Ep. 59: Weekly Income Machines, Founder-Led Growth & The Dividend Debate

So if you had a stack of cash just sitting on the table right now, would you rather chase
a flashy, I don't know, 40% yield that gets paid out to you every single week, which
is incredibly tempting, by the way.
Right.
So tempting.
Or would you rely on a famously boring stock that pays a tiny 2% dividend, but has reliably
grown that payout for 50 years?
I mean, it really is the ultimate psychological test for investors, isn't it?
We all claim we want the slow, boring, reliable growth.
We know it works, but then you log into your brokerage account and you see this neon sign flashing
a 40% yield on some tech ETF, and honestly, ignoring that is incredibly difficult.
It's nearly impossible.
And that tension is exactly what our deep dive is about today.
We're really trying to navigate the wild landscape of modern income investing.
We've got a massive stack of sources to go through today.
We do.
From those old school, tried and true dividend growth strategies all the way to the absolute
bleeding edge of the market.
Right.
Those ultra high yield weekly pay ETFs that are suddenly just everywhere you look.
Exactly.
So the underlying mission for us today is to figure out the actual mechanics of building
wealth.
How do you transition from growing your money to actually living off it?
Crucial point.
And maybe most importantly, how do you train yourself to spot the difference between a true income
generating machine and a yield trap, you know, the kind that's effectively just handing
you your own money back in tiny increments, right?
The illusion of income.
But before we can even touch those wild 40% yields, there is a massive debate happening in the
investing world right now that we really need to address first.
Oh, the anti dividend crowd.
Exactly.
They are very vocal right now.
They claim that dividends are entirely pointless while you are in your accumulation phase.
Basically saying unless you are actively retired and needing to pay for groceries right
now, you shouldn't care about dividends at all.
That's their stance.
But one of our sources today, an investor named Amos, presents a really highly structured
rebuttal to that exact movement.
I love this part of the reading.
Yeah.
He makes the case that ignoring dividends during your wealth building years is based on just
a fundamental misunderstanding of how cash flow actually works because the anti dividend
argument usually hinges on this one specific idea, right?
That selling shares is exactly the same as receiving a dividend.
Right.
They argue you can just create your own dividend by liquidating a little bit of your stock
whenever you want, which I mean, sure, it sounds logical on the surface, but Amos uses
a real estate analogy and the sources that I think completely shatters that logic.
The apartment building analogy, it is perfect for this.
So Amos points out that selling shares to create income is like owning four apartment buildings
and then selling them off one by one to pay your bills.
You go from four buildings to three to two.
Exactly.
Your actual ownership stake in the income-producing asset shrinks permanently.
But collecting dividends, on the other hand, is like keeping all four of your apartment buildings
and simply collecting the rent checks every month.
Right.
Your share, your actual ownership of the business stays exactly the same.
You keep the buildings, you spend the rent, I mean, that just makes sense.
But what is the actual strategic advantage of doing that while you are still working and
saving?
Like, if you don't need the rent money yet.
Right.
If I don't need the money today, why does it matter?
Well, it gives you a profound mathematical and psychological advantage.
It's called zero sequence of return risk.
Wait, what does that actually mean mechanically?
Because sequence of return risk sounds like, I don't know, something from an actuarial
exam.
I know.
It's a mouthful.
Let's break that down.
Again, you need $10,000 and you plan to get it by selling shares of a growth stock.
Okay.
Pretty standard.
Suddenly, a massive recession hits and the broader market drops 50%.
Your growth stock is now worth half as much.
Oh, wow.
Okay.
To get your $10,000, you are now forced to sell twice as many shares at rock bottom prices.
You're just bleeding out shares.
Exactly.
You are permanently destroying your future compounding power because those shares are gone forever.
That is sequence of return risk.
It's the danger of the market crashing exactly when you need to pull money out.
Ah, I see.
But with a dividend stock?
With a quality dividend compounder, you just wait.
You sit there.
Your share count is identical and you keep collecting the rent.
Because rent usually doesn't stop.
Right.
History shows us that quality compounders, companies like Johnson & Johnson or Walmart historically
do not cut their payouts during crises.
Even during the COVID crash.
Yes.
The sources change that even during the absolute peak of the COVID crash, 85% of large cap
dividend payers either maintained or actually grew their dividends.
