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Kurtis Hemmerling  

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  • The Importance Of Total Return With Dividend Growth Investing [View article]
    I re-ran the test where you hold the 10 largest cap applicable stocks and only sell if dividends are cut. Proceeds are re-invested equal-weight into existing positions (no dead capital). 2.32% annualized return.

    I did this again where you hold the stocks even when dividends are cut (no selling no matter what). Annualized return is 4.23%.
    Mar 13, 2015. 10:34 AM | Likes Like |Link to Comment
  • The Importance Of Total Return With Dividend Growth Investing [View article]
    I agree with you BoomBoom99. Do not chase total return. Some actually think this means buying high momentum stocks with the highest trailing total returns. I think chasing total return this way is a mistake.

    But if you calculate value, the difference between what you think a company is worth and the current price, and hold the ones which you think have the greatest likelihood to appreciate over the next 2 years, you may be able to maximize total return and income at the same time. The income may be greater because the yields are higher when buying deep value.
    
    Mar 12, 2015. 07:11 AM | Likes Like |Link to Comment
  • The Importance Of Total Return With Dividend Growth Investing [View article]
    Thank you for the comment. I don't like to point out actual investors but if you look through comment sections of DGI articles you will see many such sentiments. There are entire articles in SA, if you search, which argue that total return is not a useful metric for income investors and holds no value.

    I used the mega-cap example in the article to illustrate when you may want to be out of a system, but at that point in time the total return is so low that emotionally you may not want to 'lock in the losses' to try something else. You could continue the strategy but it doesn't get much better.

    Another example would be when dividends are cut and your portfolio value is low because you failed to maximize total return. This can be on a stock-by-stock basis or during a crash such as 2008/09. You can hold a basket of stocks which no longer have dividend increases if you want to, but this isn't dividend growth investing any longer.
    Mar 11, 2015. 02:17 AM | Likes Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    "If I used a simple arithmetic average of 15% growth, the final YOC would have shown 11.7%."

    Correction - it should read 11.7% + the original yield on cost, or 14.95% final YOC. The 11.7% represents the growth.
    Mar 4, 2015. 10:38 PM | 1 Like Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    Okay, so you agree with the 77% (or higher) fall-out rate over 14 years but you are questioning whether a 77% attrition rate would really have 2.5% less return per year than a portfolio which only holds the 23% survivors from the beginning? Fair enough.

    Yes, there are small differences in trades. Some stocks paid an extra dividend in the 2012 fiscal year. Strictly following the dividend growth rule, regular income dropped. Some of these would have been sold (but the special dividend isn't counted towards growth - just if they stuck an extra regular dividend in the fiscal year). However, this would have a minimal effect on the 14 year performance as it was near the end of the test and 2013 was a good year. As well, all capital is distributed equal-weight in the sim among all eligible stocks - so no dead money. A sold holding gets put right back into the div growth pool.

    I get that a DGI investor may make allowances based on this or that. I can use 2 year average growth or trailing 6 quarters or whatever - but this was about stocks which grow dividends annually without lowering it. The big surprise for me is that there was only a 2.5% drop in return annually between the 23% surviving stocks (cherry-picked) and the entire group.
    Mar 4, 2015. 04:19 PM | 1 Like Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    I understand what a geometric mean is and I am saying that the compound annual growth rate is the geometric average annual return.This was already applied to my calculations that needed it and is standard financial practice is the way I used it.

    But I am suggesting that your use of the geometric average is incorrect. I have never seen anyone use a geometric mean to tally portfolio yield. The yield does not need a geometric average applied to it. The way you apply it in this instance (to yield) would have this effect: I have 10 apples, 2 apples and 5 apples. 17 apples. The geometric mean is 4.64159. I quickly re-count my apples (3 piles) and suddenly I have 13.92477 apples?

    Try out the CAGR calculator. http://bit.ly/ZJ8quk

    If you double your money in 10 years, the compound annual growth rate is 7.18%.

