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Craig Lehman

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  • The Early Retiree Portfolio For 2015 [View article]
    Robert, Then you're going to need a new goal. Gotta have a goal. It would be a shame if you couldn't think of something to do with extra money. CKL
    Dec 20, 2014. 05:07 PM | Likes Like |Link to Comment
  • The Early Retiree Portfolio For 2015 [View article]

    Thanks, I did read your linked article. I agree with your rationale for the cash buffer and its size. In this interest rate environment, I don't hold any bonds, although several of my stock holdings are sometimes referred to as "bond surrogates."

    Where I disagree with you, however, is this statement from your previous article: "A bit more than half of it should be allocated to stable income stocks and the rest can be invested more opportunistically." To me, the proportion that should be allocated to stable income depends on whether your basic needs and wants are covered. Until I can say "100%", I'm not interested in "opportunity" stocks (unless they're also "stability" stocks -- I don't see that the categories are necessarily mutually exclusive.)

    Why would I want my dividend stocks to have low beta? Because it's been shown that, as a group, low-beta stocks outperform high-beta ones over the long run. I believe this is one of the conclusions of O'Shaughnessy's What Works on Wall Street, though I've heard it more than once. That said, low-beta is not something I go searching for; it usually just comes with the kind of stock I want in my stability portfolio. E.g. among the stocks I own, D has a beta of 0.29, LMT 0.60, O 0.53. My portfolio beta is only 0.68, and that's with a few "opportunity" stocks thrown in.

    Of course, if I ever had to sell one of my stability stocks out of desperation, and this was at the time of a bear market, a low-beta stock will typically have declined less than a high-beta one.
    Dec 20, 2014. 03:16 PM | 1 Like Like |Link to Comment
  • The Early Retiree Portfolio For 2015 [View article]
    While I appreciate your willingness to think outside the box, I would think stocks in the "Stability" group should be "inside the box" choices: large cap, low beta, investment grade credit rating, members of the CCC list. In short, "the usual suspects." Boring as it may seem, there are reasons for having these well-known names as core holdings. I couldn't "sleep well at night" if my "stability" stocks were like the ones in your stability group. [Disclosure: I have a small position in IBM, but I wish I didn't.]

    I don't quite understand the idea that the stability stocks should cover "12 years of expenses." What, if I sell them off? No, I want their dividends (along with Social Security and retirement benefits) to cover ALL of my predictable basic expenses, for as long as I live.

    Now after that, I am open to some more speculative choices. Some DG advocates make it sound as if the ONLY legitimate objective is maximization of secure, predictable income, whereas I believe that once you have your basic needs and wants covered, you should feel free to swing for the total-return or "opportunity" fences. For that purpose, you have some interesting suggestions. But "stability" stocks -- REALLY stable ones -- will continue to be by far the largest part of my portfolio.
    Dec 20, 2014. 02:35 PM | Likes Like |Link to Comment
  • CVS Health: Uninspiring Yields [View article]
    "The company forecast free cash flow for 2015 of around $6 billion providing the cash needed for the stock buybacks and suggesting the extra amount spent on dividends will require spending cash on hand."

    There is a disapproving tone to this sentence, but I don't know how else a company can pay a dividend *except* with cash on hand. (This is why "dividends don't lie".)

    I don't understand the argument here. I can agree that buybacks are best done when valuations are historically low, but then why complain about the "uninspiring" amount of buybacks, and "extra" spending on dividends? No one buys CVS for its buyback program or its dividend; it's a total return play driven by strong earnings growth. But that aspect is not discussed at all.
    Dec 18, 2014. 09:11 PM | Likes Like |Link to Comment
  • This Is How A Bear Market Starts [View article]
    I think trying to rely this much on chart comparisons is a mistake, but if you insist, look at charts of the major indices at the time Long Term Capital Management collapsed. It's a V-shaped pattern: precipitous drop followed by equally rapid recovery.

    Now, suppose the correct interpretation of current events is that Saudi Arabia is allowing an extra 2-3M barrels of oil a day to flood the market, depressing the price of oil for the purpose of punishing Russia for supporting Assad (against the Saudi-backed rebels), and the Iranians for building a nuclear weapon (an existential threat.) Suppose further that the Saudis get Russia and Iran (who desperately need to price of oil to stay high to finance their adventurism) to say Uncle. Having achieved what they want, the Saudis respond by cutting oil production until prices return to their prior level (which, of course, they prefer.) It might not play out quite as rapidly as the LTCM saga, but in a year or so we might see oil prices right back where they were before the collapse.

