Jeff Paul

Jeff Paul
Contributor since: 2011
Using your example...at the point where ADI went up to $150 (YOC=5%, current yield=3.3%). I tell you about Even Better Dividends (EBD) stock, which yields 4% and has a comparable dividend growth rate. Being interested in income, you politely pass because your YOC (5%) is higher than 4%. However, doing the math...assume $50/share EBD paying $2/yr div (4%).
If you sell your stock for $150 (excl fees) and buy 3 shares of EBD, you would receive $6 in dividends. $6 is 20% more than the $5 you were receiving under ADI. Compared to the original $100 that you invested, you could argue your YOC is now 6%. Either way, it's an upgrade, but if you compare YOC to current yield, you would have kept your original stock. (assuming all else equal and income focus). The other issue with YOC is it doesn't factor in the time component. For example, a 15% YOC sounds great, but if it took 30 years to get there, it isn't so great.
I don't think there's much more I can say on this topic, so I'll just hope some of this makes sense and wish you well.
If your goal is dividends and dividend growth, I would urge you to think more about what you are calling "personal yield" (or YOC). You are not getting a higher yield than the current yield. Yes, you invested X and now it is worth 52% more (unrealized gain), but those shares have a value, and it is $66/share. Any comparison made to alternative options should be made with that value. For example, if you switched to NU, yielding 3.5%, you would increase your dividend stream by ~50% over what you are receiving now from AFL (2.2%). This doesn't mean you have to keep switching to get the higher yielder; there's obviously more that goes into any investment decision, plus transactional costs. But comparing a YOC to the current yield of a new investment is not an apples-to-apples comparison. YOC may be a measure of success, but current yield is the better metric for decision making for income investors. I covered some of the issues in an article a year ago.
http://seekingalpha.co...
I think you are comparing your yield-on-cost for AFL to the current yield of WAG, which is not an accurate comparison. Regardless of what you paid for AFL, it is currently at $66/share and the current yield is 2.2%. WAG's yield is the same, therefore you will earn exactly the same amount of dividends if you sell AFL and switch to WAG (excluding commissions). If you think WAG will grow its dividend faster going forward, then this may be a good trade. Yield on cost is not a good metric to use for sell decisions, as it reflects your original investment, not the current market value. For example, AFL could keep its dividend flat for the next 3 years, and its YOC would still be higher than the current yield of WAG (assuming WAG's price keeps going up with the div).
I meant Feb 2013, as this article was written in 2012. The update was delayed to April 2013. See this link:
http://seekingalpha.co...
What percentage of that 37% were financial stocks and what % were actual cuts? Historically (last 15 years or so), only about 2% of non-financials ($500MM+ cap, 7+ yrs DG) cut divs annually on average. More in recessions, sometimes none is good years. I'm guessing a large chunk were financials, and many were freezes, which in the scheme of things could be considered "good" given the economics of the time. In other research I've done, on average DG stocks that cut their div tended to outperform over the next 2 years, so holding for total return may not be a bad plan. Of course, selling before the cut would be better!
Yes, I going to be working for a wealth management firm, and will need to curtail my online writing for compliance reasons. Thanks for the positive comments though!
Well, compared to NEE and SRE, it's PE is lower, yield is higher and they all have similar projected earnings growth rates. So based on those numbers, it seems like a better value at the moment.
Hi Bruce7b,
Your question seems to make the assumption that accepting a dividend implies getting a lower return than a non-dividend stock. There is a lot of research, which I have written about, that shows dividend stocks outperforming the market and non-dividend stocks over the long-term. Based on that, DGI investors can have their dividend and still get a great total return over the long run. The challenge for individuals is picking good companies, as the research bought all stocks within the parameters, something most of us probably can't afford. But that is no different than choosing good non-dividend stocks. Returns always vary due to market timing and selection choices.
I think the main difference for many DGI investors is their objective. They seek the income stream, so are less concerned about the total return (though they would like it to go up!). From that standpoint, yes, they might buy a stock for the current yield and div growth versus the total return potential.
Under the scoring system that I used for the HYLP portfolio, SCG was the next highest utility. Others with close scores were NEE and PPL. NEE has run up and has a lower yield (disclosure: I own shares of it). I've been debating selling it and swapping for another utility. AVA looks interesting and is in a couple of the models.
Hi Bruce7b,
I have several DG-based model portfolios that you can read about. While they generally yield over 3.5% (so good for income investors), I am more interested in the total return, as the research I used to create them showed DG stocks outperform over the long run. I published monthly updates that include comparisons to the SPY, beta, max drawdown, and relative performance (volatility adjusted).
Jeff
Thanks, Elle. The trick, of course, is to sell BEFORE the dividend cut and pre-cut price drop. Then perhaps buy it back after, at least if one is trying to maximize total return. Since that is easier said than done, assuming one already owns the stock at the time of the cut, holding on or even adding to the position may be appropriate based on the examined data, if one is pursuing total return. For income investors, it will depend on what the new current yield is (versus alternatives), and how confident they feel about that dividend level and the business (could another cut occur?). In either case, I would classify the stock as more speculative until its DG trend is restored.
Thanks, SDS. I'll look up that research.
I have not. Do you have some links with more info on the Ulcer Index? I like the name!
Thanks, everyone! I appreciate your comments and wishes! I'm planning to work with Phillips & Co, a wealth mgmt firm in Portland. I believe the firm has clients nationwide. Should anyone ever contact the firm, please mention SA. I would be interested in knowing to what extent we are meeting an unserved need for income investors, and if there would be significant value in having an SA presence.
