NoFeeBoards.com!

No Fees! No Ads! No Spam!

Log in Register FAQ Memberlist Search NoFeeBoards.com! Forum Index

The Dividend Duck

 
Post new topic   Reply to topic    NoFeeBoards.com! Forum Index » SWR Research Group
View previous topic :: View next topic  
Author Message
unclemick
*** Veteran


Joined: 12 Jun 2004
Posts: 231
Location: LA till Katrina, now MO

PostPosted: Thu Aug 19, 2004 10:36 am    Post subject: The Dividend Duck Reply with quote

Wall Street never fails to feed the ducks:

NYSE,BDV, Black Rock Dividend Achievers Trust, picked from top 100 highest yield Mergent's Dividend Achiever's, will hold 60-90 issues with rebalancing to stay diversified, expense 0.85%, yields 6.75% bought below 13.75/share - fixed div .90/shr.

Hmmmm - looks like I got me a benckmark for my dividend hobby stocks. Thinking about a small position to be able to peek inside periodically.

Blockheadedness prevents me from abandoning my hobby stocks and leaping on this opportunity - after all they are 'hobby' stocks.

Like my tongue in cheek on Target Retirement - should I chuck my 40 DRIP's and trust these guys to handle the heavy lifting? What would a person want to consider if looking at something like this as a dividend strategy? (No track record on div growth comes to mind).




Last edited by unclemick on Thu Aug 19, 2004 2:15 pm; edited 1 time in total
Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Aug 19, 2004 11:49 am    Post subject: Reply with quote

unclemick
Quote:
Blockheadedness prevents me from abandoning my hobby stocks and leaping on this opportunity - after all they are 'hobby' stocks.

The Black Rock Trust has expenses. Even 0.85% compounded builds up eventually. The odds are in your favor, provided that you stick with your basic strategy.

Quote:
Like my tongue in cheek on Target Retirement - should I chuck my 40 DRIP's and trust these guys to handle the heavy lifting? What would a person want to consider if looking at something like this as a dividend strategy? (No track record on div growth comes to mind).

Actually, I think that I have made a decent case (preliminary, to be sure) that you are better off tossing out the mutual funds and making your hobby stocks (or DRIPS) the core of your portfolio. Relabel them. Properly identified, your indexed mutual funds are the hobby stocks [with lots of risk] and your DRIPS are your [safe and reliable] core holdings.

Scary conclusion, isn't it?

Most index funds are dangerous at today's valuations. [The only thing worse are actively managed mutual funds with their high fees.] Unless stock and bond holdings provide almost identical returns, having bonds drags down the overall performance below that of an all dividend approach. The rebalancing bonus is a mirage, a sham. Rebalancing only goes part way. There is no real bonus unless all asset holdings produce almost identical total returns over long periods of time.

If you use the Black Rock Dividend Achievers Trust as a benchmark, be very careful in making comparisons. Undoubtedly, you will be withdrawing some of the dividends for income while the Trust is likely to report results assuming all dividends are reinvested.

Have fun.

John R.


Back to top
View user's profile Send private message
Alec
Admin Board Member


Joined: 10 Sep 2003
Posts: 31
Location: Crofton, MD

PostPosted: Thu Aug 19, 2004 4:42 pm    Post subject: rebalancing bonus Reply with quote

Hey John,

Perhaps you and I have a different idea of what the rebalancing bonus actually is. I have [as you probably have] seen the benefit of rebalancing described as leading to returns that are higher than either asset. Obviously, this can only be true if the two assets have similar returns.

But, the "rebalancing bonus" doesn't actually say this. What it does say [or to me at least Wink ] is due to the non-perfect correlation of two assets, the realized return should be greater than the weighted average of the returns of the two assets.

For example, from 1984-2003, a portfolio of 60% VFINX, 40% LBA index returned 11.73%. This was 0.31% higher than the weighted average of VFINX (12.78%) and the LBA index (9.38%). And naturally there is the benefit of lower standard deviation, lower than the weighted average of the standard deviation of the two assets - realized 0.112247 vs expected 0.127712. Granted, over shorter time periods there may be no rebalancing bonus at all. For example, from 84-93, the rebalancing bonus was about 0.08%, and from 94-03, the rebalancing bonus was 0.50%. And over even shorter periods, like a couple of years, one will probably look like a dope rebalancing.

I also looked at a 60/40 mix of S&P 500 and 5 Yr Treasuries from 66-82, and found the same thing - rebalancing bonus of 0.34% with reduction of SD by 0.018403. Even with a wide range of different mixes of each asset, in both time periods, there was a rebalancing bonus.

