Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
The betas listed in the graphics are for the time frame being measured, which is about 19 months for the Inception graph. That is a shorter timeperiod than what Yahoo Finance reports (60-month beta). I also calculate the volatility of weekly returns, which is a component of the beta calculation, but independent of comparison to the SPY. I consider 0.65 to be low, relative to 1.0 for the SPY. That isn't a scientific definition, nor do I use it as a baseline for any decisions. Some investors probably consider anything under 0.80 low, and some may have a stricter cutoff (0.50?). The bottom line is that these portfolios have lower beta than the market index and are thus far achieving higher total return.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Thanks Jstr. I only have about 2 years of data, and no major pullbacks, so it's hard to answer your last question. The lower max drawdowns are encouraging, and I did do a spot check recently of about 10 holdings to see how they fared in 2008-2009. The REITs fell about as much as the S&P (percentage wise), but bounced back much quicker. The other sample stocks (cons staples, MCD, PG, utilities, JNJ, etc), fell on average maybe 50-60% of the S&P's fall, so I'm hopeful the portfolios will hold up well when the next decline hits. The only concern would be if people start rotating out of dividend stocks, which could lead to a greater decline, but I think rates would have to go up quite a bit before div stocks are unattractive in that respect. Of course, growth stocks won't look so attractive in that environment either, so div stocks may still perform better on a relative basis to the S&P.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Yes, I was referring to MPT, and since there are multiple anomalies (low-beta, small cap/value, etc), at some point I would think the theory will need a revision. In general, the idea of more reward for more risk makes sense to me; that's just market economics. If you can get higher reward for less risk, everyone would do that, so the riskier company needs to offer a higher rate of return. Maybe that works better for bonds, since stocks are more subject to market pricing (no guarantees). But, higher risk also means higher chance of bankruptcy or other issues, so in aggregate, I can see where this category could have below-average returns. The issues of manager incentives and investor behavior are other layers that MPT doesn't factor in, not to mention different definitions of "risk".
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
No offense taken, Richjoy. I think we need to look at opposing research and experiences that don't match the "accepted theory" (meaning MPT in this case). The viewpoint of low-beta outperformance as an "anomaly" comes from an MPT-centric position. Like David, it is not one that I necessarily subscribe to, though I think parts of it make sense…at least until a new theory emerges, as you mention.
Given that we've discussed data (and experience) showing the value of low-beta stocks, it does beg the question why all of this institutional "smart money" isn't all over low-beta holdings, to the point that the excess value is removed. Note, I'm not saying they don't invest in these stocks, but I do wonder why the %s that you quoted aren't higher. Also, it occurred to me that the %s don't reflect total market cap. i.e. 86% of Google's $250B market cap is institutional, which is far more than probably all of the stocks you listed. It's a complex system, so I don't claim to pinpoint a particular cause. I do believe that if institutions truly believed as we do, there would be less excess returns from low-beta stocks (due to higher demand/interest/attent... Experience and recent data says that is not the case, which is fine by me, as like you, I choose my own path.
A Low Beta, High Dividend Growth Rate Portfolio With 3.4% Yield And 20% DGR [View article]
To the best of my knowledge, the CCC list, which is my source for the data, only calculates annual div growth, hence the annual rebalancing. I would agree, that doing it at 6-months could have advantages. I don't have a good way to compute all of the rates though. If you know of another way to get it or create it, please let me know!
It mentioned that since fund manager performance is often based on the information ratio (active returns over benchmark / std dev of those active returns), it incentivizes managers to favor stocks with a beta closer to the benchmark (SPY, for example) that offer above average return potential. Also, for managers with bonus-structured compensation, there is more incentive to have high-beta stocks, which theoretically increase the chance of getting a higher return.
To your point, this doesn't mean they don't buy lower beta stocks, but it would suggest that they favor those with betas closer to one. Obviously there are other factors involved (earnings projections, sector, etc), when it comes to institutional purchases. What might be interesting, if you have the time, would be to list the betas next to all of the holdings, and see if there are any correlations between beta level and institutional ownership level. DOV, AFL, CSX, EMR, and CVS have higher betas, and generally have higher ownership.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
I would add one qualification…you don't need to pursue "the best total return", that could lead to higher risk. You need a reasonable target (maybe 7% annually) at a reasonable risk level and lower than average drawdown. That is, find an appropriate balance between reward and volatility that meets your goal and that you can live with comfortably! If your return exceeds that goal, then all the better!
