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[ image at QVM site ]

Yield for this filter is the annualized most recent dividend payment as calculated by VectorVest. 

The values for AGG and BND are highlighted in pink as “central values” representing US aggregate bonds.  Fixed income funds are highlighted in yellow.  Equity funds are not highlighted.

Notably absent from the the filtered list are key funds such as:

• DIA (Dow 30 large-cap)
• SPY (S&P 500 large-cap)
• MDY (S&P 400 mid-cap)
• IWM (Russell 2000 small-cap)
• EEM and VWO (MSCI emerging markets)
• EWZ (Brazil)
• FXI (China)

The filtered does not suggest that higher yielding stocks will have higher total returns than lower yielding stocks. It expresses no opinion on that question.  It does identify those stocks that are producing above average dividend cash flow and that have certain minimum liquidity and market-cap.

The list raises the question of relative long-term value of certain equity funds versus certain bond funds.

For example, if a utilities fund (such as XLU) has the same or slightly higher yield as aggregate bond funds (such as AGG or BND), perhaps moving some money from the aggregate bond fund to the utility fund could improve long-term cash flow, because the cash flow from the utility may be more likely to rise than the cash flow from the bond fund.

Further, if a dividend oriented fund (such as SDY, the S&P Dividend Aristocrats) pays nearly as much dividend yield as an aggregate bond fund, perhaps some reallocation from aggregate bonds to the dividend fund could increase long-term portfolio cash flow.

Of course, moving assets from bonds to stocks, even for yield, will likely increase portfolio volatility, but for some investors, volatility is not such a big worry if the dividend cash flow keeps coming in.

There are risk/reward trade-offs to be considered, but the starting point is the data.

You can look-up the composition of XLU in many places, and that is unlikely to change much. However, the criteria for SDY are such that companies do flow into and out of the S&P Dividend Aristocrats index, particularly with the devastation of last year.  GE, PFE and 8 others got bumped, because they cut their dividends.  One was deleted due to acquisition and 2 new were added.  The Aristocrats criteria are S&P 500 membership and 25 years of back-to-back full year dividend increases.  Here is the list S&P has announced for 2010, ordered by sector:

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[ image at QVM site ]

Due Diligence Shop Talk: 

Note that annualized last distribution is not always the best method of comparing funds, particularly if the distributions from period-to-period vary substantially, as is common among international funds, for example.

The initial challenge investors face with databases is that each tends to use one method or the other to calculate yields for all funds, regardless of specific suitability. Databases are only a first step.  Manual research must follow to invest knowledgeably.

Critical Note: We have not individually verified the accuracy of the data for each fund in this list.  The data came from a commercial data service.  Yield data is particularly prone to inaccuracies and difference between data services.  The data in this list is not warranted to be correct.  Be sure to verify any data for yourself, fund-by-fund.

Key reasons for yield data inaccuracies or database differences include:

1. whether the yield is based on 12-month trailing dividends, annualized most recent dividend, annualized indicated next dividend, or SEC yields;
2. whether the frequency multiplier is appropriately selected per fund (e.g. times 12, times 4, times 2 or times 1);
3. whether the distributions on which the calculations are based are essentially out of date (e.g. 12-mo trailing dividends when dividends are rising or falling at a significant rate);
4. whether the reported dividends include only interest and dividends received from the underlying portfolio, or whether it includes some capital gains or return of capital.

Further to item #3, consider this example:  VWO, the Vanguard emerging market fund pays 1 time per year (unless there is special supplemental).  Last December it paid about $1.18 in dividends on a trailing 12-month basis (no capital gains or losses).  This year, Vanguard estimates the dividend to be $0.49 on a trailing basis (no capital gains or losses). Annualizing the last paid distribution would give a radically different view of yield than annualizing the projected trialing amount to be distributed in a matter of days.  Dividend yield discovery is not as straight forward as price discovery, which is right out front all of the time.

This table comparing selected funds from State Street, Blackrock and Vanguard illustrates that the frequency of distribution for funds of the same category are not necessarily the same — pointing to the need when working manually to be aware of distribution frequency.

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[ image at QVM site ]

Specific Due Diligence: We did verify the annualized yield based on last distribution for BND, XLU and SDY, which we singled out as examples in this report.

Here is the detail of the verification we performed with data from the sponsor sites.

