Tough Times for Dividend Investors 21 comments
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In theory, equity income investing creates a reasonably steady and growing income stream from stock investments — a good chance of maintaining real purchasing power of the stream. That contrasts with bonds which create a more reliable, but constant income stream that has no chance of maintaining real purchasing power (inflation protected Treasuries and perhaps some variable rate bonds excepted).
In practice lately, however, the equity income theory isn’t working so well. Dividends are being cut at an historic rate, particularly among banks, but to some degree in other industries as well.
Dividend investing isn’t for everybody, but it is attractive and important to some, particularly those who rely on their portfolios to generate cash flow to support their lifestyle.
S&P Dividend Aristocrats:
Standard and Poor’s may even have to reduce the performance requirements for its Dividend Aristocrats (proxy SDY) to keep the index going. Because the index rules require at least 40 issues, S&P may have to reduce the number of years a company has paid and consecutively increased dividends to a lower number to admit additional companies to keep the count at or above 40. It’s currently at 52 members. Some of their major stalwarts have bitten the bullet and cut dividends — a disqualifying event. Only 20 of the 52 members of the S&P Dividend Aristocrats pass the filter we use below.
The 2009 Aristocrats list is shown in this image:
click image to enlarge
Leading Dividend ETFs Fundamental Portfolio Attributes:
The dividend oriented mutual funds and ETFs (examples: DVY, VIG, SDY, VYM, DLN, DTN, DHS, PFM, DTD, PEY, CVY, FDL, PHJ ) have reduced prospects from which to select strong dividend companies. Some are heavy on financials. Check the current distribution yield and SEC-30 day yield on the funds, because the trailing yield may have substantially evaporated due to dividend cuts.
Here are fundamental portfolio statistics for the example ETFs:
click image to enlarge
Leading Dividend ETFs Price Behavior:
Here are price charts (with performance comparison to the S&P 500 index and the Barclay’s Aggregate Bond index) for the three dividend funds with the largest asset bases:
click charts to enlarge
Taking a Census of Dividend Stocks in the Total Stock Population:
We looked into the overall universe of US listed stocks to see what is available to dividend focused investors.
Beginning with a universe of 8,472 stocks, the list reduces to 3,852 by applying a $5 price per share minimum. After a $250 million minimum market-cap requirement, the universe reduces to 2,606 stocks. Then a $5 million requirement for the 3 month average daily Dollar trading volume knocks the list down to 2,498 companies.
If we assume 2,498 to be the count of reasonably eligible companies for a conservative dividend investor, we find that only 1,375 (55%) have a trailing yield greater than 0%. However, if we limit the list to those with a current 105% or lower payout ratio (the > 100% limit gives companies some slack in this trying time), the list reduces to 1,026 stocks (41% of the eligible company count). Except for trusts and partnerships, you would probably put a tighter filter on the payout ratio.
By applying a short-term “hold the fort” test (no reduction in dividends over the last four quarters), the list drops significantly to 677 (27% of eligible companies).
Finally, if we want the real income growth promise of dividends to be met by requiring at least 3-year dividend growth rate of 3%, the list falls further to 464 companies (19% of the eligible list).
Last comes the matter of the trailing yield itself which sees the list squeeze down tight if we require a yield that is competitive with S&P 500 index (around 3.3% trailing and 2.7% forward):
- yld > 0.0%: 464
- yld > 0.5%: 455
- yld > 1.0%: 426
- yld > 1.5%: 386
- yld > 2.0%: 329
- yld > 2.5%: 269
- yld > 3.0%: 213
- yld > 3.5%: 168 (7% of eligible companies).
US Listed Non-US Stocks Important Part of Equity Income Universe:
ADRs are in important part of the list. For example, 6 of the 10 largest market-cap companies in the list are ADRs. That is probably also a good example of the need to think an invest globally more so than in prior years.