    But in the second example, if I have 3 different stocks (equal weight), one with a 9% yield, a 5% yield and a 1% yield, I can say that I have an average 5% yield. If I have $10,000 invested in each stock I will actually earn $1,500 in dividends or $500 on average or 5% average. This uses the simple arithmetic mean and not the geometric.

    As for my use of the geometric mean or compounding growth ratios - look at the chart that starts with a 3.25% yield on cost and 15% growth rate. If I had expressed this as a arithmetic average I would have multiplied 24 years (first year isn't considered growth but is the baseline year) by 0.15 to get 3.6. This would then represent the multiplier to my original annual dividend stream (which I chose to express as yield on cost). If I used a simple arithmetic average of 15% growth, the final YOC would have shown 11.7%. It is obvious that I did not use the arithmetic average. If I didn't use the arithmetic mean in my forward growth numbers, why did you assume I used it in my trailing growth numbers? Perhaps the answer has more to do with a view that I am attacking dividend growth investing instead of actually wondering if I used a standard CAGR calculation.

    If you find a money manager using one of those geometric averages for a stock index, run. http://bit.ly/1FaOp4i
    Mar 4, 2015. 03:58 PM | 1 Like Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    I ran all sorts of variations in P123 and the results are similar. I ran it using ex-div and pay dates. I ran it using either annual periods or TTM.

    The testing here is not limited to the CCC list. It may be that instead of 70% survivor-ship, one investor or another might feel inclined to include exceptions. Yes, this might change survivorship bias by a few percent depending on the investor leniency. But if you add more exceptions on one end (current list), you need to add it to the other (2001 historical list) with a similar result.

    But to be fair, the one survivorship test did use the CCC list. I ran a point in time screen and tallied all div growth stocks with 5 years or more of div growth as of 2001. This P123 list was compared against the number of stocks on the current CCC list which have 19 years or more of consecutive div growth. It is my experience that the CCC list, as you say, includes certain exceptions which makes the list a tiny bit larger than the strict rules-based approach. Thus, in 2001 David Fish may have added a few more names than my 2001 list, and the survivorship rate would even be worse than the 77% attrition rate I calculated.
    Mar 4, 2015. 02:54 PM | Likes Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    Thank you for your comments and telling us how you meet these challenges.

    As for survivorship bias, I consider a stock as not surviving once it is removed from dividend growth universe. In my non-biased dividend example, a stock was sold as soon as it failed to increase the dividend. The 2.5% reduction in the compound annual growth rate shows the consequence of selling a stock when the dividend fails to rise and distributing the capital amongst the surviving names. This is showing the difference between computing the average return of the CCC list (as one example) and a real investment portfolio following the exact same guidelines as the CCC list.

    I would suggest that the yield of the replacement stock is very important for yield on cost projections. If you invested $100K and have a 10% yield on cost after 5 years, and now you sell your shares and have $200K in capital to redeploy, you would need to invest in a stock with a minimum of a 5% current dividend yield to collect $10K in dividends and maintain your 10% yield on cost.
    Mar 4, 2015. 01:39 PM | 1 Like Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    Paul,

    Perhaps you can add additional explanation why you use the geometric mean in this case. I disagree with your use of it.

    As for my hypothetical example.... all growth rate calculations and figures used for the sake of this article do in fact use the compound annual growth rate or the geometric mean. The software I use, Portfolio123, uses CAGR for growth calculations. It is standard practice and I operate under the assumption that all readers would know this.

    Back to the portfolio...if each variable already represents the 5 year geometric mean, you should not apply it a second time. If one portfolio has a compound annual growth rate of 1% and a second portfolio has a compound annual growth rate of 100%, the investor (holding both portfolios equal-weight) could say that his average return per year is 50.5% as this number already includes the compound annual growth rate. He would definitely not say that his average return is the geometric average of a geometric average which is 10%.