That is a staggering statistic.
And it actually brings up another argument the anti-dividend crowd loves to make, which
is that share buybacks are better than dividends for returning value to shareholders.
Ah, yes.
The tax efficiency argument.
Right.
They say it's more tax-efficient for the company to just buy its own stock to push the price
up.
You don't really have to push back on this one based on our sources.
Yeah.
Emus makes a great point here.
He does.
He points out that companies are notoriously terrible at timing their own buybacks.
Like think about companies like Duolingo, PayPal, Nike.
The sources show they have had aggressive share buybacks recently, but atrocious stock performance.
They are often buying back stock at the absolute top of the market, which effectively destroys
shareholder value.
This tangible cash is simply harder to manipulate.
I mean, a dividend is cold hard cash in your brokerage account, that corporate management
can no longer squander on a bad acquisition or a really poorly timed buyback.
Yeah, they can't mess it up once it's in your account.
Exactly.
And another critique you often hear is that dividend investing excludes roughly 62% of the overall
stock market.
Which sounds bad.
It does, but Emus frames this as a feature, not a bug.
By demanding that a company can actually afford to pay a consistent growing cash dividend,
you are automatically filtering out the unprofitable cash burning, highly speculative businesses.
Right.
Which brings up the obvious next hurdle.
If you're sold on the power of keeping your apartment buildings and collecting rent,
how do you actually find the right companies without drastically overpaying for them?
Right.
Because you can't just buy a stock blindly just because it pays a dividend.
Exactly.
A bad business is a bad business.
And it still dictates your future returns.
So to solve this, our source is highlight a specific screening framework called dividend
yield theory or TYT.
Yeah.
I'm looking at the notes on this.
Could you walk me through the actual mechanics of dividend yield theory?
Like how does a regular person use this?
The mechanics are elegantly simple, actually.
TYT operates on the premise that a mature, stable dividend paying company will generally
trade at a relatively consistent yield over time.
So you take a stock's current dividend yield and you compare it against its own five
year historical average yield.
Got it.
If the current yield is significantly higher than its historical average, the theory suggests
the stock is currently trading at a discount.
So using dividend yield theory is almost like looking at the sticker price of a used car
versus its historical blue book value.
That's a great way to put it.
If the car is suddenly offering you way more value for the same price than it usually does,
it's on sale.
That is a highly practical way to look at it.
If we look at the material sector, the sources give us a fantastic real world application of
this.
The HB Fuller example.
Yes.
Consider HB Fuller, ticker symbol FUL.
They are a global adhesives manufacturer.
Not the most glamorous business in the world.
No.
But incredibly essential.
Everyone needs adhesives.
Right now their forward dividend yield is 1.53%.
But if you look at their five year historical average yield, it's only 1.22%.
Which means, according to DYT, it's currently trading at roughly a 20% discount to its normal
valuation.
And the most impressive part of that source material is that HB Fuller has increased their
dividend for 57 consecutive years.
57 years of consecutive annual increases is the definition of a steady compounder.
I mean, they have navigated inflation, multiple recessions, global crises, and they
still manage to raise the rent every single year.
That's incredible.
The sources also highlight Avery Denison and RPM International.
RPM is currently trading at a 16% discount to its historical yield and both over 50 years
of consecutive dividend increases.
Wow.
But and we must inject a massive note of caution here.
There's always a catch.
Always.
And theory is a screening filter, not a crystal ball, meaning a massively high yield could
indicate a great bargain or it could be a giant red flag.
Precisely.
If a stock's yield is suddenly triple its historical average, it might mean the market has
a rationally underpriced a great company, which is what you want.
Right.
Or it could mean the underlying business model is fundamentally broken.
Institutional investors know a massive dividend cut is imminent and the stock price has collapsed
for a very legitimate reason.
Do you always have to dig into the earnings and the free cash flow?
You have to ensure the business can actually still afford the payout.
That makes total sense.
Now you can't build a whole portfolio just on adhesives and industrial tape, though.
Sure.
We've got our steady, boring, 50-year dividend growers forming the bedrock.
But a truly turbocharged, the wealth accumulation phase, you really need a growth engine.
You do.
And according to our sources, the most compelling growth strategy right now isn't necessarily
chasing the hottest new AI trend.
