Our investable universe currently contains 157 stocks rated ‘buy’.

Last month there were 176.

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 July 2026

Some Interesting Stats:

• 157 companies total receive a ‘buy’ rating

• That’s down from 176 last month

• And 173 the month before

• 21 moved from ‘hold’ to ‘buy’

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

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

Recommendation Changes

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

Here’s a sample of a few:

• BlackRock (BLK): A leading global investment management corporation. As the world’s largest asset manager, their massive scale and diverse platform (including the iShares ETF brand) drive steady fee-based revenue and strong free cash flow, translating to highly reliable shareholder returns.

• MarketAxess (MKTX): Operates a leading electronic trading platform for fixed-income securities. Their powerful network effect connects thousands of institutional investors and dealers, creating deep liquidity and a strong economic moat. This highly scalable, asset-light digital marketplace generates industry-leading profit margins and robust free cash flow.

• Paychex (PAYX): Offers integrated human capital management solutions for payroll, benefits, and human resources. Their highly scalable, asset-light software platform benefits from high switching costs, generating strong margins and resilient free cash flow.

Here's what paid subscribers get access to in the rest of this issue:

• Undervalued Growers on the Reverse DDM

• 33 High-Conviction Cannibal Stocks

• Top High Yield Opportunities & REITs

• Full Portfolio Status & Recent Additions

Community Question

With 31 quality dividend growers moving up from ‘Buy’ to ‘Hold’ this month as valuations stretch, how are you allocating new capital right now?

1. Buying high-yield/defensive names that haven’t run up yet.

2. Focusing strictly on dividend growers trading at fair value or better.

3. Letting cash build in short-term yield while waiting for better entry points.

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 Cash Flow Drives Everything

Dividend growers have outperformed the market since 1973.

Why?

Because companies can only keep raising dividends if they keep generating more cash.

Producing more cash makes those companies more valuable over time.

In the end, cash flow is what drives returns.

2️⃣ The Market Is Focused on the Wrong Thing

Cash flow creates long-term value, but nearly 1 in 3 options traded today expires the very same day it’s bought.

Instead of focusing on growing businesses, many investors are betting on day to day price movements.

That’s gambling, not investing.

3️⃣ An Investing Quote

Technology has made investing easier.

But it’s also made gambling easier.

With trading apps, zero-day options, sports betting, and prediction markets, it’s only a tap away.

And someone (other than you) makes money on every trade or bet.

Warren Buffett has even talked about this problem.

4️⃣ The Cathedral and The Casino

At the 2025 Berkshire Hathaway meeting, Buffett compared the U.S. economy to a cathedral with a giant casino attached.

The cathedral represents real businesses generating profits and cash flow.

The casino represents people gambling and speculating.

His message was simple:

Build wealth in the cathedral.

Don’t get distracted by the casino.

Watch the clip below:

5️⃣ Example of a Dividend Stock

Let’s look at a business Buffett would think is part of the Cathedral.

MSA Safety sells real, tangible safety equipment like firefighter breathing apparatuses, gas detection systems, and industrial hard hats.

They also earn repeat revenue from replacement filters, batteries, sensors, and maintenance services required to keep the gear safe and compliant with safety regulations.

That’s how they’ve raised dividends for 59 years.

Key numbers from Fiscal.ai:

• Profit Margin: 15.2%

• Forward PE: 19.4x

• Dividend Yield: 1.2%

• Payout Ratio: 28.5%

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.

What makes this deal especially interesting is the buyer: Warehouses De Pauw (WDP), a company I’ve highlighted in previous Best Buys articles.

Let’s dive in to the deal and see what it means for Argan SA shareholders like us.

If you want to read the original Argan SA Investment Case, subscribe for free, and get instant access:

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The Merger Terms

WDP’s CEO Joost Uwents is calling this a blending of companies.

Argan’s CFO described it as the two companies “merging and combining” to create a win-win for both sides.

It’s obviously a friendly merger, here’s what we’re getting for our Argan shares:

• 3 WDP shares for every 1 Argan share held.

