pioneers of understanding this nexus between not just the merits of an investment but the holdability or experience or how you hold that investment such that you're able to succeed. And so I grew up very much around this. In fact, from a very young age. I was an active investor participant in financial markets and my father used to hand me thick stacks of envelopes all the time from a very young age. And it took me a very long time to really figure out why it was so valuable or so empowering. And I guess today one doesn't get the envelopes, it's all digitally, but the envelopes were basically just the dividend statements or the dividend checks of the companies that our family office was holding. And one by one by one, what you would see is that there's a company, it paid you A dividend. And then you would mark one, that it was received and two, that it was meaningfully higher than the same dividend from the same company this quarter last year. And uh, after you do this dozens and hundreds and thousands of times, you come to learn something very important. The dividend is really like a secret language that the company is communicating with itesta base. And instead of being glued to the price all the time, day by day, minute by minute, wreaking havoc over your emotions, you can look to this data point which is extremely powerful and extremely informative to direct you to where you're going. And so as I was spending more time in the family office really learning and honing our uh, systems, I was approaching my 30th birthday and thought I want to build this into a service for other people, not just for ourselves. Because it was clear, all the academia is absolutely clear about this, that the investment return and investor return has a big gap. And we took the view that we're going to try compound our own capital and our co investors capital by 30x in 30 years. My 30 year uh, Horizon using this methodology.
Phil: This is incredible to me hearing what it must have been like at the dinner table when your family'sitting around discussing these kind of things. Because I don't think a lot of people get this kind of opportunity in their families to benefit from such wisdom and knowledge. Uh, I mean it's a great thing. And especially the idea of dividends as well being for it sounds like almost force fed to you.
Jonathan Nurick: Uh, it's funny that you say that. I remember sometimes going on business trips with a family. It was during school holidays. And so we would go on the trip wherever my dad's work was taking him. And you'd walk through the airport and there'd be say a bank branch next to a McDonald's which at the time was a very important holding of ours. And I was educated, as you say, from a very young age. Stand at the McDonald's, count the number of people, look at the prices on the board and each time a burger, ah, fries, a Coke gets sold, some tiny fraction of a cent is yours. And what you'd like to see
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Jonathan Nurick: is more of these McDonald's with more people there. And when it came to going to the supermarket and buying something like Band Aids to take in your bag to cricket practice for your fingers and looking at what the Johnson and Johnson Band Aid price was where it was in the supermarket relative to some competitor, you grow up understanding that a stock is not a ticker or just A certificate, you're a genuine owner of business, even if you have a, uh, tiny, tiny, tiny fraction. And so you see the whole world through this lens of business owner, business participant. And it's an incredibly empowering kind of upbringing.
Phil: Okay, well, let's have a look at the basics. I mean you've done a pretty good job there of explaining how you know what dividends are, but let's just dig a little bit deeper. What are dividends and how do they work?
Jonathan Nurick: Good question. When a company earns, let's say hundred dollar one in profit at the end of a period, the end of the year, they have a few different things they can choose to do with that. One thing would be to reinvest back into the business, open new stores, hire new people, invest in new products around advertising, etc. They can buy another company, a competitor or something like that. If they have debt, they can pay down the debt. They can buy back their own shares in the open market just the same way that we can. And then one's ownership percentage would increase. And the other option that they can exercise is to take part or all of that profit and pay it out to the shareholders. That's what you call a uh, dividend. It's your share of the profit of the company that they decided, they being the senior management team and the board which should get together at the end of the period and decide how to allocate this profit and it is shared with you in cash.
Phil: That's a great explanation of uh, I guess, capital allocation, isn't it? Because that's what happens with it. And there's different kinds of companies that pay dividends, aren't there like there's a lot of growth companies and they plowing all of their money back into growing the business. And then there's others who might be sort of older and a bit more stable that will actually reward shareholders. Does that sort of affect the focus and the kind of companies that you're particularly looking at?
