Quantified Dividends: Why Coca-Cola Is A Sell [View article]
I hate to break this to you, but your "theory" and this article can basically be summed up in two words: P/E ratio.
Payout ratio = Div / Earnings Yield = Div / Price
Payout / Yield = D/E * P/D = P/E.
I would argue you are far better off looking at the Yield and Payout ratios to make your decision versus the P/E. You can have high yield (8%) and high payout (80%) for a PE of 10, which appears to be a strong buy under your rankings.
If you need income, you want a higher yield, but then can decide if the payout is too rich for your comfort. If you want growth, lower yield may be fine, but you want to see lower payout and then check out the DGR and earnings growth projections.
Are Dividend Stocks A Substitute For Bonds? [View article]
Where are you finding 7.5% treasury or high-grade 10-yr corporate bonds? Point me at some of them and I'd gladly invest some dollars there. If they don't exist, it discounts the example provided. I know I can find 5% DG stocks. I do agree with having part of the portfolio in bonds (corporate, muni, govt, etc) for diversification purposes, and in the case of lower-grade munis/corporates, higher yield.
Are Dividend Stocks A Substitute For Bonds? [View article]
If I'm suffering from anything, its from your reference to treasuries in this article, and from using an example that has yields that one cannot get right now from anything except maybe junk bonds. I have written on research that shows DG stocks with CAGR of 10%+ over 25 year periods, so I don't suffer from recency. Time to unfollow this thread. Wish you were a better communicator, as I think some of your message is valid, but the message gets lost due to the messenger.
'Buying Dividend Stocks For Income' Arguments Don't Make Sense [View article]
I think I get what the author is trying to say. There's always risk, and investors shouldn't just look at a (high) yield without considering why the firm is paying out such a high amount and whether it can sustain it. Depending on the investor's goals, some people in this forum seem less concerned about fluctuations in principal (i.e. total return), so long as the dividend stream is maintained or growing. Personally, I look at both. I think it would help to qualify what stock universe is being considered. Many of the articles (David's, mine, others) have focused on the more select group that has consistently increased dividends for 10+ years, which takes away a good chunk of the risk. There is research (I'll post tomorrow) that showed higher returns from those stocks with higher yields (from this universe), as well as overall outperformance compared to the whole market. Doesn't mean some of these firms won't "fail", but as a group, they have historically outperformed over the long term.
Dave Van Knapp Positions For 2013: Tuning Out Market 'Noise' With Dividend Growth Investing [View article]
Hi AlphaScorpio85,
I was the same way when I first started, but then having gone through the crash in 1987, the tech bubble in 1999/2000, and now the 2008 financial crisis, my strategy has definitely changed. You say you started 1.5 years ago, so you haven't gone through watching your assets drop 40%...if you're lucky, it won't ever happen. Also, if you review some of the research I have highlighted in my model portfolios, DG investing has been shown to deliver better long term total return (not just dividends) vs the overall market and with lower volatility. It goes against what we are taught in finance programs, but it provides support for those pursuing DGI at any age. Based on some research I am currently reviewing, low volatility appears to be yet another anomaly in MPT (Modern Portland Theory), so DGI has a lot of research backing it, even if the "masses" believe high growth is the way to go.
If You Believe In Dividend Investing, You Should Buy Cyclical Companies, Not Consumer Staples [View article]
If those are "the best cyclicals", their performance is the same as the staples I listed, but the staples had much lower volatility. As for 30 year timeframes: CAT: $3 in 1982, $87 now (+2800%) Deere: $1.40 then, $75 now (+5257%) KMB: $1.46 (1984), $82 now (+5516%) PG: $1.20 then, $63 now (+5150%)
While only a small sample comparison, KMB outperformed CAT and DE, and PG nearly matched DE and beat CAT. I would bet the volatility was lower for KMB and PG too. So, I question the claim that cyclicals have outperformed staples over the long run. Select ones, perhaps, but your "best ones" did not beat two of the best staples.
Can Dividend Growth Investing Be Reconciled With Modern Portfolio Theory? [View article]
FYI, there is increasingly more research on DGI stocks showing that they outperform the overall market over time and with lower volatility. This may help to resolve the goals of income and total return to an extent. When I get some time, I'll post some summaries of the research I've found from this year. What's interesting is that much of it was being written by asset mgmt firms, so maybe they are finally coming around to DGI. Not sure if we should congratulate them or be scared…there goes the neighborhood. ;-)
Tax On Dividend-Paying Stocks Rising To 74% [View article]
I agree, Blix. The corporate taxes are irrelevant. Those are paid regardless of whether the firm pays a dividend or not, and that is already factored out of net earnings. The graph is a bit misleading because it includes this, and is also 3-D with the retained dividends portion in the back, so it looks rather small. Also, since we can deduct federal taxes on state returns (and vice versa), the effective taxes are a little lower. The quoted rates also only apply to those in the highest brackets, which isn't the majority of people. Plenty of firms paid divs when rates were higher, and most of my funds are in IRAs, so I'm not planning any changes due to the tax code at this time.