- Alec


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Aug 19, 2004 5:36 pm    Post subject: Reply with quote

Alec
Quote:
But, the "rebalancing bonus" doesn't actually say this. What it does say [or to me at least ] is due to the non-perfect correlation of two assets, the realized return should be greater than the weighted average of the returns of the two assets.

You have stated it correctly.

This is one of the things that Gummy has discussed in detail. [I recommend that people buy his CD with the archives of his website.] The bonus is when compared to the weighted average--exactly as you have said. Gummy's complaint was that this has been glossed over by William Bernstein and others. His point was that you may give up more by introducing a new asset class than you get back via the bonus.

They most common example in SWR models is a mix of stocks and commercial paper. With stocks returning 6.5% in the very long-term and commercial paper barely returning 1% in the modern era [in real dollars and with all dividends and interest reinvested], a 50%-50% mix has a weighted return of 3.75%. The rebalancing bonus adds to this weighted return, but such a portfolio does not come close to reaching 6.5%.

We find that high dividend stocks have done well. Lowell Miller's company found in a 1990-1991 study that utilities have come very close to matching the total return of the S&P500 (within 0.5% in nominal dollars) with one half of the volatility. It is the only study to see how well utilities have actually performed. Everyone else had assumed that they must necessarily do poorly. Others had always excluded utilities from their high yield research.

Other research has shown that high dividend large capitalization stocks have outperformed the market as a whole. [I have not finished my reading that backs up this point. I am reading James O'Shaughnessy's What Works on Wall Street at the moment. The hidden flaw in his reporting is that all costs are excluded. BTW, all of the rebalancing studies that I have read have this flaw as well.]

Lowell Miller contends that the safest and highest yielding stocks such as utilities, banks and REITS are a better choice for the "bond" portion of a portfolio. They outperform by a big enough margin. Bonds no longer provide the level of safety that they are credited with. Bond prices have been highly volatile in recent decades.

The intended effect of high dividend alternative approaches is to capture a larger percentage of the return of the overall stock market. A portfolio consisting of the S&P500 index and a diversified collection of secure, large capitalization, high dividend stocks sounds like a winner. [Valuations still matter. Liquidation prices are still important.] That combination might have a true rebalancing bonus with a long-term total return above the 6.5% to 7.0% of the S&P500. [There is the issue of the correlation of returns. It is not guaranteed that an appropriate combination exists.]

Have fun.

John R.


Back to top
View user's profile Send private message
unclemick
*** Veteran


Joined: 12 Jun 2004
Posts: 231
Location: LA till Katrina, now MO

PostPosted: Fri Aug 20, 2004 4:19 am    Post subject: Reply with quote

JWR

1. So my hobby stocks have morphed from 'don't get no respect' to dividend stocks worthy of due diligence.

2. My 50/50 defensive investor balanced index - Bogle/Graham - the horse I rode in on - gets put out to pasture.

Speed is not my strongpoint. Chickenheartedness is still a viable investment theory in my book.

Theory wise - two income streams: 1. Dividend stocks - try and build up over time; 2. Balanced Index - SEC yield plus perhaps some look back variable take out.

???? Possibly ending up in old age with 100% dividend stock income stream and a depleted balanced index. Hmmmm - 70 1/2 (in 9 years will make me an offer I can't refuse).

Two parting thought's - your comment on another thread about the market arbitrage working on dividend stocks appears to continue (sans numerical proof) and I pass on the rebalancing discussion since I tend to watch SEC yield. I do enjoy reading the posts on the subject.


Back to top
View user's profile Send private message
Alec
Admin Board Member


Joined: 10 Sep 2003
Posts: 31
Location: Crofton, MD

PostPosted: Fri Aug 20, 2004 7:24 am    Post subject: high div stocks Reply with quote

Regarding the trading costs and taxes associated with high dividend paying stocks, two prof's at BYU have looked at them:

McQueen, Grant, and Steven Thorley "Mining Fool's Gold," Financial Analysts Journal, March/April 1999.

McQueen, Grant, and Kay Shields and Steven Thorley. "Does the Dow-10 Investment Strategy Beat the Dow Statistically and Economically?" Financial Analysts Journal, July/August 1997. [I couldn't find this one for free on the net Evil or Very Mad ]

From reading the first paper, and reading highlights of the second, it looks like the majority of the outperformance would've been eaten up by taxes (on the higher dividends) and investing/transaction costs.

Do you really need to purchase ind stocks for the high dividend strategy? You could use Ishares DVY, see also M* portfolio breakdown of DVY. Lots of Banks and Utilities. Or even VEIPX (Vanguard's Equity Income fund) - shoots for stocks with above average dividends and below average valuations among other things. DVY is actually more mid cap value, which is a better diversifier of large caps than large value.