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[ image at QVM site ]

The next chart shows the yield you will find at several popular sources, with a comparison to the manually verified annualized last dividend for the three funds we verified above.  You can see that the data vary significantly.

 

[ image at QVM site ]

We’ve gone to this extreme in documenting yields to illustrate the financial significance of carefully investigating data sources, and of manually cross checking data before making yield oriented investment decisions.

Compliance Disclosure:

In the aggregate, we currently own JNK, HYG, EMB, VGK, LQD, XLU, AGG, BND, MUB, SDY, DVY, EFA, SPY, EEM, VWO, EWZ, and FXI in some but not all managed accounts. We do not currently own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.  This report is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance. Do not rely solely on this research report when making an investment decision. Other factors may be important too. Consider seeking professional advice before implementing your portfolio ideas.

Richard Shaw
QVM Group LLC

Short-term data is easy to access.  Long-term data is somewhat more difficult for many investors to find.  We’ll leave the current and forward conditions to you in this article, but this data may be helpful with respect to history.

Note: This is a data presentation.  No intent to offer conclusions.

How have graduated and rebalanced allocations between US bonds and US stocks performed on a total return basis over many time periods, from short to long?

Let’s look at 1, 3, 5, 10, 15, 20, 25, 30 and 34 years (the longest period the US Aggregate Bond index has existed).

The table below presents the total return (price return + dividend and interest return) for the Barclay’s Aggregate Bond index and the MSCI USA Standard Core index from 1976 on an annually rebalanced calendar-year basis.  The return for 2009 is the annualized value for performance through November.

The allocations are in 10% increments for each of bonds and stocks.  The resulting 11 allocations range from an aggressive 0% bonds and 100% stocks, to a conservative 100% bonds and 0% stocks.

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[ image at QVM site ]

Bonds have been comparatively steady performers over most time periods, while stocks have had substantial variation.  Fortunately for those who remained in stocks through 4Q2008 - 1Q2009, or those of us who exited before that time and re-entered after that time, stocks have done very well this year.

The important take-away is that mean returns vary significantly over time, and must be frequently re-evaluated, and should not be assumed to be constant in the future.

The next table shows how the return variation around the mean stratified based on the bond-stock allocation over the full 34 years of the Barclay’s Aggregate Bond index.  It shows the mean total return, the worst calendar-year loss, the best calendar-year gain, the standard deviation of annual total return, the number of loss years out of 34, and the statistically suggested range of high to low return for 96% probability (mean return +/- 2 std. dev.) were the future variation to closely resemble the past variation.

[ image at QVM site ]

Reasonable proxies for the US stock market are: SPY and IVV (each tracking the S&P 500 index), IWV (tacking the Russell 3000 index), and VTI (tacking the MSCI US Broad Market index) .  Reasonable proxies for the US aggregate bond market are: AGG, BND and LAG (each tracking the Barclay’s US Aggregate Bond index).

Within the high variability of returns for US stocks has been a comparatively stable and consistently positive dividend yield.  Investors might chose between pursuing price performance or pursuing dividend cash flow.  Rebalancing among yielding instruments can have the effect of improving cash flow.

This multi-decade chart of US stocks total return, price return and dividend return illustrates the relative steadiness of investment cash flow versus investment market value.

[ image at QVM site ]

Unlike conventional bond interest, stock dividends tend to grow over time (the past 12-months being an unusual exception).  Note that dividend yield fluctuates up and down as price fluctuates, even though the amount of dividends themselves tends to increase.

Over the approximate 40 years of the MSCI USA stock index, the mean total return has been about 9.5%, of which approximately 6.0% has been price return and approximately 3.5% has been dividend return (roughly 37% dividend return and 64% price return).

For those drawing on portfolios to support lifestyle, and who can live with about a 3% draw on current portfolio value, steady stock dividends can create peace of mind while market prices fluctuate.  Many investors, of course, are not so well endowed and must be acutely concerned about the effect of a constant or growing draw on a fluctuating portfolio value.  Outliving assets is a terrible thing to happen.

The past is not the future, but it’s a good idea to be aware of the past when understanding the present and trying to see into the future.  We hope these data will be helpful to the do-it-yourself investor who may be overwhelmed by the present.

