A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
The portfolio is a simulated one. It was constructed utilizing prices yesterday during trading hours. However, it's real in the sense that you could could go out and buy it today (currently at a discount!).
I do not own all of the positions in the portfolio and of the positions that I do own, only one was initiated in the past week (ETE). The other positions that I currently own were initiated awhile back.
If there is sufficient interest, I could provide quarterly updates.
Retirement's 4% Rule: Surprising Answers You Need to Know About the Inflation Factor [View article]
DVK thanks for the article.
To follow on Fish's comment, I wasn't really surprised either, the notion of a safe 4% withdrawal rate correlates with a certain level of real return. When you push that to zero, you're gonna have trouble.
If you were to propose a 7-8% withdrawal rate with a real return of 3-4% you'd get similar tables and very few would be surprised by the outcome.
Dividend Growth Stocks May Be Overrated Investments [View article]
Wow, a lot of compliments here… It’s a well written and interesting article, but you’re asking us to make a pretty big leap of faith. The assumption that there are no capital gains on the dividend stock side is pretty lopsided and will obviously tilt you towards principal neutral securities. In fact, you left out what would have been the highest class of returns from your sample set, junk bonds / distressed debt.
I know you said that your suggestion is based on yield only, and from that aspect I think you’ve drawn all of the correct conclusions. However, the conclusions that you can draw aren’t really that useful at all. It would be like writing an article about ETFs and comparing that to investing in the index directly and, as one of your assumptions, excluding transaction fees. Excluding the transactions fees is really an unrealistic assumption and it will bring you right to the wrong conclusion that you should try to replicate the index yourself because the ETFs have management fees.
You’ve done a lot of good and interesting work here, but you really need to take it the final step and incorporate capital gains. I would recommend finding a screener for high yield and lower yield stocks to bifurcate your data set (I think CRSP has all this info) and you should see a difference in the capital gains as well (holding risk constant, higher yielding stocks should have lower capital gains as compared to lower yielding stocks)..
David, thanks for the article. Of the eight champions on your list, I've reviewed four of them (APD, ADP, ITW, and WMT) and ITW is my favorite with a high dividend growth rate and strong consensus estimates resulting in an IRR of ~18% (Analysis: sellingtheta.com/2011/.../)
Not Yet the Time to Buy Exxon Mobil [View article]
I've got XOM as a wait and see as well. The Company's yield is low, has cyclical earnings and weak consensus estimates going out to 2015 (IRR of ~10%). Analysis: sellingtheta.com/2011/.../
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
Utilizing 5 Year Betas and applying ARCC's Beta (1.87) to GBDC, which apparently doesn't have enough history to have a beta, gives the following results:
0.69 Beta on a market value weighted approach; and 0.71 Beta on an income weighted approach.
As far as the number of dividend aristocrats/champions, I'll take a count and include in the next article. I do agree with you that consistency of div growth is worth something and is generally valued among the dividend investor community.
I definitely prefer it as compared to utilizing the historical 5 year dividend growth rate. I see lots of people placing a tremendous amount of weight on how fast companies have historically grown their dividend while the payout ratio has crept up and hindered the ability for the company to continue to grow the dividend at that rate going forward.
The biggest challenge will be what to do with MLPs / REITs... EPS will be a proxy for cash flow, but you might get some bizarre results with all of the additional items in Net Income (as compared to distributable cash flow).
Why Dividend Stocks Make Great Acquisitions [View article]
DGI thanks for the article. You make a lot of good points, it is often challenging to pick up strong dividend growth stocks at great valuations as they are often bid up a bit due to their defensiveness and stability in earnings as compared to the market averages.
Clorox is a great company, but I can't help but feel its a little bit rich right now with the Carl Icahn boost. As a comparison, the TEV/EBITDA is at 11.3x 2011 estimated EBITDA; Procter and Gamble is at 10.5x and should trade at a slight higher multiple than CLX. Both are good companies at fair valuations today, but for a little more bang for you buck I'd go with PG (analysis: sellingtheta.com/2011/.../)
Dividend Seekers Can't Go Wrong With Coke [View article]
Tweedn makes some very good points. However, while the PE is a little bit high at 18.9 by most traditional metrics / comparisons, you are buying a large margin of safety in the form of very stable / recurring demand and strong market positioning. I think that is why both Coke and Pepsi trade at slightly higher ratios that you would otherwise think.