[absolutely no opinion is being expressed here about the attractiveness of these stocks. - just commenting about the non-US composition]:
- China Mobile (ADR) - CHL
- Royal Dutch Shell (ADR) - RDS.A
- Chevron - CVX
- TOTAL (ADR) - TOT
- Coca-Cola - KO
- Verizon - VZ
- Novartis (ADR) - NVS
- Sanofi-Aventis (ADR) - SNY
- Abbot Laboratories - ABT
- StatoilHydro (ADR) - STO
Dividend Stocks in Their 52-Week Price Range:
[again, no opinion on the stocks below -- just providing descriptive features of the list]
Some of the stocks are low in their 52-week price range [ position = price/(52wkHI-52wkLO) ]. The lowest follow:
- Abbot Laboratories - ABT - position = 0.02
- United States Steel - X - position = 0.05
- Teekay - TK - position = 0.07
- FirstEnergy - FE - position = 0.08
- American Ecology - ECOL - position = 0.09
Others are high in their 52-week price range. The highest follow:
- PG&E - PGC - position = 0.64
- TC Pipelines - TCLP - position = 0.65
- Suburban Propane Partners - SPH - position = 0.76
- Sunoco Logistics Partners - SXL - position = 0.92
- Computer Programs & Systems - CPSI - position = 1.00
There is something in the list for bottom fishers and something there for momentum followers, but the list is small for either approach while also focusing on equity income.
S&P Dividend Aristocrats In Our Filter:
The 20 members of the S&P Dividend Aristocrats that pass the filter (at the 3% yield cutoff level) used here are shown below (there are other members of the Aristocrats that continue as Aristocrats, but that do not yield as much as 3%):
- Abbott Laboratories - ABT
- AFLAC - AFL
- BB&T - BBT
- Bemis - BMS
- Chubb - CB
- Cincinnati Financial - CINF
- Clorox - CLX
- Dover Corp - DOV
- Emerson Electric - EMR
- Johnson & Johnson - JNJ
- Kimberly Clark - KMB
- Coca-Cola - KO
- McDonald’s - MCD
- McGraw-Hill - MHP
- M&T Bank - MTB
- Pitney Bowes - PBI
- Pepsico - PEP
- Proctor & Gamble - PG
- PPG Industries - PPG
- Stanley Works - SWK
Summary:
In the end, the conservative equity income investor has a universe of only a few hundred companies from which to select by applying other important selection criteria. There will certainly be turkeys in that final list that must be avoided, and a few solid keepers to be identified and acquired. You’ll have your own particular idea as to what defines a “keeper”, but if you seek equity income from US listed stocks the list of suitable companies is not large. Give yourself margin for error in judging the financial strength of companies and their ability to sustain and grow their dividends.
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This article has 21 comments:
Obviously many of these are small volume and you need to do your own DD, and especially check the dividend record for contimuity and future projections, but their appear to be many gems out there for those willing to search for them and they could substantially increase your annual dividends.
Other attractive payers are E & ETP and you can get into emerging markets with the Brazil fund EWZ at about 5.2% yield right now.
The idea is to pick your own dividend stocks, as the funds and ETFs can be slow to rebalance, and as stated, many are already still heavy into the financial sector. A "boring" universe of things like utilities, consumer staples, and health care is a good way to start. You can supplement that with REITs, MLPs, Canadian Royalty Trusts, and bond ETFs.
You can do your own mutual fund by using something like Folio, or Sharebuilder. I personally use Folio, and it's perfect for a dividend strategy.
Check out some great authors here like Dividends4Life, and Dividend Growth Investor, as they have links to some great screens and ideas.
On Apr 07 06:34 PM market ace wrote:
> I think if you limit yourself to US stocks you will have to settle
> for 2-3% yields being called "dividend aristocrats". If you are serious
> about real dividends you will need to go to foreighn stocks such
> as Canadian trusts. There are numerous trusts in every imaginable
> industry that pay substantial monthly dividends of 10% or more. Sure
> they are not big movers and the Candian currency differential reduces
> your yield as does the foreign withholding tax which makes them unsuitable
> for IRA's, but right now the US $ strength gives you superior buying
> power on the front end and you could get a nice gain when the dollar
> falls.
>
> Obviously many of these are small volume and you need to do your
> own DD, and especially check the dividend record for contimuity and
> future projections, but their appear to be many gems out there for
> those willing to search for them and they could substantially increase
> your annual dividends.
Thank you for supplying this list for our inspection.
First Tr:VL Div Index FVD Price: $10.13 0.02 0.20% Vol: 20,205 11:29 AM ET 4/8/2009
The Fund seeks total return through a combination of current income and capital appreciation, by investing primarily in common stocks that pay dividends and have the potential for growth.