It's looking at the person sitting in the corner office.
We are talking about founder offa.
Yes.
There is a source covering a relatively new ETF with the ticker FFF, also known as the Founders
100, and the underlying thesis is incredibly straightforward.
Basically, you construct a portfolio containing only the 100 best, founder-led, publicly-traded
companies.
Exactly.
And the performance data they cite for this concept is just wild.
I know.
I saw that.
The research shows that the 200 largest founder-led companies managed to beat the S&P 500 by 4% annually
over a 27-year period.
4% annually, compounding that alpha over nearly three decades creates an astronomical difference
in wealth.
Huge.
And a separate study by Bain actually found a three-time stock price performance difference
between founder-led companies and the rest of the S&P 500.
So what is actually happening here?
I mean, is there a structural reason a founder dramatically outperforms a standard corporate
CEO?
Or is it just luck?
It's not luck.
It really comes down to a profound difference in psychology and incentives.
How so?
Well, think about the mindset of a visionary relentless founder versus a standard caretaker
CEO.
Caretaker CEO, right?
A founder's entire identity, their life's work, their legacy, and usually the vast majority
of their personal net worth are entirely tied up in this one company.
They're all in.
They are making strategic decisions in terms of decades.
But a caretaker CEO, who is usually brought in by a board of directors, well, they have
a completely different incentive structure.
They're often just managing quarterly earnings, trying to hit short-term metrics so they
can unlock their next compensation bonus or stock grant.
Right.
They're playing two completely different games.
The founder is trying to change the world, and the caretaker is trying to hit a Q3 revenue
target.
That's a great way to summarize it.
Yeah.
We have ETF actually build this portfolio, though, because they can't just buy every single
founder out there.
They employ a very rigorous screening process.
They start with a universe of roughly 800 to 1,000 founder-led companies.
They filter that down to the top 200 based on market capitalization.
Then they apply a factor model to pick the best 100.
Wait, hold on.
For the listener who isn't deep into finance, what does applying a factor model actually mean
in this context?
Good question.
Think of a factor model as a strict algorithmic scoring system.
So instead of a human manager just guessing which companies are best, the system scores them
on specific mathematical traits.
Like what?
Things like how fast their revenue is growing, how strong their profit margins are, and their
price momentum.
They take the top 100 companies that score the highest.
They wait them based on their size, but, and this is key, they apply a hard cap of 7.5%
in any single position at their quarterly rebalance.
Oh, smart.
So that ensures a massive company like Nvidia or Meta doesn't just end up taking over the
entire fund.
Exactly.
And the strictness of their rules becomes really clear when you look at who is excluded.
Right.
Because they have Jensen Huang and Nvidia, Mark Zuckerberg at Meta, Alex Carpet Palantir.
But they specifically exclude Jeff Bezos at Amazon.
Which feels crazy in first glance.
It does, but it's because he is no longer running the day-to-day operations as CEO, the
active presence of the founder at the helm is the entire point of the fund.
That makes sense.
They even noted in the research how Nike's stock performance historically suffered when
Phil Knight stepped back from the CEO role.
Yes.
But it's also important to note for the listener that this FFF ETF is purely a growth sleeve.
It's enough for dividends.
No, it yields a tiny 0.9% paid-out annually.
You are not buying this for the income.
You are buying it to rapidly grow your capital base alongside those steady dividend payers
we discussed earlier.
Okay.
So let's fast forward a bit.
Say you've held these founders.
You've collected your dividend rent and you've built this massive mountain of wealth.
The dream scenario.
Right.
Now, you actually want to retire or at least start living off your portfolio, transitioning
from aggressively growing your wealth to generating income without just selling off your
golden geese.
That requires a completely different approach.
It really does.
Edward Carona, a trader with 30 years of experience, is actually featured in our sources making exactly
this point.
Oh yeah.
His stuff was fascinating.
He argues the skills that got you wealthy are not the same skills that will keep you wealthy
and generate cash flow.
So what's the solution?
You need a mechanical bridge to transition from growth to income.
And he suggests a highly specific options approach called the wheel strategy.
Now, I have heard of the wheel strategy.
But I always get lost in the actual mechanics.
Can you walk me through how it literally generates income?
Absolutely.