I think you just hit on one of the issues with the logic of the original statement, George. Yes, paying a dividend means less cash for expanding the business, but that assumes that the cash would be spent on profitable ventures and that there are sufficient projects for all of the cash. Otherwise, the firm may start misspending the money (wasteful activities, overpriced acquisitions), or it just sits on their balance sheet earning very little return. Look no further than Apple…even with their dividend, the cash pile grows. For more "normal" firms, paying a dividend helps to avoid this, and focuses management on spending their remaining funds wisely. Firms can't continue to grow at an exponential rate anyway, so it seems to me there is a balance between growing the firm and returning a portion of earnings to investors.
A Backward Way To Achieve 10% Yield On Cost In 10 Years [View article]
You summed up what I was going to write very well, Richjoy! My question for Robert is if he plans to wait for those stocks to drop 25%+? (I'm not sure I would call those "close" to meeting his criteria) Or is perhaps the 10% requirement unrealistic? Sure, if we have another macro-market crash, this can be achieved, but that aside, it seems less likely.
I know Robert is only concerned with dividends, but this is where as a total return investor, I look more at dividend and earnings growth to drive the price over the long-term, aiming for 10%+ total return. That relaxes the need for a specific dividend target, but of course, I have to deal with price fluctuations.
Why MLPs Are Extremely Overvalued As An Asset Class (Part 1) [View article]
Hi James, Since you plan to write a followup, I would really like to see some more context and analysis of the EV/EBITDA ratio. PE comparison is meaningless (wish you hadn't included it, as it is misleading), and different industries have different EV/EBITDA ratio levels. According to an article I found (link below), MLPs typically have higher EV/EBITDA than regular stocks because they don't pay corporate taxes (so denominator is "worth more"), people pay premiums for yield, and they have lower cost-of-capital. Given the extremely low interest rate environment, simple supply/demand would drive up the EV/EBITDA. So, while I'm not as persuaded by comparisons to other industries/securities, I would agree that on a historical basis, the EV ratio is high for MLPs. However, until interest rates rise enough to create competitive alternative investments for income investors, is there anything else that will threaten the category? Watching debt levels is certainly valid, but can we find out to what extent those funds are being used to expand (acquire) operations, in which case we would expect EBITDA to increase in the future? I don't know if there is a good way to find this out on a historical basis to see the trend.
FYI, here's an article on energy MLPs that had info on valuation and other factors to consider: www.naptp.org/News/Wee...
McDonald's Is 20% Overvalued -- Investors Should Sell [View article]
I did a discounted cash flow on MCD about 5 months ago, and came up with an intrinsic value of around $100-110, based on the assumptions I used. Even if I raised their cost of capital by 20% and lowered EBITDA margins (i.e. sensitivity analysis), the lowest value I got was $90. The stock was near $75 at this time, so my only problem was not having free cash to purchase it! I wish it would fall back to $80 so I could scoop it up. Based on my analysis, it is currently at fair value, maybe on the high side. Doing a simple Gordon Dividend Growth model, I get a number near $90. So it might retreat to that level. It will likely take a major earnings miss or other macro market moves to drive it to $80.
I don't see much point in adding fuel to the fire, however, I question the assertion that dividend growth stocks didn't provide some benefit during the downdraft. Several of my holdings (MO, JNJ, KMB, KMP) fell only 1/2 as much as the S&P in 2008-2009, and that is just looking at the price, not counting the growing divs. In your table, consumer staples show little change, and based on market cap, that would make up a large part of the portfolio. They have also rebounded very nicely. Anyway, show some more data to back up the claim…and if you are only looking at the last 6 months, that is rather selective and doesn't really reflect longer-term investing. Also, based on Yahoo Finance data, the S&P fell 12.8% over that timeframe, while the Div SPDR fell 10% (your number). That means it fell ~22% less than the S&P (percentage comparison). Does that count as protection in a downdraft?