• €11.00 in cash per share, paid before the deal closes.

• That a €79.22 total implied value per Argan share

  • A 21% premium over pre-announcement prices

• Expected Dividend Step-Up: We’ll also get a 6% dividend increase based on forward management projections

  • My math says that should be a 12% increase based on current trailing payouts

Is It a Good Deal For Us?

Let’s look at why management thinks this deal makes sense.

They make 4 main claims:

Strategic Fit

Both companies are still run by the founding families (the Le Lans for Argan, and the De Pauws for WDP) and both are entrepreneurial and growing.

Working together does seem to make some sense, so I’ll agree with them here.

Leadership and Scale

Scale matters in logistics real estate.

• Big tenants like Amazon or Carrefour prefer to work with one company that can lease across multiple countries

• Owning properties across multiple regions also creates more opportunities to lease additional properties to existing customers.

• A larger portfolio also lets the company spread its fixed costs across more properties.

• Generating more cash flow lets you grow with less debt or equity issuance

The merger will create a €13 billion portfolio across eight countries.

Argan dominates France, and WDP is very strong in the Benelux (Belgium, the Netherlands, and Luxembourg) region and Romania.

That gives the combined company assets across Europe’s busiest transport corridors.

Combined Growth

WDP wants to expand across Europe, and buying Argan’s French properties makes a lot of sense to help them with that.

Many of the main transport routes across Europe run through France.

The next places WDP plans to expand to are Italy and Spain, which would help them further connect Europe.

It also creates the opportunity to grow a lot within France.

WDP has €700 million in annual self-funding capacity.

Argan owns a 750,000 square meter landbank within France, where access to capital was the main thing slowing down the development.

Management thinks the combined company will be able to double the pace of development of that land.

Credit Quality

I think this is the weakest argument that management made.

They’re pitching the merger as a way for Argan SA to upgrade its credit rating and lower the cost of capital.

WDP does have a much larger balance sheet, and investment grade ratings of A3 (Moody’s) and BBB+ (Fitch).

Argan SA has a lower, but still investment grade BBB- credit rating.

I’m not sure that’s as big of a deal as they’re making it out to be.

The thing that I do like is that the deal is expected to grow the EPS and Net Tangible Assets (NTA) enough that the Loan-to-Value and Net Debt/EBITDA numbers hardly change.

The combined company is expected to maintain WDP’s high credit ratings.

Is It a Good Deal For Us?

The deal gives us much more diversification.

We’re going from concentrated in France to owing assets across eight different countries.

Management is also projecting a DPS that’s > €1.60 by 2030.

It’s currently €1.29, so that implies a CAGR of around 5.5%.

Our starting yield on Argan was 5%, so if management can grow the divided by 5.5% per year, that should give us a 10.5% return per year over the long-run.

I’d be happy with that!

Another great thing is that Argan’s brand and local management team will remain in place and continue running the French operations from Paris.

So we’re keeping the same, well-run French REIT, adding on WDP’s assets, and getting paid a premium for it.

I think this is a good deal for us!

A Few Words on WDP

I’ve pointed out WDP in the Best Buys articles in the past because I think it’s also well run, has a history of growth, and because it was (and still is) reasonably priced.

Let’s look take a quick look a little deeper into Warehouses De Pauw.

Family Run

Just like Argan, WDP still has the founding family involved.

The De Pauws still own nearly 20% of the company through their RTKA family structure.

Isabelle De Pauw is also a non-executive director on the company's board.

She is also the daughter of Tony De Pauw, who was the co-CEO of the company along with Joost Uwents from 2010 to 2025.

After the merger, the company will remain family owned.

• The De Pauw family will own 14%

• The Le Lan family will own 9%

This keeps plenty of skin in the game for the families and aligns their incentives with ours.

History of Growth

WDP has a history of consistent growth in Revenue and Dividends Per Share.

We already know they have a solid balance sheet, and they maintain a conservative Payout Ratio.

That tells me that management is conservative, and we’re not adding a lot of leverage or risk here.

