The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Great points. In fact, those are probably the two biggest risks to understand in this type of market, where investors are substituting stocks for bonds (because they have to).
1) Understand the risks associated with equity's inferior place in the capital structure. 2) Understand how rising interest rates may affect equity values.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Yeah, see, this is the scary thing.
I'm actually not convinced that it's even possible to build a fixed income portfolio that generates attractive enough yield without taking risk that is roughly equal to what investors can find in the equity space. Bonds up and down the curve are so ridiculously expensive. There are a lot of under-appreciated risks. They may not materialize any time soon (or ever), but that doesn't mean the risks aren't there.
MLPs and REITs are really gaining popularity, and I see that trend continuing as well, at least until the next major injection of macro risk or until something changes in the Treasury market.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
I think the only reason nobody's picked the Garmin fruit off the tree is because it's covered in dirt. It's a business that, on the surface, looks really unpalatable. I'm not convinced it's all bad, though. It's possible for them to stay relevant.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
I like this! I'd much rather hold something like this than the S&P 500. Strategy-wise, I think this would indeed be an excellent piece to use as the equity portion of an income portfolio.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Ha!
CTL isn't TOO bad. With its current yield, you could make a case that it is somewhat compelling. I just worry about more dividend cuts and how a company like this might fare during the next recession. I'd just rather take 1% less in yield and get AT&T.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Totally agree. Great comment.
For what it's worth, I hear this very similar perspective echoed all through the RIA and institutional world. I'm not sure if all of this is a bad thing, per se, because there are lots of positive economic effects. It's just that there are so many hidden potential risks and costs.
I think a lot of us just wish we knew how it was all going to end. This is uncharted territory in a lot of ways. In the 90's we'd never seen a tech bubble and we thought it was normal and didn't think it would end in the way it did. In the 00's we had a leverage/housing bubble and we thought it was just normal enthusiasm and we didn't think it would end in the way that it did. Something different is happening today, and it's not going to end in the way we think it will.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Good points. Dividends are definitely something that go into and out of fashion depending on the climate. Right now, honestly, I think we're in the early innings of dividend policy for corporate America. Yields were fashionably low during the tech bubble and leverage bubble. But it's different now. Boards all over the world are discovering the positive effects of what happens to their share price when they take the dividend very seriously.
I like your "In God We Trust, All Others Pay Cash" motto, as it totally applies to dividend stocks. I have a hard time believing the data these companies deliver to me because of my inherent skepticism. But I believe it when they "show me the money."
The Fish list looks really similar. Lots of similar names. Good companies, though.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
The "dividend cut" chart was actually what inspired this. I'm not sure what it means either (if anything).
With top line growth flattening out and operational efficiency pretty high, I think there are new risks for dividend investors to be more concerned about today than they were in, say, 2010 or 2011. Whether those risks as large in an absolute sense is a tougher question to answer.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Hey Cranky, great article there on a low beta portfolio. I know it's off topic, but that's a neat basket of names you've got over there. I run a few portfolios and will definitely steal some of that info for use. Thanks.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
I understand your points...
1) The S&P dividend yield today is 1.95%. The 130 year average is closer to 4%. Today may indeed be a great time to be a dividend investor, but only relative to the peak of the tech-bubble or other points in the last decade. If you look at a bigger slice of history, dividend yields are quite low. That may or may not be fair, and what I should really do is calculate their spread over Treasuries. In that sense, it may not be all dark for dividend investors, either.
2) S&P publishes a spreadsheet of their "dividend aristocrats" -- companies that have raised their dividend for 25 straight years. These are a good place to start for finding the types of companies you're talking about. A history of raising the dividend isn't a guarantee the company will always keep raising it, but it is a good place to start. Totally agree that a list like this is where dividend investors should start, especially if they're subbing it for fixed income.
3) For my three stock picks, my goal was to fish through the higher yielding space to see which, if any, might be interesting to consider. I mentioned this at the start of that section, but should have been more explicit about why.
Of course, not EVERYBODY, is talking about using dividends as a substitute for fixed income. But this is a trend that is very popular right now within the industry and it's getting more popular, too.
I totally agree with your point about rising stock prices and the concept of total return in dividend stocks. But again, for folks using them as a substitute for fixed income, that may definitely be a good thing, but isn't why they got into the stock.
I'll cite an example from my industry... 10 years or so ago, my company had made an allocation to a large, well known hedge fund who had a history of a stable, multi-strategy return stream (10-15% returns with 5-10% vol). During 2005 and 2006, all of a sudden their returns jumped up to around 30+% per year and they also had a few monthly losses that were bigger than anything else seen in their history or suggestive by their original strategy. This was awesome and we appreciated the profits, but it was way outside or original expectations and didn't fit with the reasons why we got into the fund in the first place. So we got out. And it was a lucky thing, too, because the fund blew up about 6 months later.
Anyway, the point is to have the right expectations for getting into the stock.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
Right, and that's probably smart.
The reality is that a lot of other types of investors are using these types of stocks as bond substitutes right now. Some know what they're doing, obviously, like the new trend of more and more bond funds holding equities. But there are a lot of people piling into this space without full understanding of the risks and realities.
So many of us just focus on the yield, but there are other important things that support it. It takes more work than you'd think to figure out the good dividend stocks. Like you mentioned, it requires looking at a lot of factors.
Stellar comment. This is a really important idea right now.
