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SDS (Seductive Dividend Stocks)
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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? /... More
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  • A New (?) Pattern Between Dividend Yield And Capital Appreciation For US Stocks Based On Long Hist (Jan 15, 2012/ 3 March 2012) 7 comments
    Mar 3, 2012 11:01 PM
    A picture prepared by J.P. Morgan and published in a recent SA article /
    seekingalpha.com/article/319663-on-divid... attracted my attention. I reduced the picture to only US market to illustrate the pattern I observed.
    Original of the picture: www.jpmorganfunds.com/cm/BlobServer/jp-l...;filename=jp-littlebook.pdf

    The pattern is:

    If dividend yield INCREASED in the decade K to compare with the previous decade K-1, then capital appreciation in the next decade K+1 will be HIGHER than in the decade K.
    Or the same: If dividend yield DECREASED in the decade K to compare with the previous decade K-1, then capital appreciation in the next decade K+1 will be LOWER than in the decade K.

    I used green and red lines to outline the pattern.

    Of course data set is limited and I beleive prof. Siegel (?) or prof. Shiller or somebody also provided extended dataset that should be analyzed (sorry I don't remember exactly the book author and title but the author reconstructed data for US market from ~ 1870). Moreover might be the author of this book or somebody also already recognized the pattern, so I use "new (?)" with question mark in the title.
    Of course I know that human beings tend to see pattern in random numbers but I think I can explain this pattern by reverse to average postulate for equity markets.

    Anyway, if this pattern will continue I think we had slightly higher yield in recent previous decade to compare with 1.8% (S&P suppose to have excact number) and should expect at least positive capital appreciation in this decate. Let's see.

    Added 3 March 2012:
    The pattern was already described:

    The case is closed - it correct.

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Comments (7)
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  • Norman Tweed
    , contributor
    Comments (7358) | Send Message
     
    Thanks SDS for this observation of the cyclical nature of dividends. You definitely have observed a powerful phenomenon. In addition, it appears to be repeating in this secular bear market.
    15 Jan 2012, 11:14 AM Reply Like
  • Jeff Paul
    , contributor
    Comments (1292) | Send Message
     
    I've never seen that chart/pattern before. It looks like the JP Morgan research report was pretty recent, and they didn't seen to point out the pattern you described. My concerns would be similar to what you mentioned…the data set is very limited, so not sure we can draw conclusions. I suppose this could be a value indicator. In theory, we would want divs to grow the same rate as capital gains for sustainable growth. If they are falling, the market is overvalued in a relative sense.

     

    Another concern is that they approach this in decades, so it doesn't really provide actionable information on a timely/trading basis. Also, they use the S&P, which owns all sectors and changes its components over time. I don't own that, so my individual performance will be different. From the standpoint of having a sense of how the overall market may perform over the next decade, it would be nice to think that this indicator is correct and we will see better cap gains through 2020.
    15 Jan 2012, 12:42 PM Reply Like
  • LondonE2
    , contributor
    Comments (328) | Send Message
     
    SDS:

     

    I don't recall seeing this research elsewhere, but I tend to agree with your assessment that it may be explained by reverting to mean. I agree that the data is obviously limited, and I'm not sure what can be gleaned from an analysis that looks at decade blocks, which are essentially arbitrary and far too large for me to make meaningful judgments based on them. I would like to see the same kind of analysis done on a universe of stocks on rolling and annual periods, though.
    15 Jan 2012, 10:08 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3183) | Send Message
     
    Author’s reply » I asked few fellow investors via SA email about their opinion and got the following answers:

     

    Jeff Paul

     

    I've never seen that chart/pattern before. It looks like the JP Morgan research report was pretty recent, and they didn't seen to point out the pattern you described. My only concerns would be what you mentioned…the data set is very limited, so not sure we can draw conclusions. I suppose this could be a value indicator. In theory, we would want divs to grow the same rate as capital gains for sustainable growth. If they are falling, the market is overvalued in a relative sense.

     

    The other concern is that they approach this in decades, so it doesn't really provide actionable information on a timely/trading basis. Also, they use the S&P, which owns all sectors and changes its components over time. I don't own that, so my individual performance will be different. From the standpoint of having a sense of how the overall market may perform over the next decade, it would be nice to think that this indicator is correct and we will see better cap gains through 2020.

