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Kurtis Hemmerling's  Instablog

Kurtis Hemmerling
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I am a quantitative model designer. I build customized portfolio solutions for brokerages, family offices and individual clients around the world. Some of the models required the capacity to trade hundreds of millions of dollars. I would best describe myself as a value investor looking for... More
My company:
Portfolio123
My book:
Myth-Busting the Stock Market: Developing Uncommon Sense By Challenging Financial Truisms
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  • FAQ For High Yield Income Plus Portfolio

    This blog is to answer a few questions regarding one of the models offered in the new SA Premium program - High Yield Income Plus.

    The article, Overcoming The Pitfalls Of High Yield Investing, has raised a few questions in the comment section that deserves further treatment.

    How much of the annual returns is due to dividends vs. capital appreciation?

    Of course, this will fluctuate every year depending on such factors as opportunities for firms to re-invest, the interest lending rate and so forth. Using one of Portfolio123's tools, I create a custom data series that gives the average dividend yield for the universe I select stocks from based on my ranking system.

    (click to enlarge)Avg Dividend Yield High Yield Stocks

    Thus, the average annual dividend yield would be between 9 and 10%. The total return CAGR is over 21% for the 50 positions. We can say that a little less than half of the stocks return is given in dividends, assuming that our 50 stocks have a fairly equal distribution in the stock universe.

    Does market risk related to income risk? If I buy and hold can I ignore market conditions if I am only concerned about the income stream?

    Some investors claim that income risk and market risk have little cross-over. Is this the case? How would we test it?

    First we define our investable universe. In this case we say that our 'high yield' investable universe is any stock that meets the following requirements:

    • Average price>$1 and daily turnover>$50,000
    • Minimum 3% dividend yield
    • Dividend yield at least 1% higher than 20 year Treasury bond yield

    I will simulate buying and holding any stock that passes on the date January 2007. I will then track the total dividends paid (not per share but total $ amount) to common shareholders over the trailing 12 months. (1 = $1,000,000). The chart will be market-cap weighted since we simulate owning 100% of all market-capitalization.

    If income risk is unrelated to market risk, the rising and falling of dividends paid ttm will have low correlation to what the market was doing. To put it another way, rising markets will not necessarily see a rise in dividends and a market crash will not necessarily see a drop in dividends.

    (click to enlarge)

    The data is a little lagged since we are using the trailing 12 months. But it is fairly obvious that the market drop in 2008/09 had a major impact on our dividends even though we bought and held since 2007. The market dropped by over 50% and our annual dividend stream dropped by over 50%.

    How much of the income risk is related to companies no longer being listed?

    The following chart shows the survivorship of our 212 stocks which we invested in starting in 2007.

    (click to enlarge)

    Interestingly enough, there is a steady decline. Thus, our stock universe has an annual discount rate of 5.2% (we lose 5.2% of our stock universe every year).

    This gradual decline should likewise create a gradual drag against our dividend chart in the previous question. Thus, the up and down volatility of total dividend income is not due to delisting stocks.

    To negate the effect of delisting stocks, I will track the average dividend cash flow paid to common shareholders (NYSE:TTM) instead of the sum. Thus 100 stocks and $100 million in total dividends will produce the same ratio as 50 stocks and $50 million in dividends in the event that 50 stocks fall off the market.

    (click to enlarge)

    After controlling for stocks which delist, the remaining stocks still saw a 45.5% reduction in income during the 2008/09 crash.

    Yes, but this is clearly due to financial stocks. What is the result if I did not invest in any financials?

    First of all, it would be incorrect to remove financial stocks in hindsight. Unless you accurately forecasted the market crash due to financials and stayed away from that sector, it needs to stay in our population.

    But for arguments sake, let us remove financials to see the average dividends paid of surviving firms since 2007.

    (click to enlarge)

    Our dividend draw-down is up to 48%. Removing financials did not improve our average income reduction of surviving stocks. While only 4.2% of our stocks drop off the list annually as opposed to 5.2% when including financials, our actual income volatility is greater despite the reduction in stocks dropping off.

    Relating to the very first chart in the linked article at the top, is the 90%+ drawdown of the 25 highest yielding stocks in the Russell 3000 is due to mortgage backed instruments?

    Let us re-run the test removing sub-sector Real Estate (GICS 4040). This test will take the 25 highest yielding stocks in the R3K and then only hold those tickers which are not part of the real estate sub-sector.

    (click to enlarge)

    An average of 11 stocks of the 25 highest dividend yielding names relate to real estate. If we remove those names, the remaining tickers held equal-weight still produces a draw-down of 84%. True, this isn't a 90% drawdown but it is still very ugly and much higher than the broad market (which includes real estate stocks).