On the Utility front, were most of the Utilities "Regulated" by the state/local gov'ts? Can we infer the same volatility now that some/most of the industry is being deregulated?

Can most of the outperformance by the high dividend stocks be attributed to the higher yields (p/d), or can something else, like high book to market (low p/b), explain it better? I'm pretty sure, from looking at past returns, that combining higher BtM stocks with the S&P 500 did improve return and decrease volatility (SD). Heck, I do this. I think I would keep all of the high BtM stocks/fund in tax-deferred accounts [this isn't really an issue for me right now since I've got everything in tax deferred].

On a more personal note, I had a visit with my 92 year old grandfather last month, and we discussed things like how he got his first and second job, stocks, etc. Apparantely, my great grandfather only had a pension and his high dividend paying New England Bell stock (former employer) in retirement. Of course, this was back when it was probably yielding something like 8%.

- Alec


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Fri Aug 20, 2004 7:39 am    Post subject: Reply with quote

unclemick
Quote:
1. So my hobby stocks have morphed from 'don't get no respect' to dividend stocks worthy of due diligence.

It wasn't I. I wasn't the one who refused to give them respect.

Quote:
Speed is not my strongpoint. Chickenheartedness is still a viable investment theory in my book.

Based only upon my limited experience, Chickenheartedness is a definite plus, improving long-term returns.

Quote:
your comment on another thread about the market arbitrage working on dividend stocks appears to continue (sans numerical proof)

There is a dispute about this. Mark Hulbert (CBS Marketwatch.com) puts it this way: Dividend policies have returned to historical norms. They have not gone back so far as to come close to their highest degree of popularity in recent years.

Quote:
I pass on the rebalancing discussion since I tend to watch SEC yield.


My preliminary findings along these lines are obviously radical. This is why I have been proceeding very deliberately when looking at high dividend strategies. This is why I have presented Lowell Miller's material slowly and cautiously, looking for hidden flaws.

One thing that is clear about rebalancing is that it limits your upside. In terms of what our SWR models tell us about the past, rebalancing has added only a minuscule increase in safety at the cost of a large upside potential. [E.g., the worst case Historical Surviving Rate comparisons are between withdrawal rates of 3.8% versus 3.9%. The improvement from rebalancing was 0.1% for giving up the upside potential.]

Have fun.

John R.


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Fri Aug 20, 2004 8:23 am    Post subject: Reply with quote

Alec, thank you for your interesting comments.

Our emphasis on this board is retirement portfolios. Some of the more academic considerations are not especially relevant. If retirees are using dividend income for living expenses, tax consequences from dividends are not too serious. [Add the changes in the tax law to that.] Tax effects are sheltered in IRAs and most other retirement accounts.

I consider investing/transaction costs to be critically important. It causes me to reject arguments favoring the DOW-10 Dividend Strategy until they are included.

Quote:
Do you really need to purchase ind stocks for the high dividend strategy?

No. That is what makes the research conducted by Lowell Miller's company so important. Everybody else has assumed that utilities would underperform. So much so that they never even attempted to discover the facts.

Quote:
On the Utility front, were most of the Utilities "Regulated" by the state/local gov'ts? Can we infer the same volatility now that some/most of the industry is being deregulated?

The degree of this is uncertain. Utilities still have products that are continually in demand. We cannot assume the same reliability of returns and the same degree of safety as in the past.

Quote:
Can most of the out-performance by the high dividend stocks be attributed to the higher yields (p/d), or can something else, like high book to market (low p/b), explain it better?

You are ahead of me. James O'Shaughnessey claims that multiple factors in combination are much better than individual factors. [I have not gotten far enough to verify that.] I have noticed that sometimes the advantage of an individual factor is avoiding doing the opposite (which leads to disaster).

Looking ahead, I know that James O'Shaughnessey identifies the price to sales ratio as the best individual factor. Add rising sales to go along with that. [A company can improve the bottom line only so much by cutting costs. At some point it has to have rising revenues to improve profitability.]

There are lots of traps in O'Shaughnessey's analyses. His conclusions can be highly misleading if accepted at face value. I bring this up here although it is my response to something that Mike mentioned on another thread.

For example, O'Shaughnessey's time frame is 45 years and his comparisons are based upon nominal dollars. When he states that a certain approach would have increased one's holdings by a factor of 4, he is talking about 45 years of compounded interest. If stocks in general return 10% (nominal) annualized, the favored strategy would have increased the annualized return from 10.00% to 13.44%. Now let's assume that O'Shaughnessey's mutual fund charges a management fee of 1%. [My guess is that his fees are higher.] That would bring the annualized total return down to 12.44%. An investor would still be better off after 45 years, but by a factor of 2.68 instead of 4. In the meantime, it is supposed to take 14 years as a minimum to see whether a particular approach is better. That's a lot in fees for a long amount of time.