The wheel strategy is a systematic process using options.
The first step involves selling cash secured puts on a stock you actually want to own at
a price lower than where it's currently trading.
Let me make sure I follow.
So if I love a stock that is currently trading at $100, I would sell a put option agreeing
to buy it if it drops to $95.
Correct.
The person buying that option pays me a premium basically cash straight into my account
just for making that promise.
Exactly.
You were literally getting paid to wait for a better entry price.
That sounds great.
It is.
Now, if the stock never drops to $95, you just keep the premium and do it again.
Okay.
But if it does drop, you are assigned the shares.
You are forced to buy them at $95.
Which was the plan anyway.
Exactly.
This is step two.
Once you own the shares, you pivot.
You start selling covered call options against those shares.
You are now agreeing to sell those shares to someone else if the price goes up to say $105.
And I collect another cash premium for making that promise.
Right.
So I look at this almost like operating a boutique insurance company.
Like I am collecting regular premiums from other traders who want a bet on the stock moving
around.
That's a perfect analogy.
And if it's a dividend paying stock, I'm collecting the regular dividends at the same
time.
Yes.
The insurance analogy is highly accurate.
You are acting as the underwriter collecting steady premiums, but there's a massive catch.
What is it?
By selling that covered call, you have strictly capped your upside.
Right.
Because if the stock goes to the moon, say it jumps to $120 overnight, I am still legally
obligated to sell it for $105.
And that is where the psychological discipline comes in.
Because that hurts to watch.
Oh, absolutely.
You are actively trading potential unlimited upside for guaranteed immediate cash flow.
The wheel strategy is not a passive, set it and forget it investment.
It active work.
Very active.
It requires engagement, tracking strike prices, managing assignments, and the emotional maturity
to watch a stock soar past your strike price knowing you kept your gains.
You have to be okay with that because your goal is safe income, not maximum growth.
Operating a boutique insurance company actually sounds like a part time job.
It can be.
Naturally Wall Street looked at how exhausting the wheel strategy can be, and basically said,
hey, we will do all that stressful options trading for you, package it into an ETF, and just
pay you a massive yield.
Which brings us to the absolute explosion of high yield covered call ETFs, particularly focused
on the tech sector.
Yeah, the curated tech covered call space is a perfect laboratory to understand the difference
between chasing yield and actually building wealth.
It really is.
The courses provided direct comparison between two active ETFs doing this, KQQQ and QDVO.
So KQQQQ is aiming for top tech companies, and both a massive, roughly 17% distribution
rate.
Cute.
The sources mentioned it holds high beta names like Broadcom and Amazon.
Meanwhile, QDVO takes a different approach.
It prioritizes capital appreciation first and income second.
Right.
It will significantly less about 11% holding slightly lower beta names like Apple.
Now for the listener, what does high beta actually mean in this context?
Beta is simply a measure of volatility compared to the broader market.
A high beta stock like Broadcom swings much more violently up and down than a lower beta
stock like Apple.
In the options world, higher volatility means higher premiums.
So KQQQ generates a massive 17% yield because it is selling options on wild or more volatile
stock.
Your reveal in the sources is this classic tortoise and the hair dynamic.
Yes.
Despite yielding 6% less on paper, QDVO completely crushed KQQQ into a return.
It was 32% compared to 25%.
How is that mechanically possible?
If I'm getting paid a 17% yield, shouldn't I be making more money?
You'd think so, but this is where we have to explain the brutal mathematics of covered
call track.
Covered call track.
Okay.
Remember, selling a covered call caps your upside.
Let's run a 30 second hypothetical.
Imagine a tech ETF hold a stock at $100.
They sell a covered call capping the upside at $102 and they collect a big premium, which
they pay out to you as yield.
Okay.
FL.
Now imagine a massive tech rally happens and the stock shoots up to $110.
The ETF is forced to sell the stock at $102.
They completely miss out on that $8 of growth.
They're precisely.
They miss the rally.
Now, the next month, the market drops and the stock falls back down to $95.
The ETF takes the full brunt of the fall because options don't protect your downside.
Over time, in a choppy or upward trending market, the strategy systematically chops off all
your big winning days, but forces you to participate in all the losing days.
That's awful.
It is.
Your underlying capital base gets chewed up.