Jonathan Nurick: Very much so. Uh, you're right that the industry basically creates a division between dividend payers and non payers. The non payers are those that as you say, or maybe earlier, stage higher growth, they take everything they earn and try and invest it back into growth. And then you have those that might be beyond their fast growing days. They choose to, uh, or can't reinvest everything back in expanding the business and they send it out to the shareholders. But there is actually a very interesting middle ground between those two. And coming back to our investment philosophy, there is A lot of research, originally out of MIT in the United States, spearheaded by Professor Myron Gordon and his team. His team ended up winning Nobel Prizes. And now what they were trying to do was find the best correlation or the most determinative data point that would tell you where a share price is likely to go. What they found was firstly that companies that pay dividends as a category perform better in terms of share price or total return than those that don't. There are outliers there. This is not, uh, a rule for everything. It's just that the category outperforms the other category. And then they found that those companies that raise their dividend each year outperform those that simply pay a dividend. It makes common sense that if the profits that are coming out to you are rising, something good is happening. And usually when good things are happening, the share price tends to follow. And then they found that the companies that raise their dividend each year at the fastest rate outper perform the most. And then they canonized what is today known as the Gordon growth model, or, uh, a derivative of that is called the dividend discount model. And essentially what it says is that if a company pays dividends and grows that dividend over time, your expected annualized return for each year that you hold it over the long arc of time should be your current dividend yield plus the expected rate of growth in that dividend. Now, if you break down that formula, what you find is that if you can identify those relatively rare companies that pay a dividend but are able to grow it at a very fast rate for a very long time, you should get an outsized reward because the share price will follow that trajectory. It's not that dissimilar to if I make it very tactile. If somebody is either collecting rent or paying rent to their landlord, and each year that rent is increasing by some number, if you're able to increase that effect of rent at a very high rate, the value of that building or
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Jonathan Nurick: apartment or industrial complex is increasing at roughly the same rate.
Phil: So does m this mean that a metric that should be of interest to potential investors is the dividend yield? I know that you can't just look at it in isolation, but if you were to look at the dividend yield of a number of companies, and there's many softwares that allowed you to filter for these sort of things, and to also look at the growth of that dividend over a period of time would be a valuable exercise?
Jonathan Nurick: Absolutely. Most investors who think about dividend think about it in terms of their current income, that's completely fine. But it's not going to be the optimal way to deal with dividends. And that's because companies that have a high dividend yield or high current yield, they're priced by the marketplace in expectation that that dividend is not going to grow much, if at all, they tend to already be paying everything they earn out by way of a dividend. And if you pay everything out, that means there's very little left to reinvest in your business. So you're not going to be investing in better products, more stores, many more people, more advertising, et cetera. And so an investor who's purely focused on their current income, their current dividend, is kind of shortchanging themselves from the future. Because if the dividend isn't rising as a signal that the company is becoming more productive, more valuable in its dividend paying capacity, the share price shouldn't rise at all or much. And if we flip that over and we say irrespective of the current dividend yield, if what we focus on is the rate of change, because the rate of change is what influences the rate of change in the price, we're interested in the total return. So it's not a coincidence that most of our companies actually have very low current yields. Now if you look at them over time, each time they grow their dividend, they announce a dividend increase of 10, 15 or 20% year after year after year. The market rewards them with a commensurly higher price and bring that yield back down for the new purchaser. So if we look at some of the holdings that we own in our fund, the yield today and the yield when the Fund opened in 2019 is actually exactly the same, even though the dividend is double or triple and the share price has gone up double or triple, because the initial yield might have been seen as low, but it's no longer low, it's low to the new purchaser because this company is able to increase its dividend paying productive capacity.
Phil: Yeah, it's a valuable analogy. You're talking about a property, as in the rent for the property goes up and then the commensur, the value of the property will go up as well.
