Dirk Quayle's Instablog President, Business Logic Corp., LikeAssets, CFA Dirk Quayle http://seekingalpha.com/author/dirk-quayle/instablog Safety in Dividends? http://seekingalpha.com/instablog/195693-dirk-quayle/112489-safety-in-dividends?source=feed 112489 Where should investors look for income when traditional sources yield so little, or nothing at all?  Dividend stocks have been cast as an alternative, but many investors remain nervous about fulfilling fixed income allocations with stocks, and rightfully so.  With that in mind I set out to see what dividend yields I can receive while playing it safe. For me safe means a low probability of near-term dividend cuts, the ability to maintain or grow the dividend whether the economic scenario is deflation or inflation, and a stock price that is a bargain.

Dividend Cuts:
Interest Coverage helps investors understand a company's ongoing earning power and cash flow and measures the ability to adequately cover interest payments on debt.  If Interest Coverage is tight (for me anything under 6X), the dividend may be at risk if there is a bump in the road.  To play it safe, I wanted at least a 10X coverage level giving me comfort that a dividend cut is not likely near-term.  For additional analysis beyond the screener consider looking at the full debt service coverage (which includes scheduled principal payments as well as interest) and the mix of fixed and floating rate debt.  A higher level of fixed rate debt means that future interest payments should be less likely to spike if interest rates jump.  

Deflation and Inflation scenarios:
If a company has proven its ability to grow revenue and EPS over the past 5 years, I have confidence they can continue to grow in a stagnant or deflating economy as well as an inflating one. For the analysis I decided on 2 growth measurements, 5 year EPS growth > 12%/yr and 5 year revenue growth > 9%/yr.  Using both EPS and revenue growth helps address shortcomings of either in isolation.  EPS growth can occur with revenue/company stagnation by virtue of share buybacks alone.  Revenue growth without growth in earnings could be the result of one or more ill advised acquisitions.

Bargain Price:  
With the criteria noted above, I am willing to be a contrarian rather than a momentum investor.  Any stocks passing the tests above have solid growth and dividend track records, and are financially sound.  Therefore, if I can find any that are also significantly lagging their benchmarks it is worth serious consideration.  In this case each one has returned less than 10% below their benchmarks assuming I invested in them a year ago.  And this performance calculation includes dividends, a standard part of the LikeAssets application return calculation.

I also added one additional criteria to help mitigate liquidity risk, a focus on larger stocks with market capitalization > $5 billion.

Targeting a dividend yield of at least 2%, I used the above criteria and created a stock screen using Google Finance and the LikeAssets application available in the SeekingAlpha app store.

Results: ABT, HRS, GD, BLK, MDT.  I excluded ADRs and LPs.

Here is a snap shot of the screening results and the LikeAssets chart showing the underperformance relative to the benchmark.





If you want to track this strategy in the future, bookmark this LikeAssets portfolio.


Disclosure: I am long ABT.
]]> Thu, 18 Nov 2010 17:43:22 -0500 Where should investors look for income when traditional sources yield so little, or nothing at all?  Dividend stocks have been cast as an alternative, but many investors remain nervous about fulfilling fixed income allocations with stocks, and rightfully so.  With that in mind I set out to see what dividend yields I can receive while playing it safe. For me safe means a low probability of near-term dividend cuts, the ability to maintain or grow the dividend whether the economic scenario is deflation or inflation, and a stock price that is a bargain.

Dividend Cuts:
Interest Coverage helps investors understand a company's ongoing earning power and cash flow and measures the ability to adequately cover interest payments on debt.  If Interest Coverage is tight (for me anything under 6X), the dividend may be at risk if there is a bump in the road.  To play it safe, I wanted at least a 10X coverage level giving me comfort that a dividend cut is not likely near-term.  For additional analysis beyond the screener consider looking at the full debt service coverage (which includes scheduled principal payments as well as interest) and the mix of fixed and floating rate debt.  A higher level of fixed rate debt means that future interest payments should be less likely to spike if interest rates jump.  

Deflation and Inflation scenarios:
If a company has proven its ability to grow revenue and EPS over the past 5 years, I have confidence they can continue to grow in a stagnant or deflating economy as well as an inflating one. For the analysis I decided on 2 growth measurements, 5 year EPS growth > 12%/yr and 5 year revenue growth > 9%/yr.  Using both EPS and revenue growth helps address shortcomings of either in isolation.  EPS growth can occur with revenue/company stagnation by virtue of share buybacks alone.  Revenue growth without growth in earnings could be the result of one or more ill advised acquisitions.