Style Market Cap Classification Asset Class Inception Date Primary Exchange
Value Multi-Cap Equity 08/19/2003 NYSE ARCA
Performance
FVD SP500
1 Day -1.85 -2.30
1 Week 2.23 2.29
4 Weeks 14.92 13.50
13 Weeks -14.92 -12.07
1 Year -31.75 -39.21
3 Years -26.75 -33.78
5 Years -8.36 -22.75
1 day | 1 wk | 4 wks | 13 wks | 1 yr | 3 yr | 5 yr
Investment Information
Market Cap 106,539,180
Net Assets $95,400,000
NAV $10.09
Prem/Discount 0.20%
Shares Outstng 10,538,000
Avg Daily Vol 73,400
Dividend Rate % 3.66
Latest Dividend $0.09 - 03/23/2009
Detailed Information
Mgmt Co First Trust Advisors LP
Administrator First Trust Advisors LP
Turnover 5.00
Beta .85
P/E 13.82
P/B 2.58
Expense Ratio .700
Top 10 Holdings
Company Name % of Total
Portfolio Dollar Value
(in thousands)
Wells Fargo & Co 0.90% $858.60
US Bancorp (Del) 0.84% $801.36
Cullen/Frost Bankers Inc 0.81% $772.74
American Express Co 0.81% $772.74
McGraw-Hill Cos 0.81% $772.74
Bank of New York Mellon Corp 0.80% $763.20
Bank Hawaii 0.79% $753.66
City National Corp 0.79% $753.66
Hershey Co 0.78% $744.12
Bank of Montreal 0.78% $744.12
Total: 8.11% $7,736.94
To receive a prospectus, contact First Trust Advisors LP
120 East Liberty Drive
Wheaton, IL 60187
800-621-1675
News Headlines
12:32 PM ET, 2/8/2009
Dividend ETFs draw interest as investors hunt for yield
5:30 PM ET, 5/20/2007
Morningstar expands presence in ETFs with indexes, research
Sector Allocation
Sector % of Total
UTILITIES 22.75%
FINANCIALS 21.77%
INDUSTRIALS 17.19%
CONSUMER GOODS 14.01%
OIL & GAS 5.11%
Consumer Services 5.03%
HEALTH CARE 4.29%
BASIC MATERIALS 4.15%
TECHNOLOGY 2.91%
TELECOMMUNICATIONS 2.76%
Portions of the mutual fund performance information contained in this display was supplied by Lipper, A Reuters Company, subject to the following: Copyright 2009 © Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
Today's "dividend aristocrats" are increasingly the companies who chose to take on (or maintain) debt at ~7-10% to pay dividends to their investors, who are in turn earning 2% on those dividends in money market and bank accounts. Those investors are doing the equivalent of borrowing from the bank to earn interest in a savings account.
That math just doesn't compute for me.
QUESTION 1 - Preamble:
I am a conservative equity income investor. Criteria #1: low turnover (less than 20%) within the ETF itself. Even though a high-turnover ETF is shielded from the tax consequences of the turnover, the turnover in and of itself is costly. This is because turnover for domestic funds adds 90 basis points per 100% turnover (trading commission costs and impact costs and spreads). This large number is not unreasonable if you consider that 15 bp each for trading commissions, impact and spreads = 45 bp. Times two for the roundtrip trade = 90bp.
Some of the funds above such as Powershares and Zacks have very high turnovers.
Criteria #2: a dividend portfolio that mostly consists of companies most likely to not cut their dividends. If you buy a high yield dividend stock and it cuts its dividend, then the stock drops more than the market. The trading rules of the Dividend ETF requires selling the position at a loss. So you lose both principal and dividend. Most investors seek "Dividend Growth" - in these trying times I seek only those companies that maintain their dividend.
As you pointed out, being a Dividend Aristocrat doesn't mean the dividend is safer. Even the Non-Financials have been cutting their dividends as well (PFE and GE for example.)
Criteria #3: I prefer ETFs rather than individual securities.
Question 1: Have you seen any data as to which factors best prevent a dividend cut ?
Low Price/Cash Flow ?
Low Price/Free Cash Flow ?
Dividend-Payout-Ratio (Dividends/Earnings Ratio) <= 60% ?
Being a member of an aristocrat index ?
Thanks in advance
Richard - I am glad you mentioned ADRs in your report. Foreign Developed Stocks tend to be less stingy with dividends. I prefer the ETF route versus individual ADRs.
However, Foreign High Dividend ETFs have been more of a disaster than Domestic. Consider iShares two offerings - IDV (Foreign Dividend) and DVY (Domestic Dividend). I've outlined their two strategies from the prospectus.