Compliance Disclosure:

We own SPY, VTI, AGG and BND in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

Let’s look at it versus the total return of the S&P 500, the total return of 1-yr T-Bills, West Texas Intermediate Crude and the Urban Consumers All Items Consumer Price Index?

The chart shows the performance of each item indexed to 100 as of 1967.

Gold has had its ups and downs, as have oil and stocks.  How well you would have done holding it, of course, depends on when you would have acquired and sold it.

Gold generally rose from 1967 to the late 1970’s, then generally declined until about the time of the Dot.com bust and the 9/11 terrorist attacks on New York City, and has subsequently been rising aggressively.  Oil began rising aggressivly at about the same time, but lost its momentum and declined with the 2008 economic crash.  US stocks are still ahead of gold over the entire 4+ decade period.

Clearly, there were times when gold was a better holding than stocks, and there were times when stocks were better holdings than gold.  That’s where asset allocation practices come into play to enhance total portfolio return.

SPY and IVV are proxies for the S&P 500.  GLD and IAU are proxies for gold.

Compliance Disclosure:

We own GLD and SPY in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

Gold has been a fine investment as of late, but how has it done over a long period?  How about over a lifetime of investing in comparison to other major assets, such as 3-month Treasuries, US aggregate bonds, and all country world stocks?

We have data to answer that question from 1976 (34 years ago, and around about the time this author began saving for investment in an organized way).

If you began with $100 in each class in January 1976, and taxes were deferred as they could have been in a Keogh plan,  or if the account were tax-free as in a non-profit organization, the values of each position at the end of November 2009 would have been:

• 3-month Treasuries (proxy: SHV) - $648.92
• US aggregate bonds (proxies: AGG and BND) - $1,576.19
• All country world stocks (proxy: VT) - $3,185.52
• Gold (proxies: GLD and IAU) - $814.49.

So, over the long-haul of the past, gold was better than short-term Treasuries, but not as good as diversified bonds, and nowhere near as good as global stocks.

That is not to say that gold will not be better than the others going forward, but we have been through tough times before, and in the end stocks won.

We have serious doubts about US stocks (proxies: SPY, IWV and VTI) doing as well going forward as emerging market stocks (proxies: EEM and VWO), or possibly even European stocks (proxy: VGK).

The key is the value of the Dollar (proxy: UUP) for the future of gold.

The profligate public spending, mountainous national debt, negative import-export balance, anti-capital policies and wealth distribution goals of the government in the US today, and the multi-national call for a new reserve currency do not bode well for the Dollar.  That gives gold a better long-term performance expectation relative to US stocks and bonds than it had in the go-go days of US stocks.

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Gold versus Other Classes

[ image at QVM site ]

Non-US and global stocks, however, may not be as negatively impacted by a declining Dollar as US stocks in general.

The long-term decline of the Dollar against a trade weighted basket of currencies, does not fully explain the recent strong rise in gold, which seems to be anticipating something more like a global monetary collapse, which we tend to doubt (but if we are wrong, our stop loss orders on all our exchange listed positions will pull our fat out of the fire as they did in 2008 to save us from that devastation).

Gold versus US Dollar Index

[ image at QVM site ]

Compliance Disclosure:

We own GLD, AGG, BND, SPY, VTI, EEM, VWO, and VGK in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

If we face brown outs and rolling managed electricity outages in summer months due to air conditioning, how do we expect to handle millions of automobiles plugging into electric sockets as they arrive home from work each day?

If we possess all of the necessary resources domestically in the U.S. to convert to a proven technology, natural gas based vehicle system, but must rely on batteries produced in China, Japan, Taiwan and Korea to power an underdeveloped and unproven technology electric vehicle system, why not natural gas instead of electricity?

Natural gas producers, storage and transmission companies are a more sensible system to rely upon than electric power plants, electric transmission lines and foreign produced electric batteries from both an economic and national security perspective.

If that logic stands up over time, and if the flaws in the wide scale adoption of the pure electric car concept are seen more broadly, then natural gas producers, storage and pipelines companies should outperform current expectations.

Such an investment approach would require a long patient wait, but if a reasonable dividend yield is available now for some natural gas related stocks, the long-term capital gain return could surprise on the upside.

We would tend to favor pipelines over producers at this point, because the oversupply of natural gas is still growing, while there is not a correspondingly large oversupply of transmission capacity.