Bargain Price:  
With the criteria noted above, I am willing to be a contrarian rather than a momentum investor.  Any stocks passing the tests above have solid growth and dividend track records, and are financially sound.  Therefore, if I can find any that are also significantly lagging their benchmarks it is worth serious consideration.  In this case each one has returned less than 10% below their benchmarks assuming I invested in them a year ago.  And this performance calculation includes dividends, a standard part of the LikeAssets application return calculation.

I also added one additional criteria to help mitigate liquidity risk, a focus on larger stocks with market capitalization > $5 billion.

Targeting a dividend yield of at least 2%, I used the above criteria and created a stock screen using Google Finance and the LikeAssets application available in the SeekingAlpha app store.

Results: ABT, HRS, GD, BLK, MDT.  I excluded ADRs and LPs.

Here is a snap shot of the screening results and the LikeAssets chart showing the underperformance relative to the benchmark.





If you want to track this strategy in the future, bookmark this LikeAssets portfolio.


Disclosure: I am long ABT.
]]> abt hrs gd blk mdt dividends income screens benchmarks Highlights from Morningstar's 2010 Target-Date Industry Survey http://seekingalpha.com/instablog/195693-dirk-quayle/58871-highlights-from-morningstar-s-2010-target-date-industry-survey?source=feed 58871

Just Released - In depth research by Morningstar sheds additional light on complexity of Target-Date Funds. Below are some of the best excerpts that highlight why Target-Date selection and maintenance will continue to cause problems for advisors, sponsors, and investors. Required reading for every advisor, plan, or investor that uses TDFs. corporate.morningstar.com/US/asp/subject...

From Morningstar’s Target-Date Series Research Paper: 2010 Industry Survey


Excerpt #1, page 9:

 “For 2010 funds, equity allocations ranged from 65% to 26% as of late 2009. (American Funds has a listed allocation of 67%, but that figure substantially overstates the series’ commitment to stocks because American fills that allocation with funds that have high cash stakes. In practice, American Funds’ stock allocation is in the 50s.)”

My Comment: Range of 2010 Equity exposure is noteworthy for the material differences in equity allocations across the industry for retirement now, in 2010.  Additionally, the note on American Funds highlights the next level of complexity. American Funds equity fund selections hold high cash balances so even though the marketing material/holdings looks like equity it is misleading and challenging for anyone doing the analysis.


Excerpt #2, page 10: 

“Oppenheimer got clocked in 2008 because of a highly aggressive bond position, then cut back on its risk so that it failed to take complete advantage of the 2009 rally. Vanguard has a relatively conservative asset mix, so that its funds tend to trade in both up and down markets as if they owned fewer stocks than they actually do. John Hancock, Hartford, and Putnam, are the converse of Vanguard in behaving more aggressively than their glide paths imply. Also noteworthy is Wells Fargo’s outgaining American Independence by nearly 5 percentage points in 2009 despite holding the same percentage in common stocks, thereby demonstrating that the glide path is a valuable method for evaluating target-date performances, but this is far from the full story.” 

My Comment: How would you like to be the plan/investor that got “clocked”, especially by an "aggressive bond position"?  Glide path and published asset allocation is far from the whole story. Two managers with exact same asset allocations and glide paths can produce materially different performance.


Excerpt #3, page 11:

“In 2009 alone, at least five series significantly changed their series asset allocations. Fidelity, for example, diversified its series’ asset mix by upping the funds’ exposure to non-U.S. equities, and it added exposure to Treasury Inflation Protected Securities and commodities. Schwab reduced its series’ weight in equities to make its glide path more conservative. Vantagepoint extended the period in which its asset allocation glides after investors’ retirement. To curb volatility, Putnam added its new absolute return funds to its target-date series, while Invesco AIM revamped its target-date offerings in an attempt to balance risk between its target-date funds’ equity, fixed-income, and commodities allocations. Even more recently, AllianceBernstein announced it would introduce a volatility-management tactical asset-allocation technique that attempts to shelter some of the target-date funds’ assets when it expects markets will be volatile.”

My Comment: Advisors, sponsors and investors really can’t set it and forget it. Described above are significant year to year changes in the fundamental methodology of these major providers. When would an advisor/plan/investor hear about these changes?