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Sure…this was a request from a reader last month. Essentially, it is measuring the largest percentage drop during the time period being examined. So for the 12-month, I look at each week's balance, and compare it to all of the weekly balances for the rest of that period, calculating the %difference, keeping the largest %decline. Then I search for the largest %decline = max drawdown. It's one way to assess risk. We would expect dividend portfolios to have smaller drawdowns than the SPY, and that has been the case so far.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
I'm not surprised that your CEFs have done well the last 4-5 years. I would suggest going back another couple of years and see how much the CEFs fell in 2008/9 from their highs. Hopefully we don't go through that again in the next 5 years, but that will give you a sense of the potential risks. The fact that your funds are supplemental provides some leeway. They could wait until graduation, then use the money to pay off any loans (or cash out during school if the market is at highs, etc.) Good luck!
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Thanks, Eddie. How long have you been using a low-beta/HDGR style? Can you share your overall results, or is it close to returns for some of my DG models?
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Hi George,
I think there are several factors you need to consider. The easier answer is for the second question. Yes, I would look at low-beta, high DGR (and reasonable dividend, not necessarily "high", but depends on what that means). At the end of the day, total return is what will matter for you. (i.e. how much the account is worth by the time the grandchild starts college)
For the first group of grandchildren, I don't know enough about CEFs to know if I would trust them to consistently raise the income stream each year. The ETF/CEFs (bond/preferred, etc) that my parents own have generally stayed flat or even lowered monthly payouts in the last two years. Mileage will vary. There are also questions to consider:
With 5 years to go, there is potentially time to recover from a dip, considering we are at highs now and every few years something seems to happen, but are you willing to risk that? If the plan is to use the income stream and some of the principal each year of school, then the timeframe is really more like 10 years. If only the income stream is needed, then higher div yield may make some sense, otherwise, you probably want some DG mix, but get much more conservative the last couple years. Are these funds essential, or more supplemental? (goes to risk level based on purpose/importance) etc etc.
All this said, if your goal is to increase income stream (not clear to me why that is necessarily the goal), then I would probably go with low-beta DG stocks with a decent portfolio yield. But I would likely shift an increasing portion to shorter-term investments (corp bond fund, CDs, etc) as they approach college age if the funds are considered essential to them paying for college. Don't want to lose 40% the year before school, much like what happened to many who planned to retire in 2008-2009.
There's no single "right" answer to your question…you'll have to weigh all of these factors and decide on the course that makes sense for you. Every choice has its own set of consequences. Decide what is most important and what you can live with (or not live with), and go from there.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
The research (based on data) shows that low-beta stocks do outperform higher beta stocks, but financial theory (MPT) would say that to get higher reward, you must take higher risk (as defined by volatility of returns), so from that standpoint it "is not supposed to happen". The low-beta research discussed incentive reasons that might explain why institutional managers avoid low-beta stocks, hence making them better values relative to the high-beta ones that get pursued.
Dividend Growth Investing: A Strategy For Young Investors, Too [View article]
Thanks for the link to that research article. I'll look over the whole thing in more detail. To your point on "volatility NOT reduced by dividends", that is not an accurate statement based on the table in Exhibit #7. The first data column shows the return and volatility for the "No Div" portfolio, which is clearly higher than all of the five dividend quintile portfolios, and with lower total return I might add (for value weighted portfolios) and the lowest return/risk ratios.
Of the dividend quintile portfolios, you are correct that the highest yielding group did not have the lowest volatility. That actually doesn't surprise me, as many high yielders are companies in trouble, or with risky payout levels. The second to lowest yielding quintile had the lowest volatility (these are likely firms with lower, sustainable div rates). The second to highest quintile had the best reward/risk ratio though.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Thanks, varan. I'm not into all the hype…show me the evidence, and let me experiment with it, and I'll reach my own conclusions. I *am* surprised at how well some of these models are performing during the recent bull trend. Theory says the SPY should do better, then again, there are a lot of factors going on. Relative to that index, my funds are rather concentrated (so far, apparently in a good way!). Investor and institutional behaviors may also be working in favor of low-beta and div stocks, not to mention our govt keeping bond rates so low. There is also some good luck, such as HNZ getting bought out, but that's part of the game! I would be happy if we were at 85% of the SPY's performance going up…I believe the bigger benefit will come on the downturns. I have almost 2 years of weekly returns, so maybe I can do some stats on that. The drawdown numbers are certainly positive for DG portfolios!