IDV (Foreign Dividend) - "The underlying index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts (“reits”)) in the dow jones world developed-ex. U.s. Index, a broad-based index representative of the europe, pacific, asia and canada (“epac”) regions, which covers developed markets, excluding the united states. To be included in the underlying index, the securities
(I) Must have paid dividends in each of the previous three years;
(II) Must have a previous year’s dividend per-share which is greater than or equal to their three year average dividend payout ratio;
(III) Must have a five year average dividend per-share which is less than or equal to 1.5 times the five year average dividend payout ratio of the corresponding dow jones country index; and
(IV) Must have a minimum three-month average daily trading volume of $3,000,000."
DVY- (Domestic) "The underlying index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts (“reits”)) in the dow jones u.s. Index, a broad-based index representative of the total market for u.s. Equity securities. To be included in the underlying index, the securities (
I) Must have had a flat-to-positive dividend-per-share growth rate for each of the last five years;
II) Must have an average five-year dividend payout ratio of %60 or less; and
III) Must have a minimum three-month average trading volume of 200,000 shares a day."
Correct me if I am wrong, but it looks like their investment strategies are roughly the same. But in terms of the resulting turnover, they were not the same.
Last Years Turnover (Year Ended Apr. 30, 2008)
DVY (Domestic) - 20%
IDV (Foreign) - 42%
Granted, 2008 was a record year for dividend cuts. This means that 42% of IDVs stocks cut their dividends. In other words - 42% were bad investments. 42% of the stocks not only cut their dividends - they dropped in price as well as dividend investors culled them from their portfolio. This is unacceptable - a great destruction of principal. I studied the alternatives a year ago and ishares seemed to have the ETFs with the lowest turnover. Apparently the iShares algorhythm results in high turnover in the foreign developed space, but acceptable turnover in the domestic space.
I have two choices
a) build my own portfolio of ADRs
b) find a ETF of CONSERVATIVE foreign high div payers with lower turnover. (preferred)
There are less choices in the "Foreign High Dividend" space. Most of them have high turnover and high ERs.
Do you know of such a low-turnover "Foreign High Dividend" ETF? Or should I roll my own (less preferred)
Question 2: Do you have any suggestions as to where to find such an ETF?
There seem to be two camps forming: In one are those who take the general S&P data and conclude that dividend investors are all getting slaughtered. There have been several articles in the past few days that take this shallow (IMO) approach.
In the other are writers such as myself, Dividends4Life, and Dividend Growth Investor, plus the author of this article. We don't dispute the general statistics from S&P. But we take the position that what I call the Sensible Dividend Investor doesn't invest in all of those dividend stocks, but in a select portfolio of the best ones.
Each of us has our ways of screening down the thousands of dividend-paying stocks to the worthy few, but the goal in the end is to construct a portfolio of individual stocks that are unlikely to cut or suspend, but rather to grow, their dividend, even in these tough times. It's both that complicated and that simple.
Here's my solution: www.sensiblestocks.com...
As to ETFs or dividend-oriented mutual funds, I'm not sure why anyone would use them--their screens and rules, from what I can see, practically insure that they will contain a high percentage of stocks with dividends in peril. Many got caught holding banks when attentive individual stock-picking would have screened them out ahead of their massive dividend cuts. Side-note as to GE: For these purposes, it's in the financial sector, and it got trapped just like the rest of the banks and financials for its behaviors.
Year to date, I'm up around 5% while S&P is down about 10%. Currently, I'm long SDY, sold May $36 Calls on the SDY, and covered by SDS position today (will re-enter when market gets overbought again). My only complaint is the wide bid-ask spread on the SDY options, but otherwise, happy to keep earning dividend & getting paid option premium while waiting for market to stabilize (VIX down and stay down).
fyi: those that were holding the stock (bag?) when this hit them will take ten years of compounding re-investing just to recoup the loss. Been there. Done that. Don't want a T-shirt...just my money staying out of any (yes US, Canada, etc.) country's "tax free trusts".
On Apr 07 08:56 PM Lightway wrote:
> I forgot to mention, keep in mind that the Canadian Royalty Trust
> tax laws will be changing in 2011, so make sure to re-evaluate them
> yearly to see if they still fit your investing goals.
dividendinvestor.com
On Apr 08 02:34 PM David Van Knapp wrote:
> I am happy to see an article on SA that approaches dividend investing
> as an exercise in seeking the best dividend stocks one-by-one, rather
> than than lamenting the news out of S&P about how much stock
> dividends are being cut across the board.