Jonathan Nurick: Exactly right. When people ask all sorts of questions, which would be typical when they're coming to buy a property, when they're thinking to be an investor, essentially all those questions boil down to what are the prospects for the rent? Because that's going to be the determinant of the uplift overtime. So is there a good school Nearby, where is the closest hospital? Is a new train station opening nearby? Is there an ability or a new regulation to build higher? All sorts of questions like that. What is the place across the road being rented for? All of these questions, if you boil them down to what is really being asked, it's how fast and for how long can I hike the rent? Because if I can hike the rent at 5% a year or 10% a year, 15% a year, the cash flow I receive at the end of every period is going to be higher by that rate. And therefore what it's worth to me and to the market if I come to sell it is benchmarked against that rate. Now, in real estate, it maybe feels very tactile, but one building is roughly the same as the one next to it or the one next, unless it's a very unusual or very specific location. So that would be an outlier. And what we are, uh, looking for those unique or special companies that have something special about them such that they're able to grow their dividend at an unusually high rate for a very long time. Because one, that drives the price up at roughly that same rate over time. And two, like we said before, if you get your dividend statement, you feel much better about where this journey is going than just looking at the price. The price over, at least in the short term, feels a lot like a roller coaster. Even though it's following the dividend, the dividend goes up like a staircase. If you chart it, especially in the kinds of companies that we ear in that tend to be in the United States and pay quarterly dividends, they'll typically pay a dividend which is the same four installments in a row, and then announce the increase. And if you chart that, it literally looks like a staircase and we're looking
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Jonathan Nurick: for increments step by step by step, that a, uh, healthy double digit rate of change and the price traverses the same path from point A to point B several or many years later. But the experience along that journey doesn't look like a staircase. It looks like a roller coaster riding the same trajectory. And so that's why we're so focused on trying to focus on this secret language of dividends that's telling you the most reliable clue so that you can actually hold and stay the journey rather than have this big gap between how the underlying investment does, which might have been very well selected, and how long you're actually able to stay along the journey.
Phil: Take control of your investments. Shareight has you covered. It's Investopedia's number one tracking tool for DIY investors get four months free on an annual premium plan at sharesite.com sharesforbeginners I know we're going off topic a little bit here and going off pissed, so to speak, but what then is the way that you view the relationship between the price earnings ratio, which is giving you a little bit of an idea of the value of a company, and the dividend yield? Is there a nexus or are these forces acting against each other? Just explain that to me, please.
Jonathan Nurick: We think about them as two different ways to measure the price or valuation of a company. And actually we look at both and many others. When we decide on one, what companies to own and two, at what price, we use 120 different variables. We're always testing, uh, to make sure that our variables are giving us the answers or the conclusions that are productive and useful. And sometimes we add or change some of those variables. But coming back to one of the previous questions over time, subject of course to, uh, significant changes in interest rates, dividend yields tend to hold roughly the same as do the price earning ratios of any given company or even, uh, any given industry over time. So what we're looking to do is one, find a company that is able to grow or compound its divide at a high rate. We use internally 15% as our objective, recognizing that if you aim very high, ideally you hit it. But even if you miss by a little bit, missing by a little bit will give you 12 or 13% rather than if you just set the bar low, let's say 4, 5 or 6%, and you miss, you end up with maybe 0%. So it helps to be ambitious in this. But what we look for is one, once we conclude that a company is going to be able to grow its dividend at a high rate, we now need to know what price should we be paying. And we can compare its current dividend yield to its history. So we'll look at every single trade backwards over 5, 10, 15, 20 years and compare that also to the prevailing interest rate at the time so we can adjust for it. And the same will be true for the P E ratio. And what you find is because over time, the market does reflect the fundamentals, but the market is made up of emotional beings and we're all somewhere along the emotional continuum of how much, let's call it pain or volatility we can withstand before we feel forced to act. Very same companies sometimes will drift to very high price to earnings ratios and the inverse, the dividend yield would be to Very, very low, meaning we're not getting compensated that much in cash today. And sometimes the reverse is true and we're trying to buy these fantastic companies that meet all of our criteria. When the dividend yield is a little bit more attractive relative to its history, relative to its competitive set, and when the PE is a little bit lower relative to its trading history and its.
Phil: Competitive set, how do you approach companies that might have a bit more volatility in terms of their earnings? And I'm thinking particularly, uh, of commodity companies like, you know, BHP and Rio have been good dividend payers for, for a while as well, but possibly going down a little bit now, sometimes these can be experiencing very, very fast increases in earnings and dividends as well. Do you tread a little bit more carefully with companies like that?
