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JWR1945
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PostPosted: Thu Sep 30, 2004 11:55 am    Post subject: Reply with quote

Alec wrote:
Also, I'm not so sure that high dividend strategies will have the dividends increase with inflation.

Here is a better answer.

This is a link that shows how well dividends would have kept up with inflation. There were several cases of reductions of 20% or more in recent times and much, much worse during World War 1 and the Great Depression. I put this on the Historical Variations in Dividend Income thread dated Wednesday, Sep 29, 2004
http://nofeeboards.com/boards/viewtopic.php?p=23943#23943

Have fun.

John R.


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JWR1945
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PostPosted: Thu Sep 30, 2004 12:06 pm    Post subject: Reply with quote

Continuing: Price appreciation did not help in the past. Retirees were hit with a double whammy: severe cuts in the buying power of their dividend income and a reduction in (real) stock prices that lasted up to 20 years and, in some cases, even longer.

I recommend having several value indicators on your side, not high dividends alone. [Fortunately, value indicators tend to cluster together.]

Have fun.

John R.


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ForeignExchange
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PostPosted: Tue Nov 16, 2004 7:50 am    Post subject: Reply with quote

"Considering Lowell Miller's findings, I have no difficulty with the industry concentration. For example, before he actually looked into the matter, utility stocks were automatically thought to be laggards. The truth was different."

Charles Ellis discovered the advantage of utility stocks over bonds long before Lowell Miller. From page 298 "Policy in Portfolio Management", published 1971 in Classics II:

Turning now to the bond advocates' proposition two, and comparing cash income from bond interest to cash income from utility common stock dividends, the record presented in Figure 1 shows that in all but one ten-year period since World War II, total cash income from a portfolio of utility common stocks purchased in the first year and held for ten years, exceeded the income from from long-term Aa bought in that same first year. On average, over a ten-year span, Moody's utility dividends returned 6.4 percent on cost versus a peak yield of 4.6 percent for the bonds, or an average increase in income earned of 40 percent.

Over longer periods, the advantage of equities increases substantially.

Note* The ten year time periods start with 1945 and end 1969.


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JWR1945
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PostPosted: Tue Nov 16, 2004 8:08 am    Post subject: Reply with quote

ForeignExchange wrote:
Charles Ellis discovered the advantage of utility stocks over bonds long before Lowell Miller.

This is helpful.

It suggests that utilities (or something like them) are a better choice than bonds in a balanced portfolio. I know that Lowell Miller makes that argument. The interest rate of bonds is so low these days that they are not worth being included in an asset allocation. (Lowell Miller did not include TIPS and/or ibonds in when he made his assessment.)

If you have a portfolio of multiple asset classes and if their fluctuations are not correlated (too much), your expected return is a little bit better than the weighted average of the individual returns (if you rebalance your portfolio periodically). If all of your asset classes have similar returns, this is great. But if one of them is a real laggard, including anything from that asset class brings the overall return down. Lowell Miller's real life experience showed that replacing the bonds of a balanced portfolio with utilities (excluding just a few obviously bad choices, but including some that encountered nasty surprises) enhanced his portfolio returns substantially.

What was new about Lowell Miller's study is that it compared utility stocks to other stocks.

Have fun.

John R.


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ForeignExchange
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PostPosted: Tue Nov 16, 2004 8:54 am    Post subject: Reply with quote

JWR1945 wrote:
If you have a portfolio of multiple asset classes and if their fluctuations are not correlated (too much), your expected return is a little bit better than the weighted average of the individual returns (if you rebalance your portfolio periodically). If all of your asset classes have similar returns, this is great. But if one of them is a real laggard, including anything from that asset class brings the overall return down.

I'm seriously thinking of using my U.S. index fund as a feeder for a high yield stock ETF like DVY in a tax deferred account. In other words when there's enough money in the index fund, sell part of it to buy new shares in the ETF, and have more money from the dividend distributions to throw at asset classes which are down. If I can find closed end high yield dividend stock funds for Europe and Asia, selling at a discount, I may consider doing the same thing for these two regions.