I also like that WDP’s management is looking at Argan’s “AutOnom” standard as an asset.

This is their system to develop net-zero, energy-efficient warehouses.

Tenants will pay a premium for these warehouses for two main reasons:

1. Companies like Amazon and L’Oréal have “Net Zero” targets, and AutOnom warehouses help them meet them

2. It reduces the the energy costs for the warehouses, which the tenants typically pay

WDP management said that they want to learn from this standard and potentially scale it across their portfolio.

This is another way the combined company could grow, and it would protect the whole portfolio from future environmental regulations.

Conclusion

We’ve seen a number of mergers and buyout offers in the REIT space, as well as outside of it (think about companies like PayPal or Wendy’s).

I think there’s a lesson in here.

Stock volatility and dislocation in price from intrinsic value is becoming a new normal.

Companies with cash, overvalued stock, or strong balance sheets, like WDP, are using this to buy high-quality assets at a discount.

As investors, we should be doing the same thing.

We buy stocks like businesses, so we should keep using market volatility to buy up high-yielding, growing companies at attractive prices.

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.

Sometimes it is, but sometimes it’s a good business undergoing a change that the market hasn’t recognized yet.

If you can find one of those and be patient, you can get paid very well to wait.

Obviously the income from a high yield stock is interesting, but that's not the only reason to consider investing in one.

High yield stocks also perform very well overall.

Companies in the top 40% of dividend yields outperform the S&P most often:

I think there are two major myths when it comes to high yield investing.

Myth 1: High Yield Means A Company is Paying Out All Its Earnings

A lot of investors believe that a high yield stock is a company that’s paying out nearly all of the earnings in dividends.

But that’s not necessarily true.

The 20% of stocks with the second-highest dividend yields have an average payout ratio of less than 50%.

That leaves plenty of cash in the business for things like operations, investing for growth, etc.

Myth 2: High Yield Stocks Are For People Who Need Income Today

Another common belief is that high yield stocks are for people who need the income soon.

The idea is that if you don’t need income today, you should buy a dividend-growth stock instead.

Dividend growth investing is a great strategy, we love it here at Compounding Dividends.

But it’s not the only way to grow your passive income.

Buying a high yield stock with low growth and reinvesting the dividends can work well too.

If you’d have invested $10,000 in Verizon 10 years ago, here’s how things would have looked with and without dividends reinvested.

You end up with about $1,500 more if you reinvested your dividends.

Doesn’t seem like much right?

Look a bit closer - look at how many shares you own in each scenario:

• Dividends reinvested: 314.93 shares

• Dividends not reinvested: 183.49 shares

Think about what that means for your income.

Verizon currently pays $2.83 per share, so here's the income per year in each scenario:

• Dividends reinvested: $891.25/year (314.93 shares * $2.83)

• Dividends not reinvested: $519.27/year

Your income is 70% higher when you reinvest your dividends.

That’s because even though the business, and dividend payment didn’t grow that much, your ownership did.

In Part 3 of our earnings update, paid partners will get an earnings update on three businesses in our High Yield portfolio that are undergoing changes we’re getting paid to wait on.

📊 Community Pulse: How Do You Handle High Yield?

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.

Investors have been very optimistic about the AI companies and the infrastructure they need, like data centers and power.

But they’re also afraid that AI might disrupt other companies, like software, or that it could cause high unemployment.

That’s led to interest in another type of stock - HALO companies (Heavy Assets, Low Obsolescence).

The idea is pretty simple.

Buy businesses that own a lot of physical assets that are difficult to replace or copy, and ones that provide essential products or services that won’t be disrupted by AI or the next new technology.

This includes companies like:

• ExxonMobil that owns huge amounts of oil reserves and the infrastructure to recover it, refine it, and get it to market

• WasteManagement that owns the landfills and the routes that help the U.S. dispose of trash

• Vinci S.A. that manages a network of toll roads and airports

AI won’t change businesses like these.

In fact, AI could help make them more efficient and make them more profitable.

Roundhill Investments launched a HALO ETF (LHOA) that’s outperformed the S&P 500 since it launched in May.