Jonathan Nurick: It's a very good question that you raise. We actually don't look at resources or commodities at all. And that's not because there is anything wrong or negative about the space. It's just that to be able to predict with a very high degree of confidence where a dividend is likely to go over the next few years, you need to be able to be in companies that aren't very sensitive to something outside of their control. World is a dynamic place. And if you are, uh, pulling something out of the ground, or if
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Jonathan Nurick: you're very sensitive to some price, let's say the interest rate, that is beyond any given company's control, that means, as you say, that your earnings can go up very rapidly, yes, through your own doing, but also through something that just so, uh, happens to be taking place. And the reverse is true that when it falls or acts against you, that can be very destructive. And if you're in a program which is trying to psychologically attune you to stay the course in wonderful companies, it is not constructive. Even if the endpoint, let's say in one of those companies that you mentioned, let's say the dividend today is 1, and in 10 years time it's 4, which would be a pretty good outcome. But on that path it's 1 and then 2 and then 0.5 and then back to 3 or 4. The data is conclusive here. It tells us that it's very difficult to stay on course because the feedback that you're receiving both from the dividend and from how the market responds to that is very difficult to continue with what you need to be able to do day after day, not just to yourself, but also to the people around you who might be involved in the investment decision. A Spouse, a parent, a child, etc. Now contrast that with a company where it is doing something extremely predictable, where it's got an installed base of customers that choose not to or can't drift away, cancel their subscription because they desperately need what it is you're providing. It's seen as a standard. Often all of your revenues and nearly all of your revenues will be pre contracted and recurring. That means that the volatility of your earnings is much lower and therefore we can model out into the future with a much higher degree of confidence where the earnings are likely to be 1, 2, 3, 4, 5 years out, derive where the dividend is likely to be, and therefore actually chart that staircase rather than a roller coaster. Even if the endpoint of the security would be the same. Let's say they compound over 10 years. And often when people screen backwards, they look at a chart. And because of the nature of compounding, dips don't look like much, but in the moment they can feel like a lot. And so the larger the dip, especially fundamentally your dividend is not tracking as you were hoping it to track. It's very hard to stay on course. So we look for companies that are extremely predictable, also ideally in areas that, uh, don't, that aren't subject to a high degree of technological change or much attention, such that the front page of the newspaper is dealing with it every day, drawing in our emotions. We tend to be in very dull, very boring, very predictable industries.
Phil: Yeah. Other guests have pointed out that dividends often are quite less volatile. Even when, you know, a market might be going through one of its periodic dips, that dividends aren't affected as much as what the price action might be indicating.
Jonathan Nurick: That's exactly right. And we actually have a client who told me that for decades he was so sensitive to the price of what he was holding, such that in the middle of the night, it's cold, it's dark, he goes to the bathroom, he can't resist, but look at his phone to see the price, see the action, etc. Which is not constructive. That's the opposite of trying to sleep well. And ever since he understood what we're doing and has been following our methodology, instead of needing to be across the price every moment of every day in different time zones, there are really only four key dates of the year, which is each time that dividend is announced. We need to compare it to the same dividend for the same quarter of the year before. Is it higher? Yes. Is it higher by a lot and by what we expected? Yes. Fantastic. Now we can go and compare the price, but over time, not on any given day, because on any given day the market might be very consumed by what uh, is happening with the virus that is taking over the world, or uh, presidential election or an interest rate decision, but over time, where the dividend goes, the share price follows. And it's almost like a sleep oil at night. Elixxir, because you don't have to be, at least insofar as our client or investor needs to be, they don't need to be glued to the price every second of the day. If the dividend delivers over time, the share price will deliver as well.
Phil: So you mentioned quarterly earnings and quarterly payments. So obviously you are invested in the United States. What regions, sectors, areas do you generally look for?
Jonathan Nurick: I mentioned before what we don't invest in, which are things that are very sensitive to prices
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Jonathan Nurick: or things beyond their control. We tend to be in businesses that are uh, specialty niche distributors. What does that mean? It means being in large distributors of aftermarket parts for aeroplanes, or distributors of air conditioning equipment or of specialty uniforms that need to meet certain standards. Installed bases of critical software, not necessarily the cutting edge, that's front page news of the paper every day, but things that have being installed into businesses usually not such exciting applications that a business can't operate without. So, uh, for example, software for billing for toll roads, or for productivity of school canteens in the United States, or ID badges for government institutions. Pretty boring, pretty predictable medical devices that have an installed base where either a wearer or a uh, specialist kind of doctor needs to use, has been trained on a platform for many years, and is therefore very unlikely to consider exploring an alternative rather than simply using more or the newest version of the same thing.
Phil: Are you looking, starting off with the numbers like you're sort of filtering in saying, okay, we're looking for numbers that satisfy these criteria, uh, and then that throws up companies like these boring, dull businesses. Or do you look at the companies first?