I'm still reading through a lot of your postings. Great stuff here.


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Mike
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PostPosted: Tue Nov 16, 2004 10:13 am    Post subject: Reply with quote

Deregulation of the utility industry may alter their performance.


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JWR1945
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PostPosted: Tue Nov 16, 2004 10:40 am    Post subject: Reply with quote

Mike wrote:
Deregulation of the utility industry may alter their performance.

It definitely will. The big question is how? And how much? I don't know.

In some cases deregulation is only a word and the reality is likely to be different. Then there is a question of what gets deregulated. How about small (but inefficient) energy producers? Will they still be guaranteed part of the business?

There are lots of questions. I don't know the answers.

What I can see are changes in dividend policies. That may be our best clue.

Have fun.

John R.


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peteyperson
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PostPosted: Tue Nov 16, 2004 2:24 pm    Post subject: Reply with quote

JWR1945 wrote:
ForeignExchange wrote:
Charles Ellis discovered the advantage of utility stocks over bonds long before Lowell Miller.

This is helpful.

It suggests that utilities (or something like them) are a better choice than bonds in a balanced portfolio. I know that Lowell Miller makes that argument. The interest rate of bonds is so low these days that they are not worth being included in an asset allocation. (Lowell Miller did not include TIPS and/or ibonds in when he made his assessment.)

If you have a portfolio of multiple asset classes and if their fluctuations are not correlated (too much), your expected return is a little bit better than the weighted average of the individual returns (if you rebalance your portfolio periodically). If all of your asset classes have similar returns, this is great. But if one of them is a real laggard, including anything from that asset class brings the overall return down. Lowell Miller's real life experience showed that replacing the bonds of a balanced portfolio with utilities (excluding just a few obviously bad choices, but including some that encountered nasty surprises) enhanced his portfolio returns substantially.

What was new about Lowell Miller's study is that it compared utility stocks to other stocks.

Have fun.

John R.

One is rewarded for being an owner rather than a lender.

Bonds provide zero capital appreciation over the long-term, and a highly tax-inefficient income stream which struggles to provide a positive net real return for investors not tax shielded. Utilities will not grow at the speed of other types of stocks, but provide an essential service which will likely have value for decades to come. While the dividends may be taxable, the capital gains can be delayed. Indeed, the benefit of a partially to fully livable dividend stream reduces or eliminates the need to sell shares to release the capital appreciation element. A utility that grows by inflation, paying out 3-4% dividends is something that can happily provide livable income indefinitely. Volatility to the share price will become completely irrelevant, other than for companies that need a healthy share price to get bond issues approved in the future. Thus, a portfolio which contains a higher proportion of higher income payers as one comes nearer to the end of accumulation phase, can provide more assurance of market exposure. One can take advantage of the higher than bond return, but do an end-run around the volatility issue because it becomes largely irrelevant.

This would also be true for commercial real estate REITs or managed timber REITs, which each payout sufficent income from rents & timber harvests respectively, to live off. Other real assets such as oil well, gas well & precious/industrial/base metal investments can provide livable dividends but are depleting assets unless supplies are regularly replenished (as is the case with Canadian Royalty Trusts). Historically, utilities and real assets are not good growth investments. Over multiple decades one is likely to trail common stocks by owning a large chunk of them, but one does has to consider the risks of overvalued operating businesses in the present market combined with the limited growth prospects due to demographic issues. At some points, valuations in real assets will offer sensible rewards to the patient investor who wants the added reliablility of greater income streams. Outside of utilities and real assets, other businesses are available for investment which already temper their desire for growth, investing in the best growth prospects while sharing a healthy dividend with their shareholders. Not ideal when growth prospects abound and corporate responsibility avoids management enrichment via stock options & buybacks to fund same, but not all companies behave well. This again speaks to buying select businesses that display desirable characteristics, rather than index funds which mix the good, the bad and the ugly to lackluster effect in a low growth environment. Selecting other faster growing businesses into the mix should provide significant downside protection whilst outperforming the market as a whole with much more diversification to boot.