    That's a lot of assumptions, and this is not the venue for defending them, but I think a V-shaped recovery in oil prices is at least a plausible scenario. And if it comes to pass, all those chart comparisons will turn out to be completely misleading. Charts follow events, not vice versa.
    Dec 18, 2014. 12:37 PM | 1 Like Like |Link to Comment
  • Graham's Stock Selection Criteria Revisited [View article]
    Apologies, I looked in the wrong cell for VISA's current ratio.

    The link I cited makes the excellent point that you can't pay bills with working capital, you can only pay them with cash. All cash may be working capital, but not all working capital is cash (e.g., inventory.) Since companies don't want to sell off inventory to raise cash, except in desperation, the better test would seem to be what's sometimes called the acid test ratio, ie current assets minus inventory, divided by current liabilities. Looking at your list of companies, you can see several that don't have large inventory in the traditional sense, but which do probably have very good cash flow. Those are the cases where I think a low current ratio is likely to be a false negative. I believe that Graham was thinking more of traditional industrial companies, where if there are large inventories, you of course want a high current ratio to guarantee liquidity. The point is that it's hard to see how current ratio can be a good one-size-fits-all test.

    Point taken on S & P, although I do believe that its ratings problems with financial companies were somewhat of a unique case.
    Dec 17, 2014. 02:03 PM | Likes Like |Link to Comment
  • Graham's Stock Selection Criteria Revisited [View article]
    Thank you for a very interesting survey.

    While Graham's criteria are a useful antidote to irrational enthusiasm, I do think that mechanical application of the current ratio test can be extremely misleading. The basic reason is that the liquidity of current assets, and the collection of current liabilities, varies widely from company to company. VISA, for example, has a constant high cash flow, and holds no inventory in the sense of a conventional industrial company; it makes sense that it can safely operate with a lower current ratio than say Nike or Caterpillar. (Remember, credit cards were a relative rarity in Graham's day.) Here, this explains it well.

    Most if not all of these companies are rated investment grade by S & P. I seriously doubt that XOM would be rated AAA if S & P concluded, after its analysis, that its liquidity was compromised by a current ratio less than 1.
    Dec 17, 2014. 12:08 PM | Likes Like |Link to Comment
  • They Say The End Is Near: It's 2004 All Over Again For Coca-Cola [View article]
    Having spent several months in Argentina, I know what a sweet tooth these people have. The dulce de leche, the pastries, the limoncello... I should have guessed that they would be the #1 per capita consumers of Coke. No politicians flogging "sugary drinks" there (they have plenty of other topics to demagogue.) You make an excellent case for Latin America being a continuing growth driver for KO.
    Dec 12, 2014. 02:17 PM | Likes Like |Link to Comment
  • What You Can Do To Perhaps Avoid Dividend Cuts [View article]
    Not a bad idea. You are getting more money to plough back into growth companies than if you simply reinvested dividends from a middling yielder. And, you are learning the "personality" of a high-yielder you may want to keep around for retirement. I wouldn't want to build an entire portfolio that way, but for a part of it, you are arguably diversifying asset classes.

    Are these holdings you refer to CEFs? CEFs are kind of the dark alley of SA, and I would like to see more discussion of them.
    Dec 10, 2014. 06:03 PM | Likes Like |Link to Comment
  • My Strategy For Objective, Emotionless Dividend Growth Investing, Part 3 [View article]
    Call me Johnny-one-note, but one of my consistent themes in comment threads is that Dividend Growth is Dividend Growth, no matter what the yield. I applaud your willingness to include some stocks with yields of less than 2%, as well as some higher yielders like VZ.

    Do you have any particular distribution of low, medium, and high yielders in mind for your portfolio? If so, would you explain your thinking? It's a kind of diversification question I continue to ponder.
    Dec 10, 2014. 02:09 PM | Likes Like |Link to Comment
  • What You Can Do To Perhaps Avoid Dividend Cuts [View article]

    I just received the dividend notice yesterday. As it has been for years, the monthly distribution was .065, which equates to 0.78 per year. The quote on DNP as I write is 10.30. So I get a yield of 7.5728%.

    You are right, this is not the place to look for dividend growth. But I view it as a limiting case. With lower-yielding stocks, you sometimes see dividend growth of 20% or more. As you move toward higher yield, the dividend growth tends to slow; e.g. T yields around 5.5% at its current price, but the dividend growth has been less than 3%/year for several years. To me, DNP yields even more than T, but with less growth -- namely zero growth (but no shrinkage.) If someone is willing to own T, with its miniscule dividend growth, then they are just a baby step away from the logical extreme of owning a stock with even higher yield, but no dividend growth. I see no obvious reason for drawing a line.
    Dec 10, 2014. 01:27 PM | 3 Likes Like |Link to Comment
  • Consider Canadian Banks For Your Dividend Growth Portfolio, Like Bank Of Nova Scotia [View article]

    S & P credit ratings, the subject of negative watch, are from AAA to D, not from buy to sell. I would think a knowledgeable expert such as you would know that. Puzzling...