The answer is that they vary from company to company. Some sport vary high valuations, while others don't. I don't entirely understand why JNJ is priced the way it is right now. 23x is for growth stocks, not classic dividend payers, isn't it? And AAPL is a good example of something almost irrationally cheap right now. 10x is pretty fair for boring dividend payers, and it's not even 100% clear that's what Apple is yet.
Long story short: this is a stock picker's market. I know that there's a lot of evidence over the last decade to suggest that it's all correlated and it's all one market. But when it comes to managing risk in equities, I think there's a lot of value in being able to sift cheap names from the expensive ones.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
1) Understand the risks associated with equity's inferior place in the capital structure.
2) Understand how rising interest rates may affect equity values.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
http://amzn.to/13ByXtq
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
I'm actually not convinced that it's even possible to build a fixed income portfolio that generates attractive enough yield without taking risk that is roughly equal to what investors can find in the equity space. Bonds up and down the curve are so ridiculously expensive. There are a lot of under-appreciated risks. They may not materialize any time soon (or ever), but that doesn't mean the risks aren't there.
MLPs and REITs are really gaining popularity, and I see that trend continuing as well, at least until the next major injection of macro risk or until something changes in the Treasury market.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
CTL isn't TOO bad. With its current yield, you could make a case that it is somewhat compelling. I just worry about more dividend cuts and how a company like this might fare during the next recession. I'd just rather take 1% less in yield and get AT&T.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
For what it's worth, I hear this very similar perspective echoed all through the RIA and institutional world. I'm not sure if all of this is a bad thing, per se, because there are lots of positive economic effects. It's just that there are so many hidden potential risks and costs.
I think a lot of us just wish we knew how it was all going to end. This is uncharted territory in a lot of ways. In the 90's we'd never seen a tech bubble and we thought it was normal and didn't think it would end in the way it did. In the 00's we had a leverage/housing bubble and we thought it was just normal enthusiasm and we didn't think it would end in the way that it did. Something different is happening today, and it's not going to end in the way we think it will.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
I like your "In God We Trust, All Others Pay Cash" motto, as it totally applies to dividend stocks. I have a hard time believing the data these companies deliver to me because of my inherent skepticism. But I believe it when they "show me the money."
The Fish list looks really similar. Lots of similar names. Good companies, though.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
With top line growth flattening out and operational efficiency pretty high, I think there are new risks for dividend investors to be more concerned about today than they were in, say, 2010 or 2011. Whether those risks as large in an absolute sense is a tougher question to answer.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
(One of which was to pick the right type of stable companies with the right pattern of behavior.)
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
1) The S&P dividend yield today is 1.95%. The 130 year average is closer to 4%. Today may indeed be a great time to be a dividend investor, but only relative to the peak of the tech-bubble or other points in the last decade. If you look at a bigger slice of history, dividend yields are quite low. That may or may not be fair, and what I should really do is calculate their spread over Treasuries. In that sense, it may not be all dark for dividend investors, either.
2) S&P publishes a spreadsheet of their "dividend aristocrats" -- companies that have raised their dividend for 25 straight years. These are a good place to start for finding the types of companies you're talking about. A history of raising the dividend isn't a guarantee the company will always keep raising it, but it is a good place to start. Totally agree that a list like this is where dividend investors should start, especially if they're subbing it for fixed income.
3) For my three stock picks, my goal was to fish through the higher yielding space to see which, if any, might be interesting to consider. I mentioned this at the start of that section, but should have been more explicit about why.
Of course, not EVERYBODY, is talking about using dividends as a substitute for fixed income. But this is a trend that is very popular right now within the industry and it's getting more popular, too.
I totally agree with your point about rising stock prices and the concept of total return in dividend stocks. But again, for folks using them as a substitute for fixed income, that may definitely be a good thing, but isn't why they got into the stock.
I'll cite an example from my industry... 10 years or so ago, my company had made an allocation to a large, well known hedge fund who had a history of a stable, multi-strategy return stream (10-15% returns with 5-10% vol). During 2005 and 2006, all of a sudden their returns jumped up to around 30+% per year and they also had a few monthly losses that were bigger than anything else seen in their history or suggestive by their original strategy. This was awesome and we appreciated the profits, but it was way outside or original expectations and didn't fit with the reasons why we got into the fund in the first place. So we got out. And it was a lucky thing, too, because the fund blew up about 6 months later.
Anyway, the point is to have the right expectations for getting into the stock.
The Most Important Thing To Know If You're Using Stocks As Fixed Income [View article]
The reality is that a lot of other types of investors are using these types of stocks as bond substitutes right now. Some know what they're doing, obviously, like the new trend of more and more bond funds holding equities. But there are a lot of people piling into this space without full understanding of the risks and realities.
So many of us just focus on the yield, but there are other important things that support it. It takes more work than you'd think to figure out the good dividend stocks. Like you mentioned, it requires looking at a lot of factors.
Forecasting The S&P 500's Returns [View article]
The answer is that they vary from company to company. Some sport vary high valuations, while others don't. I don't entirely understand why JNJ is priced the way it is right now. 23x is for growth stocks, not classic dividend payers, isn't it? And AAPL is a good example of something almost irrationally cheap right now. 10x is pretty fair for boring dividend payers, and it's not even 100% clear that's what Apple is yet.
Long story short: this is a stock picker's market. I know that there's a lot of evidence over the last decade to suggest that it's all correlated and it's all one market. But when it comes to managing risk in equities, I think there's a lot of value in being able to sift cheap names from the expensive ones.