Petey


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JWR1945
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PostPosted: Wed Nov 17, 2004 8:01 am    Post subject: Reply with quote

peteyperson wrote:
One is rewarded for being an owner rather than a lender.

This is true most of the time, but not all of the time. The years leading up to the Great Depression provide an example.

I think that you will find the quoted sections in this post of interest. It is dated Wednesday, Aug 25, 2004:
http://nofeeboards.com/boards/viewtopic.php?p=23416#23416

It is on the "Money" Breaks Ranks thread dated Tuesday, Aug 24, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2913

Have fun.

John R.


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JWR1945
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PostPosted: Wed Nov 17, 2004 8:22 am    Post subject: Reply with quote

peteyperson wrote:
Selecting other faster growing businesses into the mix should provide significant downside protection whilst outperforming the market as a whole with much more diversification to boot.

My understanding is that David Dreman's research shows differently.

He separated the market into quintiles (for companies with $1 billion or more of capitalization). He found that the best companies with the highest valuations (i.e., the most expensive) had great growth throughout the previous decade. The companies with the lowest valuations (e.g., low P/E, low P/D and/or high D/P) typically performed poorly throughout the previous decade.

Five years later, the highest investment returns came from the companies that started with the lowest valuations. The worse returns came from the companies that started with the highest valuations.

But the best companies continued to be the best companies. They grew their earnings and so forth better than other companies. The worst companies continued to be the worst companies. They lagged behind other companies.

What was different was how each group was priced. There were consistent overreactions when companies behaved differently from their expectations. There were under-reactions when companies behave as expected. The net effect was the favorable surprises improved the prices of bad companies and unfavorable surprises hurt the prices of good companies. But the good news or bad news that confirmed previous assessments had very little effect on prices.

Have fun.

John R.


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JWR1945
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PostPosted: Thu Nov 18, 2004 8:38 am    Post subject: Reply with quote

You can read about David Dreman's findings in the November 12th issue of John Maudlin's email newsletter in the section Past Perception Dictates Future Performance.
http://www.frontlinethoughts.com/index.asp

Have fun.

John R.


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ForeignExchange
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PostPosted: Fri Nov 19, 2004 12:04 am    Post subject: Reply with quote

If one looks at the link below for "real" returns, I don't know of any way to get around the S&P 500 stock market results of the last forty years, for equities that are not in a tax shelter, except by buying high yield stocks, growing their dividends faster than inflation, and the investor re-investing at least some of his/her dividends in the same type equity.

http://www.thornburginvestments.com/research/articles/real_real_0604.asp


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Mike
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PostPosted: Fri Nov 19, 2004 3:03 am    Post subject: Reply with quote

Quote:
"real" returns

The study shows treasuries and bonds have negative real returns. However, if everyone piles into the S&P, it seems to me that dividends will fall so low that stocks will wind up with lower returns. Good for the people who get in early, bad for the late comers.


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Mike
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PostPosted: Fri Nov 19, 2004 3:23 am    Post subject: Reply with quote

Quote:
The highest P/BV (price to book value) stocks outperformed the market by 187 percent.

That's impressive.


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ForeignExchange
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PostPosted: Sat Nov 20, 2004 1:12 am    Post subject: Reply with quote

I think the nightmare for the high yield, dividend growth investor in North America, is that the same thing happens here, as what happened in Britain over the last few years.

"In most recent years, FTSE 100 dividends have risen at less than or about the headline rate of inflation. Real growth in income, which is the foundation for investing in shares, has not been delivered."

http://www.timesonline.co.uk/article/0,,145-1224527,00.html


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JWR1945
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PostPosted: Sat Nov 20, 2004 5:59 am    Post subject: Reply with quote

ForeignExchange wrote:
I think the nightmare for the high yield, dividend growth investor in North America, is that the same thing happens here, as what happened in Britain over the last few years.