     

    ======================...
    David Fish

     

    I'm not sure if this has been established by previous authors or stands as a significant pattern. To me, it seems logical, though, and what you might expect even on an individual-company basis. When the yield goes up, it can be from two causes: dividend increases and price decreases. The part that is a price decrease naturally can lead to a subsequent price increase as a stock recovers, and that process can be helped along by investors who are encouraged by the higher yield, which again may be from the two causes. So the pattern is apparently just a natural cycle: investors attracted by higher yields drive the stock price up, which decreases the yield...which again (in the subsequent cycle) attracts investors who drive the stock price up...and the cycle continues.

     

    ======================...
    Robert Allan Schwartz

     

    Yes, this is known. When a company's earnings rise, they have more money to pay more dividends, the income stream is worth more, so the price goes up; the reverse is also true.

     

    SDS:Where it was published?
    Robert Allan Schwartz:
    I just read it in a book called "The Strategic Dividend Investor", by Daniel Peris.

     

    ======================...
    Norman Tweed

     

    SDS--I read your Instablog and commented on it in a general way. This phenomenon that you so rightly perceive is based on demographics. The alternating generations are either commodity seekers or paper asset seekers. It refers to which generation is in mid life (1982-2000) Baby Boomers, 2000-2020 Gen X, 2020-2040 Gen Y. Since the dominant generations are paper asset lovers, stocks go up during their mid life cycle. Since the recessive generations are commodities lovers, hard assets go up during their mid life. There is a lot more to the demographics cause of this than I have explained, but it explains the gold bubble that we had in 1965-1981, as well as the present gold bubble and bond bubble. There are several books out on it. During the commodities bubble--like now--the governments of the world must prop up paper assets, like they are trying to do in Europe now. Commodity lovers, like Jim Rogers would rather the governments stay out of it and let the world have a 20 year depression. There is an article on SA today about Gen Y not buying paper assets--the article says they are scared. I say they are unemployed. When they are in mid-life it will be what demographers call the "High" and they will buy paper assets for no reason what so ever--just like the 1950s.

     

    What you will see is a continuing rise in yield demands during the next 10 years and p/e compression for stocks. You may be able to model it mathematically, but it is manipulated by global financial elites, who use the TARP and TALF to maintain what they perceive is the proper asset values, especially for banks and financial companies. To know when they will intervene is difficult.

     

    ======================...
    chowder

     

    I'm not sure what to make of the pattern extending forward.
    With bond rates being as low as they are, people are almost forced to look to the markets for yield.
    The first of the baby boomers are now hitting retirement age and I believe it is that segment that has driven the utility sector this past year.
    So, if capital appreciation is to dictate the next decade, I think a lot of it will come from dividend equities.

     

    ======================...
    richjoy403

     

    I am impressed by your ability to see the pattern.

     

    otoh, I'm not sure how to invest in the pattern...
    a decade is a very long time, usually encompassing at least one recession, and either a second recession or a significant market decline...it may be very difficult to maintain positions thru adverse conditions in hope of profiting by decades end.
    in addition, markets rarely cooperate in displaying their patterns in a manner that fits neatly into decade formats.
    did the data emerge over enough decades to be statistically relevant?
    however I also suggest you communicate your finding to the most appropriate author for his comments...on the basis that it could have academic merit.
    My intent was not to criticize, only to be helpful and encouraging...I would never have spotted that pattern.
    ======================...
    16 Jan 2012, 10:04 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3183) | Send Message
     
    Author’s reply » Folks - thank you for your inputs.
    My brief answers are:

     

    Robert Allan Schwartz:
    I need to read the book "The Strategic Dividend Investor", by Daniel Peris.

     

    Chowder:
    I do not see real reason to consider that this is forecasting tool except that history often repeats itself (I'm not a technician, BTW).

     

    richjoy403:
    More data needed for statistics but I cannot recall book title there numbers were recovered for US market back to XIX century.
    I do not know why market should change pattern at year with number 0 (or any other) at the end.
    I'm not so familiar with technical analysis to say exactly how invest in the pattern. I think it just illustrates reverse-to-mean idea.
    16 Jan 2012, 10:05 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3183) | Send Message
     
    Author’s reply » OK, I dig WWW a bit more and found that S&P data from 1871 were collected by Dr. Robert Shiller and coworkers see
    http://www.econ.yale.edu~shiller/data.htm

     

    I need to figure out how convert their data in JPMorgan format.
    16 Jan 2012, 10:15 AM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3183) | Send Message
     
    Author’s reply » Robert Allan Schwartz:
    "I just read it in a book called "The Strategic Dividend Investor", by Daniel Peris."

     

    SDS:
    Very good book but I didn't find pattern I figured out in the book.
    28 Jan 2012, 05:34 PM Reply Like
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