As I mentioned to unclemick, understand that these findings are radical and that they may have flaws hidden within them. Proceed cautiously.

Have fun.

John R.


Back to top
View user's profile Send private message
unclemick
*** Veteran


Joined: 12 Jun 2004
Posts: 231
Location: LA till Katrina, now MO

PostPosted: Fri Aug 20, 2004 10:53 am    Post subject: Reply with quote

Hmmmmm - perhaps it's time for some crusty curmudgeonism's before we get back to the numbers.

1. Having recovered somewhat from the other forum (laddered divided stocks) with the help of JWR's numbers - I shall attempt to regain some courage and give my 'individual dividend stocks' some respect.
2. I've been in the distribution phase for over ten years Soooo - PERFORMANCE IS NOT IMPORTANT - except for minding the store as to div/div growth. A big mistake of Mergent's Handbook was adding a total return table - not minding the the store - IMHO. A performance fixation and attempting to 'track' inflation too closely versus holding 'forever' and buying on dips (price to div ) can lead to overtrading and chasing the wrong rabbit. Judgement is called for.
3. The Norwegian widow should not be dismissed out of hand - one or a few local stocks - as long as the dividends keep coming - may not as dead an idea as some may think.

P.S. - local can be branches of some very large companies - Entergy, Bell South, Bank of America, Chevron Texaco, Exon, etc., etc.


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Fri Aug 20, 2004 11:48 am    Post subject: Reply with quote

Quote:
A big mistake of Mergent's Handbook was adding a total return table - not minding the the store - IMHO.

The total return table can help you identify stocks that have fallen out of favor. Merck MRK falls into this category. It went from a big premium to a discount.

Otherwise, I see little value for retirees. unclemick is right. It is a distraction. It only attracts speculators.

Have fun.

John R.


Back to top
View user's profile Send private message
unclemick
*** Veteran


Joined: 12 Jun 2004
Posts: 231
Location: LA till Katrina, now MO

PostPosted: Sun Aug 22, 2004 3:16 am    Post subject: Reply with quote

Let me summarize my thoughts - if only for my benefit - if anybody else can pick up some ideas for their own ER - so much the better,

1, I started this in earnest in 1993 with the idea of a small supplimental income stream with COLA type properties since my defined pension coming in 1998 had no cost of living adjustment.
2. I like DRIP's so I'm going to do it anyway. Ten years of hindsight - net/net - I've reinvested the dividends and the cash take out has been in the form of selling the ones whose dividends were cut, spin offs, cash out mergers, --- luck/chance/? -- roughly equal to the to the divdends reinvested. In non real or inflation adjusted $ about 8+%.
3. I buy high, sell low (except in mergers where there is no choice). Try to to mind the store tax wise when selling. Relatively short term, sell after 7-10 yrs if the dividend goes flat.
4. Don't rebalance, don't diversify(I have balanced index funds), don't care about portfolio value - do care about the dividend stream and loosely monior div. growth via my tax returns(1099 B) over the years since 1993.
5. Any loose cash - try to add to 'out of favor' (?timing/value?) stocks. Am perfectly willing to violate my rules - one example, New Plan Reality fell off the list so was waiting for the 7th year to consider selling - but it fell to yield around 12% in 2000 - so what the heck - they ain't going out of business - so bought some more - yielding 14% on original $ in so would be painful to sell today.

SO - glad the numbers are showing some validity to a dividend type strategy. Will probably give it increased emphasis in coming years(for my ER). MAY(or may not) look at benchmarking against one of Mergent's licensed products(Black Rock).

Hope it stimulates some thinking. Being blockheaded I'm going to continue to do it anyway.


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Sun Aug 22, 2004 3:50 pm    Post subject: Reply with quote

unclemick
Quote:
3. I buy high, sell low [high dividend yields and low dividend yields] (except in mergers where there is no choice). Try to to mind the store tax wise when selling. Relatively short term, sell after 7-10 yrs if the dividend goes flat.
5. Any loose cash - try to add to 'out of favor' (?timing/value?) stocks. Am perfectly willing to violate my rules - one example, New Plan Reality fell off the list so was waiting for the 7th year to consider selling - but it fell to yield around 12% in 2000 - so what the heck - they ain't going out of business - so bought some more - yielding 14% on original $ in so would be painful to sell today.

unclemick's approach is reasonably consistent with Lowell Miller presents in The Single Best Investment. Their sell policies are especially interesting.