We saw real dividend amounts (of the S&P500) decrease from early 1967 to 1976. Dividend amounts did not return to their 1967 peak until 1989.

You may have observed that the most dangerous period historically in our Safe Withdrawal Rate studies have been from the early 1960s through 1973 or 1974. The real dividend yield was low enough that excessive amounts of stock had to be sold.

What was even worse was that nominal dividend amounts fell in late 1970. They did not recover until mid-1975.

Have fun.

John R.


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JWR1945
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PostPosted: Sat Nov 20, 2004 6:35 am    Post subject: Reply with quote

Mike wrote:
Quote:
The highest P/BV (price to book value) stocks outperformed the market by 187 percent.

That's impressive.

I am not too sure about what your source is.

Price-to-book value can be a dangerous indicator. From James O'Shaughnessy's research, there have been long periods of time (longer than a decade) when a high price-to-book value strategy was dramatically superior. There have been longer periods of time when low price-to-book value stocks were dramatically superior and high price-to-book stocks under-performed.

It is best not to depend upon price-to-book by itself. Consider additional value indicators as well.

High price-to-book value companies are typically growth companies that depend upon human talent and little else. This can be in the form of future intellectual capital. Software development (e.g., the dot coms while they lasted) was a recent example. Biotechnology, with future patents hoped for but not in hand, is another.

Have fun.

John R.


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Mike
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PostPosted: Sat Nov 20, 2004 10:43 am    Post subject: Reply with quote

It was in the article you linked to. It is the return of the high P/B stocks in the decade leading up to their high P/B status. I am not quite sure how to make use of it, but it was an interesting bit of data.


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JWR1945
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PostPosted: Sat Nov 20, 2004 1:27 pm    Post subject: Reply with quote

This is from the November 12th newsletter by John Mauldin. His site is posting a later newsletter now.

Quote:
How much better did the well-performing stocks do than the poorly performing stocks in the 10 years prior to creating the portfolios? The highest P/BV (price to book value)stocks outperformed the market by 187 percent. The lowest stocks underperformed the market by -79 percent for a differential of 266 percent! If you look at the P/CF (price to cash flow), the differential between the two is 172 percent.

Yet in the next five years, the hot stocks underperformed the market by -26 percent on a P/BV basis and -30 percent on a P/CF basis. The out-of-favor stocks did 33 percent and 22 percent better than the market, respectively. This is a huge reversal of trend.

The time of these measurements is at the juncture of the two time periods, at the end of the first ten years and at the beginning of the subsequent five years. The high price-to-book value stocks started from a much lower level. They had been growing faster than most stocks throughout that first decade. That is where the 187% came from. At the end of a decade of spectacular growth, those stocks ended up with high price-to-book ratios.

Over the next 5 years, starting from those high price-to-book ratios, the companies under-performed by 26%. Starting out with a high price-to-book ratio was a mistake. But if you bought companies at reasonable valuations and they did exceedingly well, they could have ended up in the highest priced quintile (as measured by their price-to-book ratios).

That is, a high price-to-book ratio means sub-par performance going forward. Such a company got its high price-to-book ratio because it did exceedingly well during the previous decade.

Have fun.

John R.


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ForeignExchange
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PostPosted: Sat Nov 20, 2004 3:31 pm    Post subject: Reply with quote

Obviously, from what you've said, there may be some years where dividend growth may fall behind inflation. An investor may have to hold on to his portfolio until better times arrive. Thanks for the data. Do you have any info on dividend growth during the U.S. banking crisis from the late 80's to about 1990?

I wouldn't discount investing in stocks with low price to book value. This is exactly the criteria that Walter Schloss used which allowed his investment firm to be so successful since he started in 1955.


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