Dividend investing is akin to watching tortoises race: It’s usually boring because nothing happens before your eyes. But if you turn your attention elsewhere for a while and then glance back, you’ll find the tortoises gone. The same is true for dividend investing.
Usually boring, but not always boring . . . at least with dividend investing.
In November 2011, I recommended BGC Partners (NASDAQ: BGCP), a large institutional broker, to High Yield Wealth readers. It seemed a respectable enough high-yield investment. BGC Partners shares offered a 10% yield at the time. The BGC Partners dividend had recently been raised and the shares traded in a narrow range. Boring price action, high-yield dividends: what more could an income investor want?
A few weeks later, I bought BGC Partners for my personal income portfolio. Because BGC Partners was more than personal, it was business, I had no choice but to monitor my investment. The monitoring was much more titillating than I had expected.
A year after my initial recommendation and my initial purchase, BGC Partners’ shares were scrounging about the floor ̶ its shares valued at half my initial entry price. Trading volume across its many platforms was in decline, which means revenue and earnings were in decline. In fact, the declines were severe enough that BGC Partners was forced to cut its quarterly dividend by 29%.
A dividend cut would normally be followed by a “sell” recommendation, but my investing instincts suggested otherwise.
Taking Another Look
BGC Partners’ trading volumes were in a cyclical decline, to be sure, but not in a secular decline. I had faith that volumes would recover. My faith was fortified by the pluck of BGC Partners’ exceptional management team led by Howard Lutnick, board chair and CEO. Lutnick’s guidance enabled BGC Partners to persevere after a third of its employees (including Lutnick’s brother) were killed in the Sept. 11, 2001 attack on the World Trade Center.
Lutnick is more than a triage manager, though. He’s also a proven value investor with an eye focused on the horizon.
BGC Partners’ business was in a down cycle, but so were the businesses of many commercial real estate brokers. Lutnick saw the opportunity to diversify BGC Partners by acquiring real estate broker assets on the cheap. BGC Partners acquired large commercial real estate broker Newmark Knight Frank; a year later, it acquired an even larger broker, Grubb & Ellis.
In little more than a year, BGC Partners had morphed into the largest commercial real estate broker in the United States. Once BGC Partners’ business prospects began to improve (and I was confident they would), investors would soon enough recognize and properly price BGC Partners’ value proposition.
In the meantime, BGC Partners management helped the recognition process along. The share price soared 48% on April 1, 2013 (April Fool’s Day) after the company announced the sale of one of its trading platforms to NASDAQ OMX Group (NASDAQ: NDAQ). This was no joke. The price BGC Partners negotiated with NASDAQ OMX was higher than the entire market cap of BGC Partners at the time.
BGC Partners Dividend Moves Higher
Since April 1, 2013, most everything we want trending higher has trended higher: Revenue, earnings, and cash flow have trended higher, and so has the share price and the BGC Partners dividend. BGC Partners declared its latest quarterly dividend last week. The declaration shows the dividend was increased 12.5% to increase the quarterly payment to $0.18 per share, higher than pre-cut levels.
Though BGC Partners shares trade at a multi-year high, they still offer a high dividend yield. Thanks to the recent increase, investors can still buy a company whose shares offer a dividend that yields 6.3%.
The latest BGC Partners dividend increase lifts the High Yield Wealth cost-basis yield ̶ the yield on our initial recommendation price ̶ to 10.5%, which is above the yield at my initial recommendation. The total return on our holding period exceeds 110%.
A lot of action, to be sure, but if BGC Partners had occupied only my personal investment portfolio, it would have all been blissfully boring because my attention would have been focused elsewhere. That wouldn’t have been a bad thing.