Jonathan Nurick: I'm going to say it's both because doing the former of simply screening to see what dividend growth has been is a very incomplete approach because companies sometimes are able to grow their dividend for a long time. But then for some reason either the industry is beginning to change, the competitive set is beginning to change. Sometimes as demographics, they're not able to sustain that rate of growth. And if all you did was simply screen, you would end up disappointed because you invested in a company that maybe had 20, 30 or 40 years of very impressive high teen, consecutive annual dividend growth and then it slows down on you. And what you need to do is that is one area but that's just a starting point. You need to de very dig very deep into the company to make sure that its prospects it's reinvestment is both sheltered that when it takes. When we begun this discussion we discussed what is a dividend and a dividend is what is paid out to the shareholder. The important part is also what is retained by the company. What we like to see, uh, our companies that yes they're paying out a small part of what they ear in a dividend that's rising. They're primarily taking their profits and reinvesting in their business very productively in a very protected way such that what they expect to earn on that reinvestment turns out to be what they expected to earn for a very long time. So their dividend paying productive capacity is going up. And that is a very detailed one by one process of studying a company for quarters and years and sometimes decades on end to make sure that what you believe is true continues to be true.
Phil: It's an interesting point you make because I think it's ah, a criticism that's often been leveled at Australian banks is that they don't reinvest enough. They're just paying out too much of their earnings to shareholders. And this is another interesting ratio to think about is the payout ratio as well. Anyway, there's been two parts to that question and I'll leave it up to you for your thoughts.
Jonathan Nurick: It's a very good question. And in Australia particularly, let's say with the banks, payout ratios for dividend paying companies tend to be high. Why is that? There are a few reasons we can hypothesize. One might be that we have a very developed superannuation system or retirement system more so than most other countries and therefore invest the dollars of the investor base maybe look a little bit different to other countries. It might be partly because of tax system or incentive. We have franking credits. A lot of other places don't have franking credits. It might be a governance thing. We can't necessarily put our finger in exactly what it is, probably a blend. But the outcome is that in Australia most companies that pay dividends tend to take essentially all of their earnings. Their payout ratio, which just for your listeners, is the percentage of your earnings that you choose to pay out in a form of a dividend. So let's say you earn $100 and out of the $100 you pay out $70 as a dividend, your powerout ratio would be 70%, 30%. Isained
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Jonathan Nurick: to be able to grow your dividend at a very high rate, you need to reinvest most of what you earn in improving the productive capacity of this dividend growing engine, new products, new stores, more people, et cetera. So our companies tend to have very low payout ratios. 10, 15, 20, 30%. And in Australia, most of the companies that pay dividends have dividend payout ratios. 70, 80, 90, sometimes 100%. Now, if that is because they decided that they can't reinvest productively, they don't have the possibility of opening new stores, building new products, maybe buying other companies, then it's the right decision. That means that the company doesn't think it can invest and meaningfully grow. But it also means your dividend won't grow very fast, if at all, and therefore your share price won't grow very fast, if at all. And that's fine for a certain type of investor, but it doesn't meet our needs, especially if we come back to this idea of emotional psychology where if you subscribe, and there are 65 years of overwhelming academic and empirical evidence of this, that where the dividend goes, the price follows. Psychologically, a dividend which is basically stagnant or constant doesn't do anything for you emotionally. Oh yeah, I received X dollars, I received X dollars. Again, essentially you become one that is hopeful that at least you continue to receive your X dollars not less than X$. A much safer approach in our view, is one where I received X. Now I get 15% more than X. The following year, another 15% higher. And that is very much correlated with companies that are reinvesting very productively. There are very few of them in Australia that meet our size requirements, which is why we basically only invest the.
Phil: United States, okay, so that's mainly the territory that you invest in. Not on the asx, the US Only.