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Given that we've discussed data (and experience) showing the value of low-beta stocks, it does beg the question why all of this institutional "smart money" isn't all over low-beta holdings, to the point that the excess value is removed. Note, I'm not saying they don't invest in these stocks, but I do wonder why the %s that you quoted aren't higher. Also, it occurred to me that the %s don't reflect total market cap. i.e. 86% of Google's $250B market cap is institutional, which is far more than probably all of the stocks you listed. It's a complex system, so I don't claim to pinpoint a particular cause. I do believe that if institutions truly believed as we do, there would be less excess returns from low-beta stocks (due to higher demand/interest/attent... Experience and recent data says that is not the case, which is fine by me, as like you, I choose my own path.
A Low Beta, High Dividend Growth Rate Portfolio With 3.4% Yield And 20% DGR [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
I based that comment on the research I presented previously that attempted to explain the "low-beta anomaly".
http://seekingalpha.co...
It mentioned that since fund manager performance is often based on the information ratio (active returns over benchmark / std dev of those active returns), it incentivizes managers to favor stocks with a beta closer to the benchmark (SPY, for example) that offer above average return potential. Also, for managers with bonus-structured compensation, there is more incentive to have high-beta stocks, which theoretically increase the chance of getting a higher return.
To your point, this doesn't mean they don't buy lower beta stocks, but it would suggest that they favor those with betas closer to one. Obviously there are other factors involved (earnings projections, sector, etc), when it comes to institutional purchases. What might be interesting, if you have the time, would be to list the betas next to all of the holdings, and see if there are any correlations between beta level and institutional ownership level. DOV, AFL, CSX, EMR, and CVS have higher betas, and generally have higher ownership.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
I think there are several factors you need to consider. The easier answer is for the second question. Yes, I would look at low-beta, high DGR (and reasonable dividend, not necessarily "high", but depends on what that means). At the end of the day, total return is what will matter for you. (i.e. how much the account is worth by the time the grandchild starts college)
For the first group of grandchildren, I don't know enough about CEFs to know if I would trust them to consistently raise the income stream each year. The ETF/CEFs (bond/preferred, etc) that my parents own have generally stayed flat or even lowered monthly payouts in the last two years. Mileage will vary. There are also questions to consider:
With 5 years to go, there is potentially time to recover from a dip, considering we are at highs now and every few years something seems to happen, but are you willing to risk that? If the plan is to use the income stream and some of the principal each year of school, then the timeframe is really more like 10 years. If only the income stream is needed, then higher div yield may make some sense, otherwise, you probably want some DG mix, but get much more conservative the last couple years. Are these funds essential, or more supplemental? (goes to risk level based on purpose/importance) etc etc.
All this said, if your goal is to increase income stream (not clear to me why that is necessarily the goal), then I would probably go with low-beta DG stocks with a decent portfolio yield. But I would likely shift an increasing portion to shorter-term investments (corp bond fund, CDs, etc) as they approach college age if the funds are considered essential to them paying for college. Don't want to lose 40% the year before school, much like what happened to many who planned to retire in 2008-2009.
There's no single "right" answer to your question…you'll have to weigh all of these factors and decide on the course that makes sense for you. Every choice has its own set of consequences. Decide what is most important and what you can live with (or not live with), and go from there.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]
Here's a link to that article. http://seekingalpha.co...
Dividend Growth Investing: A Strategy For Young Investors, Too [View article]
Of the dividend quintile portfolios, you are correct that the highest yielding group did not have the lowest volatility. That actually doesn't surprise me, as many high yielders are companies in trouble, or with risky payout levels. The second to lowest yielding quintile had the lowest volatility (these are likely firms with lower, sustainable div rates). The second to highest quintile had the best reward/risk ratio though.
Dividend Growth Models Update: Low Beta, High DGR Portfolio Off To A Great Start! [View article]