Dividend Growth Stocks May Be Overrated Investments [View article]
Bob,
I respect that you are optimizing your investment portfolio to meet your individual needs, but the general premise here on seeking alpha should be the maximization of wealth for a given level of risk. To draw the conclusion that “Dividend Growth Stocks May Be Overrated Investments” (the title of the article), is inappropriate given that the author has left out a key metric of common stock returns that skews his finding in a way that may ultimately encourage investors to maximize something other than their wealth.
My Mad Method Meets The 'Chowder Dividend Rule' [View article]
I think for the most part it goes without saying, but I'll make a few points for the benefit of others.
1. If you're going to use the 5 year historical dividend growth rate as a future dividend growth estimate, be sure to look at how the payout ratios (earnings and FCF) have changed over the same period. If you have good yield and historical dividend growth, it may just be due to a higher payout ratio that is unsustainable over the next five years. (this is why many people use earnings growth rates, which is better but also not perfect)
2. Risk: Holding constant the payout ratio, a higher CDR is better, but be sure to adjust for risk. A cyclical, single product company should have a higher CDR than a diversified, multi-product, less-cyclical company given they have different risk profiles.
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
SDS, thanks for the comment. You and I are both natural contrarians, when I read articles I often think “you’re forgetting about this! And that!” So I appreciate when commenters bring up potential issues or items that were not originally discussed in my article and you mentioned two very good points.
On A, you are correct, but I think the majority of portfolios need occasional rebalancing (admittedly this one may need a bit more). I don’t take rebalancing to nth degree and perform it on a strict basis (and I wouldn’t recommend it), but more as a general suggestion. As the portfolio ages, there is no doubt in my mind that JNJ and ABT will grow their dividend faster than BWP. However, if HNZ is off by only a few dollars from the targeted allocation, I wouldn’t feel the need to rebalance the position. Going forward I will devote some time to rebalancing issue as it arises.
B is another good point. The portfolio has a natural tilt towards dividend growth as $200 in dividends is much more expensive to buy from JNJ than it is from BWP. However, the probability of JNJ having to reduce its dividend (and similar companies with excellent dividend coverage frequently accompanied with lower yields) is generally much lower. However, if the entire position were to blow up, it would be expensive to replace that income with a similar growth profile.
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
Davids, thanks for the comments. In a follow up article, I will be sure to address the size and timing of the dividends in the currently constructed portfolio.
I'll provide quarterly updates and actively manage the portfolio answering DVK's questions along the way.
Does anyone have a preference to see the portfolio run in a builder (i.e. dividends get reinvested quarterly) or harvester (predetermined amount of income spent annually and adjusted for inflation - let's say 4% of the portfolio's initial value?) mode?
5 Dividend Stocks as Bond Substitutes [View article]
Lots of good picks here, thanks for the article.
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
I do not own all of the positions in the portfolio and of the positions that I do own, only one was initiated in the past week (ETE). The other positions that I currently own were initiated awhile back.
If there is sufficient interest, I could provide quarterly updates.
Retirement's 4% Rule: Surprising Answers You Need to Know About the Inflation Factor [View article]
To follow on Fish's comment, I wasn't really surprised either, the notion of a safe 4% withdrawal rate correlates with a certain level of real return. When you push that to zero, you're gonna have trouble.
If you were to propose a 7-8% withdrawal rate with a real return of 3-4% you'd get similar tables and very few would be surprised by the outcome.
Dividend Growth Stocks May Be Overrated Investments [View article]
I know you said that your suggestion is based on yield only, and from that aspect I think you’ve drawn all of the correct conclusions. However, the conclusions that you can draw aren’t really that useful at all. It would be like writing an article about ETFs and comparing that to investing in the index directly and, as one of your assumptions, excluding transaction fees. Excluding the transactions fees is really an unrealistic assumption and it will bring you right to the wrong conclusion that you should try to replicate the index yourself because the ETFs have management fees.