Simple Dividend Strategy, Part 2: A Research-Based Case for Investing in Dividend Growth Stocks [View article]
Thanks. The thing that I still haven't resolved is that if this strategy was really so great, then you would expect everyone to do it, and then it should not achieve above market returns. I guess it depends on whether one believes that dividend stocks outperform non-paying stocks…I am more convinced now, after seeing the data, than if you had asked me before. Another study (Fama & French, I think) determined that small-cap value stocks were the best group, so for non-dividend folks, that is something to look into. With your cash position, you are getting the benefit of this market drop; just stick to firms with solid histories. Good luck to you too!
Quantified Dividends: Why Coca-Cola Is A Sell [View article]
Payout ratio = Div / Earnings
Yield = Div / Price
Payout / Yield = D/E * P/D = P/E.
I would argue you are far better off looking at the Yield and Payout ratios to make your decision versus the P/E. You can have high yield (8%) and high payout (80%) for a PE of 10, which appears to be a strong buy under your rankings.
If you need income, you want a higher yield, but then can decide if the payout is too rich for your comfort. If you want growth, lower yield may be fine, but you want to see lower payout and then check out the DGR and earnings growth projections.
Are Dividend Stocks A Substitute For Bonds? [View article]
Are Dividend Stocks A Substitute For Bonds? [View article]
'Buying Dividend Stocks For Income' Arguments Don't Make Sense [View article]
Dave Van Knapp Positions For 2013: Tuning Out Market 'Noise' With Dividend Growth Investing [View article]
I was the same way when I first started, but then having gone through the crash in 1987, the tech bubble in 1999/2000, and now the 2008 financial crisis, my strategy has definitely changed. You say you started 1.5 years ago, so you haven't gone through watching your assets drop 40%...if you're lucky, it won't ever happen. Also, if you review some of the research I have highlighted in my model portfolios, DG investing has been shown to deliver better long term total return (not just dividends) vs the overall market and with lower volatility. It goes against what we are taught in finance programs, but it provides support for those pursuing DGI at any age. Based on some research I am currently reviewing, low volatility appears to be yet another anomaly in MPT (Modern Portland Theory), so DGI has a lot of research backing it, even if the "masses" believe high growth is the way to go.
If You Believe In Dividend Investing, You Should Buy Cyclical Companies, Not Consumer Staples [View article]
CAT: $3 in 1982, $87 now (+2800%)
Deere: $1.40 then, $75 now (+5257%)
KMB: $1.46 (1984), $82 now (+5516%)
PG: $1.20 then, $63 now (+5150%)
While only a small sample comparison, KMB outperformed CAT and DE, and PG nearly matched DE and beat CAT. I would bet the volatility was lower for KMB and PG too. So, I question the claim that cyclicals have outperformed staples over the long run. Select ones, perhaps, but your "best ones" did not beat two of the best staples.
If You Believe In Dividend Investing, You Should Buy Cyclical Companies, Not Consumer Staples [View article]
Can Dividend Growth Investing Be Reconciled With Modern Portfolio Theory? [View article]
Tax On Dividend-Paying Stocks Rising To 74% [View article]
I Don't Understand Dividends [View article]
A Backward Way To Achieve 10% Yield On Cost In 10 Years [View article]
I know Robert is only concerned with dividends, but this is where as a total return investor, I look more at dividend and earnings growth to drive the price over the long-term, aiming for 10%+ total return. That relaxes the need for a specific dividend target, but of course, I have to deal with price fluctuations.
Why MLPs Are Extremely Overvalued As An Asset Class (Part 1) [View article]
Since you plan to write a followup, I would really like to see some more context and analysis of the EV/EBITDA ratio. PE comparison is meaningless (wish you hadn't included it, as it is misleading), and different industries have different EV/EBITDA ratio levels. According to an article I found (link below), MLPs typically have higher EV/EBITDA than regular stocks because they don't pay corporate taxes (so denominator is "worth more"), people pay premiums for yield, and they have lower cost-of-capital. Given the extremely low interest rate environment, simple supply/demand would drive up the EV/EBITDA. So, while I'm not as persuaded by comparisons to other industries/securities, I would agree that on a historical basis, the EV ratio is high for MLPs. However, until interest rates rise enough to create competitive alternative investments for income investors, is there anything else that will threaten the category? Watching debt levels is certainly valid, but can we find out to what extent those funds are being used to expand (acquire) operations, in which case we would expect EBITDA to increase in the future? I don't know if there is a good way to find this out on a historical basis to see the trend.
FYI, here's an article on energy MLPs that had info on valuation and other factors to consider:
www.naptp.org/News/Wee...
McDonald's Is 20% Overvalued -- Investors Should Sell [View article]
The Dumb Dividend Idea [View article]
Simple Dividend Strategy, Part 2: A Research-Based Case for Investing in Dividend Growth Stocks [View article]