    Again you accuse me of "blindly accepting" S & P's view, which I was not. I was looking for constructive input such as TR so helpfully provided. And you have a very clever rationalization for not producing your own reasons, which I will have to remember the next time I want to express an opinion without taking the trouble and risk of spelling out my thinking. I agree that there is no point in carrying this ridiculous argument further, but not because I defer to your claim of superior wisdom. I'll let readers of the comment stream judge this colloquy for themselves. I'm done.
    Dec 9, 2014. 07:52 PM | Likes Like |Link to Comment
  • What You Can Do To Perhaps Avoid Dividend Cuts [View article]
    I mostly agree with Chowder's characterization, but it suggests that CEFs almost inevitably fall on hard times. Perhaps, but in the case I mentioned (DNP) you have one of the largest, long-lived, best-managed CEFs, and it has avoided these problems. I believe there are others.

    You simply can't apply the same metrics to CEFs (I emphasize that the F stands for Fund) that you do to individual companies. If they are using leverage and options, they are doing something fundamentally different than what ordinary businesses do. I am not sure that FASTGraphs has a display which adequately captures this. Also, since unlike traditional mutual funds they don't have to sell assets when fund owners sell shares, they have a stronger ability to "stay the course" and avoid selling into market downturns. This creates interesting opportunities when they sell below NAV, net asset value. You have to evaluate them on their own terms.

    I have to credit SeekingAlpha for what I have learned about this very interesting little side stream of the market. I heartily recommend the articles of contributors Doug Albo and Left Banker for those seeking further information. My core point would be, just because 6% yield is generally a danger threshold for an ordinary business, don't assume that the same is true of a CEF. They are horses of a different flavor. They are generally not dividend growth vehicles, and they have their risks, but for investors who are willing to trade capital and dividend appreciation in a small percentage of their portfolio for generation of maximum income, they may have a role to play.

    Disclosure: long DNP, ETV, GRX, PCI.
    Dec 9, 2014. 07:19 PM | 2 Likes Like |Link to Comment
  • What You Can Do To Perhaps Avoid Dividend Cuts [View article]
    With respect to the rule of avoiding stocks with a yield of over 6%, I think an exception is needed for the case of closed end funds (CEFs) which are designed to generate current income as a tradeoff for capital appreciation.

    I know that many DG investors insist on steadily growing dividends, which most CEFs do not provide. Others insist on a minimum dividend of 2 or 2.5%, which rules out low-yield but high DG companies like GWW, ROST, VFC, CVS, etc. Rather than restrict myself with minimum and maximum payout rules, however, I prefer a "barbell" strategy which allows for holdings at both extremes. Most of my positions are somewhere in between, but I don't rule out either end of the spectrum.

    As an example of a high-yielding CEF which violates the 6% rule, but which I think can be safely held for income, consider DNP, the Duff and Phelps Select Income Fund, which currently yields 7.5% and can occasionally be purchased with an even higher yield. DNP never cut its dividend during the 2008-9 meltdown, and its beta is only 0.16. (Now, DNP hasn't raised the payout since 1997, but I would argue that that's by design.)

    Commentor rratty, above, says "I like to limit the percentage of income that any position contributes to my total income stream", and I can see the logic behind that, but I believe an alternative strategy of deriving a *disproportionate* amount of income from a few safe, carefully-selected high-yielders, is also viable -- provided that exceptions to the 6% rule are allowed.
    Dec 9, 2014. 12:13 PM | Likes Like |Link to Comment
  • Vanguard Dividend Growth - Beating The Market With Regularity [View article]

    Alan made it quite clear (by putting "creed" and "pillar" in scare quotes) that he *wasn't* taking them as "etched in stone." His point was just to extract some "common tendencies" that turn up in different authors' statements about DGI.

    Some of you comment-stream regulars here are so quick to jump on those who they perceive as critics that it seems like you don't even read the whole comment. I think it's better to try to read comments as broadly and sympathetically as possible.

    As you say, "...*most* people who practice DGI look for *a couple of things*..." That is exactly what Alan was saying, except that he found five tendencies, and unlike your "couple", took the trouble to spell them out. I quibbled with one of these. But neither of us were intending to criticize or say anything was set in stone. Geez!
    Dec 6, 2014. 03:03 PM | 3 Likes Like |Link to Comment