Here’s the top 10 holdings to give you an idea of the kinds of stocks it buys:

Premium subscribers will recognize some of these stocks.

We bought before the HALO term was even coined.

Dividend investors naturally end up owning some of these types of businesses.

• The heavy assets generate reliable cash flows and make the businesses hard to compete with

• The low obsolescence lets them grow their dividends for decades

AI can help create software that costs almost nothing to copy and distribute.

But it won't help much if you’re trying to build a portfolio of commercial real estate like Realty Income.

Premium subscribers are getting earnings updates on three HALO companies.

But for the free subscribers, I thought it would be good to give you a framework to see how your portfolio stacks up on HALO companies.

📋 Check Your Portfolio: What’s Your HALO Score?

You can run each company you own through this three question screen.

1. Replicability: If a new competitor raised $1 billion tomorrow, could they duplicate your top holding’s main physical assets in under 3 years?

   (Yes = Low Assets | No = Heavy Asset)

2. Essential Demand: Will customers still need this exact product or service during a severe recession or a major tech shift?

   (Yes = Low Obsolescence | No = Disruption Risk)

3. Cash Conversion: Does the company generate enough real, operational cash flow to fully fund its operations and payout without relying on constant debt or share dilution?

   (Yes = Dividend Safe | No = Dividend at Risk)

Need Some More Ideas for HALO Stocks?

I’ve put together a free guide featuring 10 top global HALO dividend stocks across energy, utilities, real estate, and transportation, complete with their current yields and payout ratios.

Download 10 Global HALO Stocks Here

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 if you don’t need the income today, dividend growers can give you a lot more cash in the future.

Today we’re going to look at the earnings updates of 3 stocks with secular tailwinds that should be able to keep growing their dividends for a long time.

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First, let’s look at an example of why dividend growth can be so powerful.

If you invested $10,000 into Lowe’s ($LOW) and Verizon ($VZ) in August of 2016, here’s what that would have bought you:

• Lowe’s (LOW): 122.37 shares (at $81.72)

• Verizon (VZ): 186.39 shares (at $53.65)

The dividends would have looked like this:

• Lowe’s (LOW): $1.26 (1.54% yield)

  • Yearly income: $154.19

• Verizon (VZ): $2.27 (4.23% yield)

  • Yearly income: $423.10

Over the next 10 years, Lowe’s dividend grew 7.5x (!) faster than Verizon’s.

So if you just bought and held, here’s how your income would have grown:

By 2024, the Lowe’s investment was generating more income than the Verizon investment because of the strong dividend growth.

Even more impressive is the yield on cost:

Lowe’s:

• Bought at: $81.72

• Current DPS: $4.80

• Yield on Cost: 5.87%

Verizon:

• Bought at: $53.65

• Current DPS: $2.83

• Yield on Cost: 5.27%

The Power of Secular Tailwinds

A secular tailwind is a big, long-term shift that keeps an industry growing.

Think about the aging population, the global rise of the middle class, or the transition to digital payments.

These things are structural changes that will last decades.

And when a company has one behind it, growth is much easier.

Amazon is an amazing company.

Between 2014 and today, the stock has grown at 23% per year.

But it had the secular tailwind of e-commerce sales growing at 16% per year behind it.

That growing trend is your friend.

Investing in a company that’s active in a growing market is better than buying one in a mature industry.

It’s even better when you invest in one that can also gain market share within that growing market.

📊 Quick Reader Poll

I’m always curious to see where the Compounding Dividends community is allocating their capital.

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.

We get pulled in and watch every stage

It’s the most famous and demanding bike race in the world, and it can teach you a lot about investing.

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Somewhere around 200 riders race roughly 3,500 km (2,200 mi) across flat plains, rough cobblestones, and up and down the alpine peaks of France.

If you watch the race, you’ll see the peloton, the main pack of riders, cycling tightly together at high speeds.

If you’re not familiar with what’s going on, it looks like one big race where everyone is trying to get to the finish line first.

But it’s not.