You are getting paid a high yield, but the actual value of your investment in shrinking.
QDVO 1, because it prioritized the health of the underlying capital first, leading to
a higher total return, even with a lower payout.
Wow.
Okay.
So if that volatility drag is destroying value at a 17% yield, what happens when Wall Street
pushes the dial to 40% and starts paying you every single week?
Well, this is where the modern income investing universe hits the absolute extreme.
We are looking at the explosion of single stock weekly pay ETFs.
It's wild.
Let's look at CHIPY.
It runs a covered call strategy on the semiconductor portfolio.
It has a 40 to 45% distribution rate paying out weekly.
The math the sources provide on this is staggering.
Truly.
If you put $200,000 into CHIPY, it mathematically generates roughly 80 to $85,000 a year in
cash flow, which is insane.
You are beating the median U.S. salary of $64,000 just by holding one ETF.
We also have GOY, which aims for 1.2 times Google's weekly return, plus covered calls,
paying 40 to $0.63 a share every week.
Unbelievable.
Then there is NVI, a leveraged NVIDIA ETF, with covered calls attached, yielding around
42%.
Now, the source notes that CHIPY and GOY haven't seen significant NAV decay yet.
For the listener, NAV stands for net asset value.
Simply the actual underlying value of the shares, the ETF holds.
But wait, let's stop right there and look at NVI, the NVIDIA one, because there was a massive
blinking red flag buried in the data for that specific fund.
There really is.
The most recent distribution for NDI was estimated to be 97.7% return of capital.
They charge a 0.99% expense ratio.
Can you explain what return of capital actually means here?
So return of capital or ROC means the fund didn't actually earn enough money from dividends
or options premiums to pay you that massive yield.
Okay.
So to make up the difference and keep up appearances, they're quite literally just taking
your original investment principle and handing it back to you.
Wait, wait, hang on.
So they are taking my money, holding it for a few days, handing it back to me a week later,
calling it a 40% yield and charging me a 1% management fee for the privilege.
Yes.
That is exactly what they're doing.
That's insane.
How is that an investment?
It's not really.
And the distribution is nearly 100% return of capital.
It is mathematically not income.
It is the illusion of income.
Okay.
But what about CHIPY and GOY holding their NAV steady?
Great.
So we have to look at the macroeconomic context for those.
They have survived because they are attached to semiconductors and big tech during one of
the most historic massive bull runs in market history.
Oh, I see.
The underlying stocks, like Nvidia and Google, grew so incredibly fast that it temporarily
outpaced and masked the structural flaw of the covered call drag we discussed earlier.
They are essentially standing on a rocket ship so you don't notice that the engines are leaking
fuel.
That is a very fair assessment.
These are highly concentrated, leveraged volatility plays.
They are not true, durable income machines, like a 50 year dividend grower.
If semiconductors cool off or Google trades flat for a year or worse enters a bear market
the NAV erosion on these weekly pay ETFs will accelerate violently.
You'll just watch your principle evaporate.
Exactly.
And because the yield is a percentage of that shrinking principle, your wiggly paycheck
will shrink right alongside it.
Man.
So bring it all back to you, the listener.
We have really run the absolute gamut today.
We covered a lot of ground.
We did.
We started with the unshakeable safety of collecting rent on steady, boring, 50 year dividend
growers and filtering them through dividend yield theory.
Then we looked at capturing that intense founder alpha to turbo charge your growth phase.
We explored using the mechanical wheel strategy to pivot into income.
And finally, we examined the extreme edge of the market with these 40% weekly pay options ETFs.
The tools available to retail investors have never been more complex, offering both unprecedented
opportunities and some very sophisticated traps.
Which leaves us with a final thought to chew on that we haven't even touched on yet the
tax man.
Ah, yes.
Taxes.
If you build your wealth on traditional dividend growers, those are often taxed at the much
lower qualified dividend rate, but all those massive, flashy yields generated by covered
calls and options premiums, those are generally taxed as ordinary income, exactly, which can
push you into the highest tax brackets.
So when you look at a 40% yield, you really have to ask yourself, after the fund manager
takes their 1% fee, after the covered call drag, choose up your capital, and after the
government takes up to 37% of your distributions, who is actually getting rich?
That's the real question.
Choose your income wisely.