Excerpt #4, page 12:

“There are several major areas in which significant philosophical and pragmatic differences exist among the target-date series. These areas, outlined over the next five pages, are critical in fully comprehending the potential risks and performance behavior of a given target-date series and how that series compares with others in the target-date universe. Yet the disclosure and transparency on these subjects is in most instances inadequate. Even for Morningstar, it can be a struggle to get consistent information on basic glide-path allocations, never mind more sophisticated data.”

My Comment: Even for Morningstar, in most cases the disclosures necessary to properly analyze a TDF manager are not made. Where does this leave a plan/advisor/investor? Are you able to say your analysis is adequate and sleep at night when Morningstar can’t?


Excerpt #5, page 15:

Tactical Allocation Methods Target-date fund series adopt three general approaches to tactical allocation, or deviations from the strategic glide path. 1) No tactical allocation is allowed. These firms—including TIAA-CREF, Vanguard, and Wells Fargo—draw a clear line in the sand: They stick to the stated glide path, with virtually no deviation. 2) Modest deviations are allowed. Some companies, such as American Century and Principal, use their rebalancing periods as an avenue to engage in limited deviations around the strategic targets. One firm, for instance, allows its managers to delay or move up monthly rebalancing by several months, allowing under- or overweighted asset classes to persist within 5 percentage points of the target allocation. 3) Active tactical allocation is allowed. These companies set aside a portion of their portfolios for active tactical allocation of the sort engaged in by some institutional money managers and hedge funds. This sleeve may be managed by a separate group that specializes in such investing and generally is kept within the boundaries of a certain level of tracking error. T. Rowe Price, Putnam, ING, DWS, and JP Morgan are among the target-date firms that employ some, if not a great degree, of tactical allocation. As with other aspects of the glide path, there are valid reasons behind each approach. The practitioners of active tactical asset allocation, however, present particular challenges and concerns. First, such strategies are inherently risky. They may employ derivatives or attempt to make short-term market-timing decisions, which offer opportunities for loss as well as gain. Second, such strategies require highly specialized expertise to execute successfully, which presents a challenge for a fiduciary that must judge whether the target-date company possesses such expertise. It is difficult for an outsider to evaluate whether a target- date provider has the right skills in place. Third, transparency around tactical policies is wanting.

My Comment: Bottom line – your manager may be trying to time the market.  Is that what you want in a target-date fund? And assuming you are aware of this, how will you know if they were right?


The target date fund market has the potential to simplify investor behavior for a large segment of the retirement market, but it has experienced significant growing pains with wide performance disparities that have been difficult to predict due to the complexity of underlying building blocks. New approaches are required to offer better insight into the target date market and thereby reduce target date methodology risk for investment professionals and investors.  Until then the Target-Date Fund market remains challenging for even the most sophisticated investment professionals.



Disclosure: No Positions]]> Mon, 15 Mar 2010 16:00:32 -0400

Just Released - In depth research by Morningstar sheds additional light on complexity of Target-Date Funds. Below are some of the best excerpts that highlight why Target-Date selection and maintenance will continue to cause problems for advisors, sponsors, and investors. Required reading for every advisor, plan, or investor that uses TDFs. corporate.morningstar.com/US/asp/subject...

From Morningstar’s Target-Date Series Research Paper: 2010 Industry Survey


Excerpt #1, page 9:

 “For 2010 funds, equity allocations ranged from 65% to 26% as of late 2009. (American Funds has a listed allocation of 67%, but that figure substantially overstates the series’ commitment to stocks because American fills that allocation with funds that have high cash stakes. In practice, American Funds’ stock allocation is in the 50s.)”

My Comment: Range of 2010 Equity exposure is noteworthy for the material differences in equity allocations across the industry for retirement now, in 2010.  Additionally, the note on American Funds highlights the next level of complexity. American Funds equity fund selections hold high cash balances so even though the marketing material/holdings looks like equity it is misleading and challenging for anyone doing the analysis.


Excerpt #2, page 10: 

“Oppenheimer got clocked in 2008 because of a highly aggressive bond position, then cut back on its risk so that it failed to take complete advantage of the 2009 rally. Vanguard has a relatively conservative asset mix, so that its funds tend to trade in both up and down markets as if they owned fewer stocks than they actually do. John Hancock, Hartford, and Putnam, are the converse of Vanguard in behaving more aggressively than their glide paths imply. Also noteworthy is Wells Fargo’s outgaining American Independence by nearly 5 percentage points in 2009 despite holding the same percentage in common stocks, thereby demonstrating that the glide path is a valuable method for evaluating target-date performances, but this is far from the full story.” 