You’ve done a lot of good and interesting work here, but you really need to take it the final step and incorporate capital gains. I would recommend finding a screener for high yield and lower yield stocks to bifurcate your data set (I think CRSP has all this info) and you should see a difference in the capital gains as well (holding risk constant, higher yielding stocks should have lower capital gains as compared to lower yielding stocks)..
Dividend Champions Smackdown XVI [View article]
Not Yet the Time to Buy Exxon Mobil [View article]
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
0.69 Beta on a market value weighted approach; and
0.71 Beta on an income weighted approach.
As far as the number of dividend aristocrats/champions, I'll take a count and include in the next article. I do agree with you that consistency of div growth is worth something and is generally valued among the dividend investor community.
Dividend Champions Smackdown XVI [View article]
The biggest challenge will be what to do with MLPs / REITs... EPS will be a proxy for cash flow, but you might get some bizarre results with all of the additional items in Net Income (as compared to distributable cash flow).
Why Dividend Stocks Make Great Acquisitions [View article]
Clorox is a great company, but I can't help but feel its a little bit rich right now with the Carl Icahn boost. As a comparison, the TEV/EBITDA is at 11.3x 2011 estimated EBITDA; Procter and Gamble is at 10.5x and should trade at a slight higher multiple than CLX. Both are good companies at fair valuations today, but for a little more bang for you buck I'd go with PG (analysis: sellingtheta.com/2011/.../)
Best,
Selling Theta
Dividend Seekers Can't Go Wrong With Coke [View article]
Dividend Growth Stocks May Be Overrated Investments [View article]
I respect that you are optimizing your investment portfolio to meet your individual needs, but the general premise here on seeking alpha should be the maximization of wealth for a given level of risk. To draw the conclusion that “Dividend Growth Stocks May Be Overrated Investments” (the title of the article), is inappropriate given that the author has left out a key metric of common stock returns that skews his finding in a way that may ultimately encourage investors to maximize something other than their wealth.
My Mad Method Meets The 'Chowder Dividend Rule' [View article]
1. If you're going to use the 5 year historical dividend growth rate as a future dividend growth estimate, be sure to look at how the payout ratios (earnings and FCF) have changed over the same period. If you have good yield and historical dividend growth, it may just be due to a higher payout ratio that is unsustainable over the next five years. (this is why many people use earnings growth rates, which is better but also not perfect)
2. Risk: Holding constant the payout ratio, a higher CDR is better, but be sure to adjust for risk. A cyclical, single product company should have a higher CDR than a diversified, multi-product, less-cyclical company given they have different risk profiles.
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
On A, you are correct, but I think the majority of portfolios need occasional rebalancing (admittedly this one may need a bit more). I don’t take rebalancing to nth degree and perform it on a strict basis (and I wouldn’t recommend it), but more as a general suggestion. As the portfolio ages, there is no doubt in my mind that JNJ and ABT will grow their dividend faster than BWP. However, if HNZ is off by only a few dollars from the targeted allocation, I wouldn’t feel the need to rebalance the position. Going forward I will devote some time to rebalancing issue as it arises.
B is another good point. The portfolio has a natural tilt towards dividend growth as $200 in dividends is much more expensive to buy from JNJ than it is from BWP. However, the probability of JNJ having to reduce its dividend (and similar companies with excellent dividend coverage frequently accompanied with lower yields) is generally much lower. However, if the entire position were to blow up, it would be expensive to replace that income with a similar growth profile.
A 5% Portfolio With Income Growth Opportunities, Reduced Risk to Dividend Cuts [View article]
I'll provide quarterly updates and actively manage the portfolio answering DVK's questions along the way.
Does anyone have a preference to see the portfolio run in a builder (i.e. dividends get reinvested quarterly) or harvester (predetermined amount of income spent annually and adjusted for inflation - let's say 4% of the portfolio's initial value?) mode?
Johnson & Johnson: Big, Boring and Beautiful [View article]