Here are four pipeline companies that may be interesting in terms of the natural gas versus electric vehicle argument (SEP, EPB, WES, WMZ).

The rating after each symbol is the Wright’s rating for liquidity, financial strength, profitability and growth (see the legend for Wright’s ratings).

• SEP:  BANN rating
• EPB:  BCNN rating
• WES: CBNN rating
• WMZ: CCNN rating.

None is a recommendation by us. All are suggested for further research and consideration.

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Some Fundamental Data

[image at QVM site]

2-Year Performance Versus SPY and BND

[image at QVM site]

Compliance Disclosure:

We own SPY and BND in some managed accounts. We do not own other mentioned securities. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC

Total return for yielding securities is greater than price return, because it considers both price changes and investment income.  Because some securities are yielding and some are not, and because some securities have low yields while others have high yields, total return is a better indicator of the value of owning a security than price return.

This chart shows both price return and total return for three Dow Jones Indexes:

• stocks:  Dow Jones Composite Average Index
• corporate bonds: Dow Jones Corporate Bonds Index
• dividend stocks: Dow Jones U.S. Select Dividend Index

click image to enlarge

[ image at QVM site ]

Over the past three years, corporate bonds price return and total return have outperformed stock price and total returns, and composite stocks price return and total return have outperformed dividend stock price and total returns.

The general idea that dividend yield helps support a stock’s price may be true in the long-term, but in the past three years the DJ dividend index didn’t work that way.  The extraordinary conditions in 2008 caused an unusual drop in total dividend payments.  That was certainly damaging to the performance of dividend stock indexes and funds.  However, we still like equity income funds as part of a portfolio for the extra cash flow, and in the belief that the bulk of dividend cuts are behind us.

Aggregate bonds have also outperformed stocks on a total return basis over 1-year, 3-years, 5-years and 10-years, as shown by this table:

[ image at QVM site ]

We think far more investors approaching or at retirement will use higher bond allocations than in the past, as a result of the recent carnage in their stock portfolios (if they did not exit stocks prior to full impact of the crash by way of stop loss orders or some other means).  We discussed that point in greater detail in our recent article  Old Normal Allocation Becomes the New Normal.

Proxy Exchange Traded Funds:

Reasonable investable proxies for the indexes in the chart and table are:

• Inv. Grade Corporate Bonds:  LQD, (VCIT just listed)
• Composite Stocks: DIA, IDU and IYT in combination
• Dividend Stocks: DVY
• S&P 500: SPY, IVV
• Aggregate Bonds: BND, AGG

Similar to IDU, but more liquid is the S&P Utility sector fund, XLU.  Similar in nature to DVY, but based on different dividend stock indexes are SDY and VYM.

Index Definitions:

The Dow Jones Composite Average is a price weighted 65 stock combination of the the 30 stock Dow Jones Industrial Average, the 20 stock Dow Jones Transportation Average, and 15 stock Dow Jones Utility Average.

The Dow Jones Composite Average is not as broad a  representation of the US stock markets as some other indexes, but its performance is similar.  This price performance chart for the DJ Composite versus the S&P 500, the MSCI 750 Prime Market and the MSCI 1750 Small Cap Market shows the reasonable similarity between them all.

[ image at QVM site ]

The Dow Jones Corporate Bond Index is  explained by Dow Jones as “an equally weighted basket of 96 recently issued investment-grade corporate bonds with laddered maturities. …  readily tradable, high-grade U.S. corporate bonds. … contains only ‘bullet bonds’, which are non-callable prior to their maturities. … rebalanced each month. Seasoned bonds that have most likely migrated into the hands of long–term investors are replaced with on–the–run issues still active in secondary markets. … a liquidity filter using a minimum issue size of $300 million eliminates small, unobtainable bonds from the index.”

The Dow Jones U.S. Select Dividend Index consists of 100 stocks selected from the Dow Jones U.S. Total Market Index after screening by dividend-per-share growth rate, dividend payout ratio and average daily dollar trading volume, and weighted by indicated annual dividend with individual securities capped at 10%.

Compliance Disclosure:

We own LQD, DVY, SPY, BND, AGG, XLU, SDY, and VYM in some managed accounts. We do not own other mentioned securities.  We are a fee-only investment advisor, and are compensated only by our clients.  We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients.  We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security.

Richard Shaw
QVM Group LLC