My Comment: How would you like to be the plan/investor that got “clocked”, especially by an "aggressive bond position"?  Glide path and published asset allocation is far from the whole story. Two managers with exact same asset allocations and glide paths can produce materially different performance.


Excerpt #3, page 11:

“In 2009 alone, at least five series significantly changed their series asset allocations. Fidelity, for example, diversified its series’ asset mix by upping the funds’ exposure to non-U.S. equities, and it added exposure to Treasury Inflation Protected Securities and commodities. Schwab reduced its series’ weight in equities to make its glide path more conservative. Vantagepoint extended the period in which its asset allocation glides after investors’ retirement. To curb volatility, Putnam added its new absolute return funds to its target-date series, while Invesco AIM revamped its target-date offerings in an attempt to balance risk between its target-date funds’ equity, fixed-income, and commodities allocations. Even more recently, AllianceBernstein announced it would introduce a volatility-management tactical asset-allocation technique that attempts to shelter some of the target-date funds’ assets when it expects markets will be volatile.”

My Comment: Advisors, sponsors and investors really can’t set it and forget it. Described above are significant year to year changes in the fundamental methodology of these major providers. When would an advisor/plan/investor hear about these changes?


Excerpt #4, page 12:

“There are several major areas in which significant philosophical and pragmatic differences exist among the target-date series. These areas, outlined over the next five pages, are critical in fully comprehending the potential risks and performance behavior of a given target-date series and how that series compares with others in the target-date universe. Yet the disclosure and transparency on these subjects is in most instances inadequate. Even for Morningstar, it can be a struggle to get consistent information on basic glide-path allocations, never mind more sophisticated data.”

My Comment: Even for Morningstar, in most cases the disclosures necessary to properly analyze a TDF manager are not made. Where does this leave a plan/advisor/investor? Are you able to say your analysis is adequate and sleep at night when Morningstar can’t?


Excerpt #5, page 15:

Tactical Allocation Methods Target-date fund series adopt three general approaches to tactical allocation, or deviations from the strategic glide path. 1) No tactical allocation is allowed. These firms—including TIAA-CREF, Vanguard, and Wells Fargo—draw a clear line in the sand: They stick to the stated glide path, with virtually no deviation. 2) Modest deviations are allowed. Some companies, such as American Century and Principal, use their rebalancing periods as an avenue to engage in limited deviations around the strategic targets. One firm, for instance, allows its managers to delay or move up monthly rebalancing by several months, allowing under- or overweighted asset classes to persist within 5 percentage points of the target allocation. 3) Active tactical allocation is allowed. These companies set aside a portion of their portfolios for active tactical allocation of the sort engaged in by some institutional money managers and hedge funds. This sleeve may be managed by a separate group that specializes in such investing and generally is kept within the boundaries of a certain level of tracking error. T. Rowe Price, Putnam, ING, DWS, and JP Morgan are among the target-date firms that employ some, if not a great degree, of tactical allocation. As with other aspects of the glide path, there are valid reasons behind each approach. The practitioners of active tactical asset allocation, however, present particular challenges and concerns. First, such strategies are inherently risky. They may employ derivatives or attempt to make short-term market-timing decisions, which offer opportunities for loss as well as gain. Second, such strategies require highly specialized expertise to execute successfully, which presents a challenge for a fiduciary that must judge whether the target-date company possesses such expertise. It is difficult for an outsider to evaluate whether a target- date provider has the right skills in place. Third, transparency around tactical policies is wanting.

My Comment: Bottom line – your manager may be trying to time the market.  Is that what you want in a target-date fund? And assuming you are aware of this, how will you know if they were right?


The target date fund market has the potential to simplify investor behavior for a large segment of the retirement market, but it has experienced significant growing pains with wide performance disparities that have been difficult to predict due to the complexity of underlying building blocks. New approaches are required to offer better insight into the target date market and thereby reduce target date methodology risk for investment professionals and investors.  Until then the Target-Date Fund market remains challenging for even the most sophisticated investment professionals.



Disclosure: No Positions]]> Target-Date Retirement Asset Allocation