    As for yield, I have no idea why you would apply a geometric average to it. That is a bit boggling if you ask me. It is indicated or expected dividend to price ratio to provide the first year of income so that you can apply the compound annual growth rate of dividend growth to it. If I use the geometric average of yields as you suggest the following bizairre situation would be true:

    $30,000 invested. $10,000 per stock. Stock A gives $500 in dividends. Stock B gives $300 in dividends. Stock C gives $100 in dividends. I invested $30,000 and received $900 in dividends. My yield on cost - or dividends received for that year dividend by my initial investment is 3%. That is true. By using the geometric mean I am told that my portfolio yield on cost is 2.15% which means I made only $650 in dividends for the year. But this is not true.

    You cannot apply a geometric average to every possible calculation. I use the compound annual growth rate where it makes sense to do so. But I do not agree in the manner in which you attempt to apply it. If you would like to explain your reason for doing so in the form of a hypothetical example I would be most interested.
    Mar 4, 2015. 01:22 PM | Likes Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    You can see the very tiny link below the actual list in the fine print.
    http://bit.ly/RmM4R0

    I had to cross-reference these tickers with the P123 database as sometimes it used a slightly different ticker or name. For instance, Household International (historical ticker HI) is linked to the name HSBC, which bought the firm up and not Hillenbrand which currently has the ticker HI.

    I recreated and verified the list (as best I could) for every year since 2001 based on the link above.
    Mar 4, 2015. 08:53 AM | 1 Like Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    I am glad that came across. DGI IS a valid strategy. As well, I believe very strongly in the institution of dividends.

    My motivation is to gain a better understanding of the DGI life-cycle and which sub-types have more/less risk. Many principles of DGI can be applied to other areas of the market. For example, stocks with 10 years of DGI and 10 years of consecutive earnings growth have performed very well even if the number of tickers are low. Some might choose to overweight these names.
    Mar 4, 2015. 08:45 AM | 2 Likes Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    Based on your numbers (including smallcaps) I calculate a 46.7% survival rate in a 5.5 year period. In another 8.5 years there would only need to be another 16.7% that drop off the list to have the same stats I came up with on the 14 year test.
    Mar 3, 2015. 12:04 PM | 1 Like Like |Link to Comment
  • 5 Common Errors Of A Dividend Growth Forecast [View article]
    I did this a couple different ways. One was to re-sample the market every 3 months and record all unique tickers which had a minimum of 9 years div growth. The total count of all unique tickers was then compared to the current number of stocks with 9 years or more of div growth.

    The second test was to record all stocks (as of 2001) which had a minimum of 5 years of div growth. I then zipped forward to current and counted which of these tickers had 19 years or more of dividend growth (the 5 years at inception plus the 14 year test).

    The survivorship rate in both studies were similar.
    Mar 3, 2015. 11:43 AM | 1 Like Like |Link to Comment
  • The Hidden Risk Of High Dividend Growth Stocks [View article]
    Christine,
    Thank you for your input. Can you give us a little more information?

    Do you mean that you invest in high trailing dividend growth stocks but the income appears to compound at a similar rate going forward and that over time your total yield on cost is greater than a high yield selection (while still investing in div growth stocks)? I will dig more into this subject next.

    It is also possible that there are sector, size, minimum yield, starting date, holding period and other factors that need to be accounted for when using a high div growth to project forward income streams but the initial round of testing was to use as few pieces and processes as possible to see if factor A on Universe A leads to income alpha or at least an income stream that is somewhat near our projections.
    Feb 20, 2015. 12:52 AM | Likes Like |Link to Comment
  • The Hidden Risk Of High Dividend Growth Stocks [View article]
    You bring out some good points. The universe of div growth stocks with 9 years or more of consecutive div growth, plus the $1 per share and $100K avg daily turn ranges from about 200 - 300 names over the past 15 years. The universe is created point in time. If I remove liquidity requirements it is about 220 - 370. So I essentially cut the universe in half testing the top 50%.

    Perhaps I will narrow the test and run the top 10% or 25% minus the bottom 10% or 25% to see the net difference.

    Good ideas. Thank you.
    Feb 19, 2015. 02:09 PM | Likes Like |Link to Comment
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