In my thread about Lowell Miller's books, I misstated his sell policy just a little bit. I said:

Quote:
6) Sell whenever the dividend is in doubt, when it has not been increased in the last year (i.e., twelve months) or when the company's story has changed.


I might have been better to quote the last line in Chapter 8, page 146.

Quote:
6. Sell if it appears the dividend may not be increased, or it too much time passes without an increase and there's no legitimate excuse for a failure to increase.


And in view of unclemick's comments, the sentence that precedes this is even more interesting.

Quote:
5. Hold as you would hold real estate.


New Plan Realty's change in its dividend policy was an important signal. I am not so sure of the extent to which unclemick searched for the reasons and whether he is right when he says that they are not going out of business. [For unclemick: Benjamin Graham gave an example of how to know in his 4th revised edition.]

Selling has tax consequences and other costs as well. Costs always matter.

Have fun.

John R.


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Aug 26, 2004 10:18 am    Post subject: Reply with quote

Alec
Quote:
Do you really need to purchase ind stocks for the high dividend strategy?

I interpreted ind stocks to be industrial stocks as opposed to utilities.

If ind stocks refers to individual stocks, the answer depends upon selection and cost. Both Lowell Miller and O'Shaughnessy favor buying a large number (30 to 50, respectively) representative companies (in distinct businesses) to form the equivalent of a self managed index fund with equal weights in dollars.

To keep this in context, John Bogle suggests owning 15 or more representative companies for taxable accounts weighted according to the capitalization of their industries (to imitate the S&P500 index).

My personal preference is to own individual stocks because it places all costs under my own control. I prefer not to sell unless there is a compelling reason to do so.

A dividend strategy emphasizes income streams. This helps psychologically during down markets. It provides you with a much better way to measure your progress in the short to medium term than Mr. Market's wildly changing prices. In addition, it is a meaningful way for retirees to measure progress.

My guess is that there are good alternatives to individual stocks. What is not immediately apparent about the alternatives is whether you can count on a future income stream in terms of dollars.

Both the dividend amount in dollars and the total return are relevant. The dividend amount is the income stream. The total return tells you about redeploying your funds and/or meeting an immediate need for cash.

Have fun.

John R.


Back to top
View user's profile Send private message
JWR1945
***** Legend


Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Sun Sep 05, 2004 3:21 pm    Post subject: Reply with quote

For Alec:

Your selections make sense. Both Ishares DVY and Vanguard's VEIPX invest in companies with capitalizations of $1.0 billion or more with above average yields. Their fees are low. They satisfy other indicators of value as well.

From my post about the TIPS-Dividend Approximation dated Wed,Aug 18, 2004
http://nofeeboards.com/boards/viewtopic.php?t=2896

I have concluded that both of your selections are attractive for retirement portfolios. The dividend yield threshold to make them more attractive than an S&P500 index fund is 2.5% to 3.0%. The choice is a toss up for VEIPX with its 2.8% dividend yield. The choice is clear-cut for DVY with its 3.9% dividend yield.

Prices are especially important these days because of record valuations. Today's stock market has substantial risk on the downside. Historically, high dividend stocks have cushioned price decreases. They do not necessarily prevent price decreases.

My personal preference is to purchase individual stocks. One can identify several and wait for attractive prices. Just about every stock falls out of favor at some point.

I like the ability to choose stocks that are likely to increase their dividends. Dividend growth is an important component of the Gordon Equation (the discount rate equals the dividend yield plus the dividend growth rate, approximately, when certain assumptions are made).

Have fun.

John R.


Back to top
View user's profile Send private message
ForeignExchange
* Rookie


Joined: 25 Feb 2004
Posts: 19

PostPosted: Mon Nov 15, 2004 9:24 am    Post subject: Reply with quote

Quote:
I am reading James O'Shaughnessy's What Works on Wall Street at the moment. The hidden flaw in his reporting is that all costs are excluded. BTW, all of the rebalancing studies that I have read have this flaw as well.]

The following link at The New York Times has the same problem. No mention of returns after costs, inflation, and taxes. Nice chart though.

Does Your Portfolio Need a Dividend Kick?
By NORM ALSTER


Published: November 14, 2004


http://makeashorterlink.com/?U507539C9

Don't want to register. Use www.bugmenot.com


Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic    NoFeeBoards.com! Forum Index » SWR Research Group All times are GMT - 9 Hours
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by phpBB © 2001- 2004 phpBB Group
Designed for Trushkin.net | Styles Database