>
> There seem to be two camps forming: In one are those who take the
> general S&P data and conclude that dividend investors are all
> getting slaughtered. There have been several articles in the past
> few days that take this shallow (seekingalpha.com/symbo...)
> approach.
>
> In the other are writers such as myself, Dividends4Life, and Dividend
> Growth Investor, plus the author of this article. We don't dispute
> the general statistics from S&P. But we take the position that
> what I call the Sensible Dividend Investor doesn't invest in all
> of those dividend stocks, but in a select portfolio of the best ones.
>
>
> Each of us has our ways of screening down the thousands of dividend-paying
> stocks to the worthy few, but the goal in the end is to construct
> a portfolio of individual stocks that are unlikely to cut or suspend,
> but rather to grow, their dividend, even in these tough times. It's
> both that complicated and that simple.
>
> Here's my solution: www.sensiblestocks.com...
>
>
> As to ETFs or dividend-oriented mutual funds, I'm not sure why anyone
> would use them--their screens and rules, from what I can see, practically
> insure that they will contain a high percentage of stocks with dividends
> in peril. Many got caught holding banks when attentive individual
> stock-picking would have screened them out ahead of their massive
> dividend cuts. Side-note as to GE: For these purposes, it's in the
> financial sector, and it got trapped just like the rest of the banks
> and financials for its behaviors.
>
> Here's my solution: www.sensiblestocks.com...
Dave- I went to your website - all it looked like was a pitchman's shill to buy a book/newsletter to gain access to 40 stock picks. Ignoring the pitch, I did find some stock recommendations. The current yields are listed below.
Abbot Laboratories / ABT 3.66%
AT&T /T 6.46%
Chevron 3.80%
Diageo 4.95%
Emerson Electric 4.37%
Kinder Morgan Energy Partners 8.80%
McDonalds 3.60%
Pepsico 3.25%
Realty Income 8.71%
Royal Bank of Canada 5.21%
Sherwin Williams 2.74%
Telefonica 6.20%
I use as my "benchmark to beat" the ETF DVY - ishares DJ U.S. Select Dividend / DVY - component stocks as of Mar 30, have an after expense yield of 5.43%.
Of your picks, only 4 beat the DVY yield and one comes close.
AT&T /T 6.46%
Kinder Morgan Energy Partners 8.80%
Realty Income 8.71%
Royal Bank of Canada 5.21%
Telefonica 6.20%
Taking the first
AT&T /T - YLD:6.46% P/CF:4.6 P/FCF:33.6 FCFYLD:3.0% P/E:11.9 DIVPAYOUTRATIO:73.9%
T cut their div in 2000/2001 - a big negative
Div payout ratio is 73.9 and <=60 is a safe number. - negative #2
P/E is highly manipulated in most stocks. I assume that FCF is the best measure of dividend strength I invert the P/FCF to come with a yield FCFYLD:3.0%. I don't know how AT&T can support the dividend going forward.
Kinder Morgan Energy Partners & Realty Income - two interesting bets. The usual dividend income investor metrics (P/E P/CF, etc) do not apply. To analyze these stocks would be outside the scope of the use of traditional dividend investor metrics.
Royal Bank of Canada YLD:5.21% P/CF:10.1 P/FCF:7.0 FCFYLD:14.2% P/E:12.5 DIVPAYOUTRATIO:66.0
Analysis: This is not a bad stock - it has the FCF to support the dividend. However it's yield is slightly below DVY's, so why bother?
Telefonica YLD:6.20% P/CF:4.1 P/FCF:8.2 FCFYLD:12.3% P/E:9.2 DPR:61.2. TEF has the FCF to support the dividend. What bothers me about TEF is that it has a HUUGE DEBT LOAD - LT DEBT/EQUITY 261.67% TOTAL DEBT/EQUITY 308.68%. (All my data is from reuters) This company is a disaster waiting to happen.
Sorry man, I don't find any value in your website.
On Apr 08 05:30 PM cam addis wrote:
> The ETF discussion ignores Wisdom Tree funds that specialize in foreign
> dividends and offer better yields than VIG especially, which is more
> conservative than a checking account.
Wisdom Tree dividend funds have very high turnovers. They average about 50% lately. For domestic funds that leads to a 45bp penalty annually. WisdomTree looks great on paper - they have great backtested results, but they fall short when it comes to implementation.
On Apr 08 06:52 PM living4dividends wrote:
>
> On Apr 08 05:30 PM cam addis wrote: