In a prior article, we reviewed our quantitative identification of high quality dividend stocks based on current and historical data. Once that list is known, the next question we ask is what independent analysts think. Those analysts make forward looking judgments, and may not all be considering the same information or criteria. With the independent analyst ratings, we create a subset of our Quantitative List that we call the Subjective List. That is step two in our process of generating three lists of high quality dividend stocks each month.
Each month our Rational Risk Equity Income Investor letter uses a rules-based method to identify three lists of high quality dividend stocks:
- Quantitative List - based on purely objective historical quantitative criteria, including a minimum current yield
- Subjective List - subset of the Quantitative List, based on favorable forward looking recommendations by independent analysts
- Performance List - subset of the Subjective List, based on maximum historical volatility and maximum historical negative rolling return limits
This article shows this information from the October 2012 Issue:
- how the Subjective Lists generated in each of the past 6 months have done on a long-term rolling return basis
- 10-year dividend payback estimates for Subjective List
- 10-year quarterly differences between Subjective List performance and the S&P 500 for last 6 monthly issues
- the symbols for the stocks in the Quantitative List in each of the last 6 months
- the specific rules used to select the Subjective List
FIGURE 1: LONG-TERM ROLLING RETURNS FOR PRIOR 6 SUBJECTIVE LISTS
(Rational Risk letter page 24)
This table shows a variety of performance data from the last 10 years for the Subjective List from each of the past 6 months versus the S&P 500 (proxy SPY) and an equal weight portfolio of four leading dividend ETFs (SDY, DVY, VIG and VYM). Generally, each Subjective List when held in equal weight and rebalanced monthly, has outperformed both the S&P 500 and the equal weight portfolio of dividend ETFs.
The data points are:
- Best 3 months
- Best 1 year
- Best 3 years
- Worst 3 months
- Worst 1 year
- Worst 3 years
- Trailing yield
- 3-year standard deviation
- 3-year total return
- 3-year Sharpe Ratio
- 5-year standard deviation
- 5-year total return
- 5-year Sharpe Ratio
- 10-year standard deviation
- 10-year total return
- 10-year Sharpe Ratio
FIGURE 2: 10-YEAR DIVIDEND PAYBACK ESTIMATES FOR SUBJECTIVE LIST
(from Rational Risk letter page 15)
These symbols are for the 13 stocks among the Quantitative List that passed the rules for our Subjective List methodology (detailed below). This is data taken from page 15 of our Rational Risk Equity Income Investor letter.
The calculation for these estimates utilizes the 1-year, 3-year and 5-year dividend growth rates for each stock. For the 10-year dividend price payback, we grow the current dividend for 10-years, sum those dividends and divide by the current stock price. We perform this calculation two ways, first using an average rate which is the average of the historical 1, 3 and 5 year dividend growth rates, and then again using the lowest growth rate of the 1, 3 or 5 year growth rates. We use the current dividend amount for year 1, then cap the growth rate for years 2-6 at 18%, and cap the growth rate for years 7-10 at 12%.
None of these estimates, of course, are certain to be the same as the future result, which could be more or less. Probably the best use of the results is to compare the payback percentage from stock-to-stock, and also to compare the payback percentage to the payback of a 10-year Treasury (currently 18%) or to a 10-year AA corporate bond (perhaps 36% payback).
We estimate the dividend payback for the full Quantitative List, but this table presents the payback estimates for the Subjective List in the October issue.
|10-yr Div Sum % Price||10-yr Div Sum % Price|
|Symbol||Yield ttm||Average Growth Rate||Minimum Growth Rate|
FIGURE 3: 10-YEAR QUARTERLY ECXESS PERFORMANCE
(from Rational Risk letter page 6 of each month)
No approach, no matter how well it may work in the long-term, outperforms in all short-term periods. This set of histograms shows the difference for the past 40 quarters (10-years) between the total of the S&P 500 and the equal weight, monthly rebalanced Subjective List. When the broad market is moving up strongly, the Subjective List may underperform (not decline, but not rise as far or fast). Similarly, the Subjective List may tend to outperform in periods when the broad market declines or is flat. Figure 1 above, shows that over a period of years, the Subjective Lists have outperformed.
FIGURE 4: CROSS-REFERENCE SUBJECTIVE LISTS PAST 6 MONTHS
(Rational Risk letter page 28)
The stocks that qualify for the Quantitative List vary in number and sector classification over time as company financial performance changes, and as the broad market price levels rise and fall, and as sector rotation within the broad market occurs. Additionally, the stocks that qualify for the Subjective List further vary as the forward looking opinions of independent analysts change, presumably based in part on a variety of qualitative factors that are not captured in the historical data used to generate our Quantitative List.
The table below presents the full list of Subjective List stocks for each of the past 6 monthly issues of the Rational Risk Equity Income Investor letter.
SUBJECTIVE LIST METHODOLOGY
The Subjective list is a subset of the Quantitative List, and is generally forward looking in identifying stocks that meet independently determined ratings for above average financial strength and forward total return expectations by at least one of several independent research organizations, including Thompson Reuters and Standard & Poor's, among others.
Each Subjective List stock must be rated as above average (B+ or better) for financial strength by Standard & Poor's (or if not rated by them, rated similarly by a comparable independent and nationally recognized research organization).
A) Each Subjective List stock must be rated as a "Buy" by Thomson Reuters Star Mine or Standard & Poor's, (or if not rated by them, rated similarly by a comparable independent and nationally recognized research organization), OR
B) If rated "Neutral"or "Hold" by both Thomson Reuters and Standard & Poor's, then it must be rated "Buy" by another recognized analytic service or by the "Street Consensus", OR
C) If it is rated "Sell" by either Thomson Reuters or Standard & Poor's, then it must be rated "Buy: by the other and also by another recognized analytic service and by the "Street Consensus."
Note: Some REITS, royalty trusts, MLPs, and some ADRs may not to be rated by any of the third party research firms above, and as a consequence may be in the Quantitative List but not able to be considered for the Subjective List.
NOTE OF CAUTION
No list of filtered stocks is certain or guaranteed to outperform, or to be free of individual stocks that due poorly going forward, nor to be immune from the gravitational pull of a declining stock market.
It is always appropriate for investors to evaluate individual stocks, including those in our Quantitative, Subjective or Performance lists in terms of personal suitability, and an appropriately allocated portfolio, which would include other types of securities than just dividend stocks.
Some stocks in our lists, while financially sound, are in the list because their price has deteriorated and have negative technical price charts, as our recent article on the technical rating of stocks in our October Quantitative List demonstrated.
Stocks in the Subjective List may or may not be in uptrends, but are attractive to independent analysts, however they may or may not turn out to be better opportunities than other stocks in the Quantitative List.
The Performance List consists of those Quantitative List stocks that pass the Subjective List criteria, and have also avoided certain minimum drawdowns and volatility, but are also not certain to perform in any particular way in the future.
Disclosure: QVM has positions in some of the securities identified in this article as of the creation date (October 22, 2012). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, and are not compensated by Seeking Alpha in any way relating to this article.
General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.