The Tour de France is actually several completely different competitions happening at the exact same time, on the exact same road.

Here are the different games being played inside that pack:

• Stage Wins: The Tour is broken up into 21 “stages” (one race per day). A lot of riders are there just to win a single day’s race

• The Green Jersey (Points Classification): This gets awarded to the best sprinter. These riders only care about winning ‘intermediate sprints’ (think mini finish lines in the middle of stages), or being the winner at the end of specific, flatter stages.

• The Polka Dot Jersey (King of the Mountains): Awarded to the climbers. These riders get points for being the fastest up the steepest, longest climbs in the race.

• The White Jersey (Best Young Rider): Awarded to the fastest rider under the age of 26. These guys are really only racing the other young riders.

• The Yellow Jersey (General Classification): This is the ultimate prize. It is awarded to the rider with the lowest cumulative time across all 21 stages. To win this one, you have to be good at everything (and have a strong team to help you).

What’s this have to do with investing?

Read on, and you’ll see where I’m going.

The Stock Market is a Peloton

Recently, Robert Hagstrom, author of The Warren Buffett Way, described the stock market as "heterogeneous."

What he means is that it isn’t one thing, with one goal.

It’s a collection of different players, playing different games, with completely different rules.

When a stock price moves a lot, it's easy to assume the market knows something you don't.

But most of the time, the move has nothing to do with the strategy you're following.

Just like the Tour de France, the market peloton has more than one competition going on.

• Pod Shops: Large hedge funds that use leverage and strict risk limits. They often have to sell automatically when positions move against them.

• 0DTE Traders: Speculators trading options that expire the same day. Their activity can create large short-term price swings.

• Retail Traders: Often driven by social media, momentum, and FOMO.

• High-Frequency Traders: Algorithms that profit from tiny price movements measured in fractions of a second.

• Macro Funds: Investors making bets on interest rates, inflation, currencies, and economic trends.

• Event Traders: Investors focused on earnings reports, mergers, drug trials, and other major news events.

• Fundamental Investors: Long-term owners focused on cash flow, balance sheets, competitive advantages, and business quality.

That’s not even everybody, but I think you get the picture.

If hedge funds are forced to sell, options traders pile in, and momentum algorithms amplify the move, a stock might fall 5% in a day.

That doesn't automatically mean anything has changed about the business.

Novo Nordisk

Look at Novo Nordisk just a few days ago on July 31st.

The stock fell around 8% in a single day because an experimental heart drug called ziltivekimab failed a late-stage clinical trial.

How many investors bought Novo Nordisk for ziltivekimab?

My bet is zero.

So how does that kind of selloff happen because of a secondary pipeline headline?

Event-driven traders or saw a “failed trial” headline and dumped shares, or went short.

Algorithms scraped the negative news feeds and did the same.

Multi-manager pod shops hit their daily risk limits and were forced to sell.

There was a cascade of selling based on a bunch of short-term games within the market peloton.

For a long-term investor, however, the key question is simple: Did the investment thesis change?

The failed trial didn't change the cash flow generated by Novo's obesity and diabetes drugs.

It also didn't change the long-term demand for those treatments..

Race Your Race

Tadej Pogačar gave us a great example of what it looks like to ignore the games that don’t matter and focus on your own race during Stage 20 of this year’s Tour de France.

It was the final mountain stage, and universally agreed upon to be the most difficult stage of the entire race.

For a while, Pogačar held both the Yellow Jersey for the overall race lead, and the Poka Dot climber’s jersey.

The most important thing was the Yellow Jersey.

Winning it this year would be his 5th Tour win, and would put him in a very exclusive club, with only 4 other riders in it.

At the start of stage 20, Pogačar had the Yellow Jersey virtually locked up.

Richard Carapaz had taken the lead for the Polka Dot Jersey earlier in the race, and he attacked in an obvious attempt to win the stage and the Polka Dots.

Pogačar let him go.

Instead, he focused on protecting his overall lead and helping teammate Isaac del Toro secure the White Jersey.

He ignored games that didn't matter because he knew exactly which one he was trying to win.