Thanks, Chris. I'm not totally sure what will happen yet, but based on previous conversations, if I do indeed start working for this firm, then sadly, I will probably have to discontinue writing. I appreciate your comments! On the plus side, I will get to further develop the DG models and have access to more research, so that will be good.
Hi Alan,
I track the SPY and SDY against my model portfolios. I only have data since Aug 2011, but SDY has outperformed SPY and with much lower beta and max drawdown. Over the last 3 months, beta has been higher (calculated off of weekly returns).
http://seekingalpha.co...
Hi Dave,
I agree that both camps tend to be reluctant to change their minds. As I've written about in the past, I fall into the "don't find it useful" for decision-making group. My biggest complaint is the lack of a time component. Having a 20% YOC sounds great, but if it took 20 years to get there, your growth rate wasn't so hot. Also, maybe the dividend grew quickly, then slowed down. Looking at current yield and the DGR would provide better decision making info, in terms of historical metrics, and can be compared against alternative investment opportunities.
Thanks, djrryan. Glad you find the list helpful. I owned BP previously, and sold right when the offshore incident occurred. My gripe with BP is that while the yield has been good, price appreciation lags compared to other major oil companies.
I find it hard to believe that only 8 DG stocks had buybacks in the last year. Looking at the top 10 in the PFM, all of them had buybacks, so crosschecking the two lists is not sufficient.
Hi gjg49,
I don't know the specifics of APD's cash flow use. However, they did issue some bonds (see financing cash flows), about $400K, so collectively the dividend was covered if we assume that the financing was used to cover some of the capital project. Would need to investigate further to figure out where the money went. If it went toward growth projects (one-time) that will improve operating cash flows, then the dividend should not be in jeopardy. The firm also has over $1B in long-term investments, so there is a supply of cash, which also factors into the equation.
Yes, I know. I wrestle with how much to publish, as giving away my entire spreadsheet (which takes quite a bit of time to produce) seems like too much to me. I figure I've given the process, the portfolio list, and summary stats. If you want the specifics for any of these holdings, they are in the CCC list.
I tend to have the same view as rnsmith. Seems like for every analyst in favor of a stock, I can find one against it. If they were all against it, then some would argue it is a good contrarian play. etc etc. I like to examine the key concerns/opportunities, and reach my own conclusion. With a DG focus, I don't always worry about some of it, as long as there is sufficient cash flow for the dividend. If it is a more concentrated position, I scrutinize it more.
Hi stockpicker99,
Unfortunately, the best answer I have is "it depends". I see Chowder already responded, and his link has a lot of info on price/volume strategies. If, like some DG investors, you're focus is more on the dividend stream, then it may not bother you to buy near a 52-week top, if you are still getting the yield you want, there is room for div growth (higher projected earnings, low payout), and you have a long-term timeframe. Other factors include new developments at the company or expectations on events that could impact the industry/sector.
Personally, I like to see the stock off of its high (correction due to short-term issue), but I am pursuing total return, so I want to have that value cushion. Of course, this has made it tough the last 3 months, as the market has pretty much gone up, though I did find opportunities to buy stocks like Coach and Lockheed that slipped a bit during this timeframe.
You're welcome, Hank890!
Thanks, georgebeddoe!
I go back and forth on this. They are REITs, and Schwab classifies them under Financials, so that it what I've done. I sometimes think it would make sense to put the health care REITs under healthcare. However, does a retail (stores) REIT go under Consumer Discretionary? I've seen Industrial REITs too...gets more complicated than I want to deal with. Banks and insurance are also under financials, the REITs just have better yields, so they "win". In some ways, I like this, but it means the portfolio doesn't hold any true financial firms. The other DG models do include some actual firms (CB, AFL, TRV, etc.)
I've noticed that all of the portfolios had their betas creep upward recently, though they seemed to settle back down over the past 3 months. I haven't taken the time to trace which holdings are the culprits. This portfolio doesn't factor it in, though it has had the lowest beta of all the models. The low-beta model would consider this factor at rebalance.
You're welcome, Rom! Thanks for the feedback. I think processes like this, based on the CCC list, provide an excellent starting point for individual investors. I always recommend doing more diligence, as these models are strictly rule-based off of historical numbers.
Agreed, that's why I check the operating cash flows. The CCC list does now have a column with free cash flow payout ratio (Div / FCF), which is also an option.
You're welcome, WDL.
Each of my models operates a little differently. The HYLP model looks for high yield and low payout, which mathematically implies low PE. This model does not force out a stock with high PE, however, when it is above ~65%, I do check that recent operating cash flows covered the dividend. This is because of the focus on yield, and with a 6-month rebalance, those that stumble on this front will get removed next time around.
I've debated whether to apply the stop-loss when rebalancing/creating a portfolio. It is more of a momentum check, but I figure if I use it to remove a stock from one model, than it seems hypocritical to not exclude the stock from another that is rebalancing. Yes, some would see it as an opportunity. But, in the short-term, selling it was the correct move. I would need another rule to determine when to allow it back in, other than div increase, which only occurs annually, hence the problem at this rebalance.
On the flip side, in the near term (next 6 months), Intel would need to do something that moves its stock up, while the overall market could see some correction. It hasn't been doing that the last few months, so it does have something to prove in that respect. My guess is that it will be available for the portfolios at the next rebalance, hopefully near the same price range ($20-$23), which still offers a great yield.