Jonathan Nurick: We haven't, we haven't yet found what we're looking for on the asx. If you simply look at the number of companies on the ASX that have been able to sustain a dividend that has grown every year for a decade or two or three, there are very few. And of those, there are very few who've been able to do it at a very high rate, anywhere near that 15% a year objective that we hold for ourselves, and fewer still of those opp priceed in such a way. Coming back to your question about dividend yields or pe, because there are so few, the market rates them very, very expensively because there are so few, they kind of stand head and shoulders above their next best alternative from this kind of profile in Australia, whereas in the United States, because there are more, you can often get a like for like exposure in terms of dividend growth, history and potential quality of management, ability to reinvest productively, etc. At a lower rating. And therefore it simply makes sense for us to do that. We're willing to explore and we, we often look for companies on the asx, but we simply don't find what we're looking for.
Chloe: Super is one of the most important investments you'll ever make. But how do you know if you're in the best fund for your situation? Head to lifesherpa.com.au to find out more. Life Sherpa uh, Australia's most affordable online.
Phil: Financial advice M okay, so let's run us through a couple of those companies that you've identified. I noticed Mic, Microsoft is one of the one in your portfolio. Tell us some, maybe the Microsoft story or a couple of other stories you'd like to share with listeners and viewers.
Jonathan Nurick: Microsoft is probably familiar to every listener. There's a very high chance that they use some or many of their products.
Phil: So perhaps been many people've shaken there's been many people who've shaken their fist at Microsoft products but you still have to use them.
Jonathan Nurick: That's part of the point right when, when any business receives the email, uh, or notification either directly or through some IT consultant that says whatever Microsoft product is now more expensive by 10%, there's basically nothing you can do about it's seen as the standard, it's too high to pull out of your business. So this enormous pricing power and enormous visibility into how this business is going to perform over time. So since all you're not all but likely all of your listeners are already familiar with Microsoft, perhaps let's talk about a different company and we can talk about Syntas, which is one of our largest holdings. Now Synas is probably a less familiar name and it doesn't ever make it to the front page of a newspaper.
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Jonathan Nurick: And Syntas is the world's largest provider of uniform rental solutions, fire safety and first aid. What does that mean? It means that in the United states somewhere between 15 and 16 million businesses need uniforms for their employees. They might be a quick service restaurant where in the back in the kitchen they need uh, certain fire safety aprons and for front of house it might mean that they need a little branded hat and the right polo shirt et CETERA and for a, uh, governmental organization like the fire department or the police department, they also have specialty requirements for their uniforms. Now each one of those businesses has a choice. They need to meet certain standards. They need the uniform to be clean, reliable, available for their employees in every location. They can do it themselves, but there's a much higher risk of error, failure, non compliance. Or alternatively, you can ask Synast to do this for you. Because Synas founded in the 30s, it's actually a very interesting founding story. Syntas was started by Doc and Amelia Farmer. They were circus performanceers. And in the Great Depression the circus basically stopped. People didn't have the discretionary funds available to go for entertainment.
Phil: Butum, um, presumably there were still cops needed to kick hobos up the bum.
Jonathan Nurick: Now what they, uh, in a very entrepreneurial streak, figured out that there were lots of businesses that were discarding rags that were perfectly usable. They were just now used mechanical shocks and things like that. And they would go and ask can we take basically solve your waste management problem or buy for basically nothing. Your disused rags will launder them and then we'll go and find, sell them back to the same business or other businesses. And over the decades and over the generation of the Pharer family which still controls this company, they moved from disused rags to specialty uniforms. Now SYNTAS today delivers specialty uniforms to about 1.1 million businesses that can't start their day without the uniform arriving. They are head and shoulders above anybody else in terms of number of customers. And that means that in any given geographic area where they participate, they have the highest density of customers, which means they can keep their laundries running more efficiently. And their vans dropping off every day are also more efficient so they can price at a lower cost than anybody else or, and, or provide a better service with a better reputation. And they don't lose customers. They've been able to grow their dividend every year since going public 42 years ago at an astounding rate of 19% a year. Compounded, this is not an interesting business from an exciting standpoint, but it is interesting in terms of its ability to keep growing because they have grown from a handful of businesses to more than a million businesses that depends on it every single day. And they have added more verticals that you can sell in the same way through the van that's coming to deliver because they establish this dependence relationship or one of trust. And they started adding a few years ago fire safety, compliance and first aid. Things like the cabinets with AD machines, etc. Make sure that they're there, they're up to standard, they're up to code. If something needs to be changed, they're coming all the time. And Synas pays dividend. It's primarily reinvesting back into the business. The incentives are basically set by the family which controls the company. And the Runway is enormous because just in North America, they don't even have to leave the continent. They have the ability to grow from a bit more than a million to potentially 15 times the number of businesses. They will add more verticals, they will get more efficient. And that's a wonderful kind of story.
Phil: It's interesting, isn't it? Because a lot of people are looking for an exciting narrative when they're investing. And it's a little bit counterintuitive to be looking for the more boring companies. Are there any other boring companies you can share with us? Not the boring company, but uh, perhaps.
Jonathan Nurick: We can talk about what's Go. What's Go is the world's largest distributor of H vac heating, ventilation and air conditioning equipment and components. Now they're also family controlled and run two generations. The father who was the longtime CEO is sort of evolving into the chairman, with the son who's now in his mid-40s,
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Jonathan Nurick: moving gradually into roles of increasing seniority. And they started as a distributor or initially they were a manufacturer, but they figured out that it was better to be a distributor of systems and spare parts for air conditioners. Now they're in Miami, Florida where it's hot and humid, basically around and running. Your air conditioner is seen as a non negotiable part of running a household or a commercial premises. And these systems sometimes fail, they actually fail very predictably in if you look at a large enough installed base and it's an emergency or near emergency to have it repaired. And if this has ever happened to you, what happens is you look for a technician and you call and the technician will come and they'll look at your machine and they'll say I need this part, I need this filter, etc. I will call my distributor, my supplier, and if they call the distributor, the supplier and they say we'll get you the part in two weeks time, you will call another technician because you're hot or in other parts of the United States your cold. And as soon as the technician says oh I'll come back at 3:00 this afternoon with the part, you say fantastic, go get it. Thank you. And what's go figured out that if they could scale quickly in their territory, they would be Able to have the best relationships and best terms with the original equipment manufacturers, your carriers, Dakins, Mitsubishi, et cetera, who make the equipment they don't want to sell into the household. It's kind of two personnel intensive. So they go through the distributor. As a distributor that had the best relationships they could, get product fastest, hold the broadest range of inventory and build tools, increasingly online tools, mobile apps, ordering systems, predictive systems so that the technician's job gets easier. So when they're standing in your house or in your office and you're hot, they can say what's going will have the P ready for me in two hours time. As they grew and they scaled, they buy the leading distributor or they develop it themselves in expanding territories around the United States. Now again, this is not an exciting business, but about 90% of the business are, uh, emergency or semi emergency calls saying my air conditioner break down. And whatso has been able to since the Namt family took over in the late 80s to grow their dividend and astounding rate. Now they often at the back of their materials say, and show that while they are not an exciting business, they're not in cutting edge technology and they haven't discovered a molecule that can fix a disease. They're distributing air conditioning parts that they have been in the best 30 performers the American, uh, stock exchanges since they took over. And again, they went from a very small share up to the larger share. They have about 14 or 15% market share. There is a long Runway to go. Taking just the last 25 years, since the turn of the century, they have grown their dividend 100 Eightfold. So $1 of dividend became 108 and the share price has done exactly the same. And while you are unlikely to ever find a newspaper or the TV business channel saying much about these companies, we think we can compute where the dividend is going to be with a high degree of predictability well into the future. We know because there's 65 years of academic and empiric evidence that shows that the price is likely to traverse the same pathway over time. And from a psychological or emotional standpoint, it is much easier to be, uh, an investor in a business that is providing air conditioning parts than one that is very sensitive to the latest technological development or the latest tariff announcement or some kind of government decree that may be positive or negative.
Phil: Or a resource company. Or a resource company as you pointed out.
Jonathan Nurick: Exactly.
Phil: So why do you advocate for heavier position sizing in high conviction investments? I mean we're all taught that diversity is the key to safety and avoiding volatility.
Jonathan Nurick: It's a really good question. Now, if you come up with idea after idea after idea, you'll have to mark the degree of merit or confidence that you have. So in the last discussion of Sentas and what's go, we've covered things like predictability, longevity, we touched on quality of management, etc. You're
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Jonathan Nurick: not going to have an infinite number of very good ideas. Good ideas are exceedingly rare. In fact, we have a small handful year that we think meet our requirements. And if you rank all of your ideas, it is likely the case that idea 1, 2, 3, 4 and 5 are better than idea number 100 through 100. It makes sense to concentrate your time and your effort on those that you think have the best merit. Where you think you have the highest degree of confidence in the likely outcome, you are likely to know them better. Because if you spend your time studying endlessly a smaller group of companies rather than an infinite number of companies, if your work is any good, you will know them more intimately. And so you can become more like that true business owner that we discussed at the very beginning, going to the McDonald's in the airport and being properly attuned to the business development rather than simply the price. Now, you do want minimum degree of diversification, which is why we don't hold one company in, uh, our core fund, we own around 30, and around 30 also gives us a very important other thing which we haven't really discussed yet and that is for our clients, we try and simulate or create the experience that I used to get with opening those envelopes. So we invested heavily in studying the psychology of feedback mechanisms, especially as they relate to investment. And each week, in fact it went out about an hour ago. Just looking at the time, we write our investors a one minute bite sized dividend progress update. Now, it doesn't come in the mail, it comes as an email, but essentially all it does is detail the most important developments during the week only through the progress of the dividend. So we'll say last week it said, this week, Synax raises dividend by 15.4%. 15%. 15.4% is right in our wheelhouse. And two sentences back. What makes SYA special in any given week, it isn't that meaningful. But if you compound week after week after week and quarter after quarter and year after year and soon, decade after decade, what you find, uh, people tell us that even where they own the same security elsewhere, the feedback mechanism is drawing them towards the most critical proxy that is universally understood what a dividend is. It's tactile, it's very hard to tamper with. It's easier to adjust earnings, free cash flow models, et cetera. It's very difficult to tamper with a cash that has already left the company and is in your account. And so our clients tell us, and this is by design, that the hold ability of these securities inside this framework, inside this paradigm, is vastly superior to the experience of holding them elsewhere. And actually it extends their holding horizon because it's just a matter of how much a company falls temporarily, often through nothing to do with it. It might just be some macro concern that won't be of any consequence of the company, but the price sometimes falls and it's just a matter of extent before they capitulate. But when you focus their attention on the right thing, they're grateful for being able to have that much smoother ride. And you distill that down into a concept, coming back to income, that the safest income is a rising income. The faster it's rising, the safer it is. It's a very easy, understandable framework. So we need a certain number of companies and all of our testing and research suggests around 30 is the number which lends itself to each of your investments is actually meaningful. It's not an infinite number of ideas. It's sufficiently diversified between enough industries and it lends itself to a frequency of reporting so that you get this compounding nature of you see each of your companies every year raise their dividend on what becomes an almost every week basis. You will have that dividend increase if you have 30.
Phil: So how can listeners and or viewers find out more about divgr we publish.
Jonathan Nurick: Extensively on our website. People are free to join this mailing system, devgrow.com.au commt we see it as a service to improve every investor's emotional well being, whether they're a client or not. We think it's very additive and we're very thankful to people like yourself for sharing your platform with us to be able to educate and inform what we think is a very novel and
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Jonathan Nurick: very empowering framework to lift the ability for investors to actually get the compounding desires that they have, as opposed to looking at the merits of investment and not being able to actually stick with it.
Phil: And just quickly, what happens when you get Aussie investors going, where are my franking credits?
Jonathan Nurick: People who come to us understand that that equation that we dealt with, which is your total rate of annualized return over time is equal to your current yield plus your rate of change. The yields of our companies are very low. They're growing very quickly in terms of our effective yield, even though the market keeps the yield at roughly the same rate. But they understand that the important part here is not the current income, it's the rate of change in the income, such that if we can get the income, however low, it starts as a yield and some of the companies we've discussed, their yields are well less than 1%. It seems low. It's not for the income that we own them, it's for the rate of change that income. As long as the dividend is growing at a very high rate, two things are likely to happen. One, the share price will follow at roughly the same rate over time. Tick. That's excellent. And two, your feedback is one of empowerment, of understanding, of moving forwards in an easy to digest framework that they are able to stay the journey, stay the course, get the real compounding without having to worry too much about that current income, current franking credit that may or may not, uh, serve that same purpose.
Phil: Jonathan Yric, thank you very much for joining me today. It's been a real pleasure. And Jen in the background. No one's going to see you very.
Jonathan Nurick: Much, Phil, Much appreciated.
Chloe: Thanks for listening to Shares for Beginners. You can find more@chesforbeginners.com do if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.
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