    May 21 11:31 PM | Link | Comment!
  • Introduction To Free Investment Models

    Free and Public Investment Models

    Over the coming months I will be adding content to my Instablog section showing investors how they can build their own investment model using the principles that I write about in Seeking Alpha.

    The simplest way I know to follow these models is to have a paid account with the same stock screening and backtesting platform which I use, Portfolio123. If you sign up for a trial using the link here, you'll get 30 days of free trial instead of 15 days posted on their site.

    I want to be clear that these models are free. The principles will all be laid out for you to do on your own provided that you can find a data source which allows screening and ranking. Or perhaps a community project can be started by someone...I don't know. I will just provide you with the screen and you can go from there.

    Steps To Find the Free Screens

    Once you sign up for a P123 free trial account (I don't believe you need credit cards or anything), you can click on this link to go directly to the screen I have made public called Free Div Growth Screen 2. Yes, there is also another freebie div growth screen 1.

    To find this and many other public screens, click SCREEN and under the drop-down menu select P123 SCREENS. In the menu bar you will see a magnifying glass. Click it.

    (click to enlarge)

    It should take you to a page that looks like this:

    (click to enlarge)

    From here you can type in "Hemmerling" without the quotes in the Author field, or simply leave everything blank and hit search if you feel inclined to sift through 3,000 stock screens to see what gems might be hidden.

    Dividend Growth Safety Screen Holdings

    Below are the holdings of the Dividend Growth Safety Model which is submitted for publication as of April 10th, 2015. Before that, here are the steps to build this model yourself:

    1. Dividend Growth stocks in the Russell 1000 with at least 10 years of dividend growth
    2. 4 week rebalancing
    3. Calculation of the 100 day average of daily price beta
    4. Calculation of the 60 day average of ATRN (Average True Range Normalized)
    5. The stocks meeting criteria 1 and 2 are given a relative rank between 1 and 100 based on how low the beta is (lower beta gets a better score). Do the same for ATRN. Stocks with the best combined score are purchased and held.
    6. You only sell a stock if the combined average score is 80 or less (or if total score is 160 or less if you add the two scores together)

    Or, just run the screen 'as is' that I have provided. All the steps are done for you. And remember, more will be added later.

    As promised, here are the 20 portfolio holdings:

    TickerNameMktCap
    (NASDAQ:SIAL)Sigma-Aldrich Corp16431.52
    (NYSE:FDO)Family Dollar Stores Inc.9014.72
    (NYSE:WM)Waste Management Inc.24600.51
    (NYSE:RSG)Republic Services Inc.14421.9
    (NYSE:CLX)Clorox Co (The)14235.02
    (NYSE:GIS)General Mills Inc.31105.97
    (NYSE:CHD)Church & Dwight Co. Inc.11170.9
    (NYSE:T)AT&T Inc173657.8
    (NYSE:KO)Coca-Cola Co (The)181276.3
    (NYSE:PG)Procter & Gamble Co (The)223224.2
    (NYSE:VZ)Verizon Communications Inc200643.2
    (NYSE:HCC)HCC Insurance Holdings Inc.5536.34
    (NASDAQ:COST)Costco Wholesale Corp65874.42
    (NYSE:CB)Chubb Corp23215.01
    (NYSE:TRV)Travelers Companies Inc (The)34088.76
    (NYSE:PEP)PepsiCo Inc143101
    (NYSE:BRO)Brown & Brown Inc4568.59
    (NYSE:WPC)W. P. Carey Inc6856.6
    (NYSE:KMB)Kimberly-Clark Corp39025.19
    (NYSE:WMT)Wal-Mart Stores Inc266517.9

    Stay tuned, more to come.

    Kurtis Hemmerling

    Apr 10 9:04 AM | Link | 7 Comments
  • What Free Financial Stuff Can I Give You?

    This blog is for anyone who reads my articles to chime in on what free stuff they would like to see at the portfolio management platform that I work with - Portfolio123.com. I am hoping to build out a new section of free financial stuff.

    If you could make a wish-list freebies - what would it be?

    To get the creative juices flowing...

    • Market-timing indicators? (I have a new market-timing system soon to be published here)
    • Specific models or strategies?
    • Charting of stocks or ETFs?
    • Economic indicators?

    Its an open forum - you tell me what you'd like to see and I'll see what I can do.

    Also, open invitation to anyone who wants to join my new LinkedIn group where I post various systematic investing techniques.

    Systematic Investing Techniques - LinkedIn Group

    Apr 01 12:51 PM | Link | 6 Comments
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