Investors should do the same.
Know your strategy. Know your time horizon. Ignore the games you’re not playing.

Tadej Pogačar went on to finish Stage 20, then the final Stage in Paris to win his historic fifth Yellow Jersey and secure his place in the cycling history books.

To Win, You Have to Survive

One more lesson from 2026’s Tour de France.

To win, you have to make it to the end.

The Tour de France is notoriously unforgiving.

This year’s tour took out two strong riders.

Jonas Vingegaard, a two-time champion, crashed on a pretty routine roundabout during Stage 15, breaking his collarbone and instantly ending his race.

Norwegian rider Torstein Træen was actually wearing the Yellow Jersey when he crashed on the descent of the Col du Tourmalet during Stage 6, ending his race.

In the stock market, crashes are inevitable.

They usually take out investors using excessive leverage or chasing speculative stocks.

Long-term investors who own strong, cash-generating businesses are far more likely to survive the downturns.

And survival is the first requirement for compounding.

That’s It For Today!

Here are the most important things you learned:

• The stock market is full of different players, playing different games.

• A stock going up or down doesn’t always mean anything important has changed about the business.

• Know why you own each business, and ignore short-term market noise.

• Focus on your own game, and don't get pulled into games other people are playing.

• To win the long game, you have to make it to the end, risk management makes sure you do.

One Dividend At A Time,

-TJ

P.S. Want to screen for Yellow Jersey Contenders?

I just ran a quick screen based on cash flow, capital allocation, dividend safety, and balance sheet safety.

Here's the criteria I used:

1. Cash Flow

• Free Cash Flow Conversion (≥90% FCF / Net Income): Accounting profits can be manipulated; cash flow cannot. This ensures at least 90 cents of every dollar in net income becomes actual, usable cash.

• 5-Year Free Cash Flow Growth (≥5% Unlevered FCF CAGR): The cash flow engine must be expanding over a full multi-year market cycle, not stagnating.

• Free Cash Flow Yield (≥3.5%): Protects against overpaying for quality by ensuring a strong baseline cash yield relative to share price.

2. Capital Allocation & Dividend Safety

• Payout Ratio (≤60%): Retains at least 40% of earnings to reinvest in the business, pay down debt, or cushion against sudden economic headwinds.

• Share Count Reduction (≤0% 5-Year Share Growth CAGR): Zero share dilution. Management must be holding share count flat or actively shrinking it through share buybacks.

• Return on Invested Capital (≥8% 5-Year Average ROIC): Demonstrates sustained capital efficiency and a durable competitive moat.

3. Balance Sheet

• Interest Coverage (≥5.0x EBIT / Interest Expense): Ensures the company generates more than enough operating profit to cover interest obligations, even if debt costs rise.

• Leverage Ratio (≤2.5x Net Debt / EBITDA): Keeps debt low enough to prevent financial distress during sudden market drawdowns or recessions.

79 companies in the U.S., Australia, Europe, and the U.K. made it through.

If you want to see them, click the button below and enter your email for instant access.

Download the list here!

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.

Quarterly earnings season is in full swing, and Mr. Market has been very moody.

Case in point: Last week, two of our portfolio holdings reported earnings, and the market treated them completely differently:

1. Company A reported a temporary dip in profits as margins returned to normal levels, and Mr. Market immediately threw a fit, knocking 15% off the stock price in a single day.

2. Company B reported solid sales growth as their long-term investments (that management had been telling us about the whole time) began to pay off, and the market rewarded them with a strong rally.

When you watch a stock you own drop 15% in a matter of hours, your brain naturally wants to do one of two things: panic sell or buy the dip.

But as long-term investors, we need to ask a simple question:
Has anything actually changed with the underlying business, or is Wall Street reacting to short-term headlines?

Most of the time, quarter-to-quarter earnings volatility is just noise.

Or buying and selling based on a $0.01 miss on analysts’ estimates.

For long-term owners of the underlying business, focused on compounding cash flow, that short-term panic can give us great buying opportunities.

💬 Quick Question for You

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 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.