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Tony Ash
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Managing Director at start-up investment advisor, Julex Capital Management, developing and marketing dynamic asset allocation ETF Managed Products and services to financial planners and institutions providing downside protection, upside participation and consistent returns in both bull and bear... More
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  • Top 10 Reasons Why I Love Dividend Growth Strategies! 3 comments
    May 8, 2012 12:51 PM | about stocks: DVY, VIG

    The capital markets are still tough to navigate in the post-Crisis environment. Low rates, high volatility, and increased risk for "black swan" events (e.g., Eurozone, China, Middle East, etc.) all combine to make this a tough environment to plan for long term investment returns.

    After much study and deliberation, I have come to the conclusion that the current market focus for Dividend Growth Strategies is well founded and is the best place to position core holdings. It should be supplemented with small cap equity, emerging market, and global bond positions. The actual mix is dependent upon whether you are funding college, retirement, or estate planning for heirs.

    Why is a Dividend growth strategy the best place to be right now? Following are my top 10 reasons:

    1. Dividend yields are high relative to bonds

    2. Payout ratios are low

    3. Corporate balance sheets are heavy with cash

    4. Corporate focus for dividend-payers is targeted to support dividends

    5. Best dividend-payers are weighted in less volatile sectors of utilities, consumer defensive, and industrials; currently under-weighted to financials pending recovery

    6. Businesses have adapted to become more efficient post-Crisis and better positioned for more profitable business to support dividends

    7. Low beta compared to broad market index

    8. Simple to understand and easy to filter

    9. Yield component available to reinvest or spend

    10. Price component is relatively less volatile

    What is the best way to play this strategy? I think the DVY ETF based on Dow Jones U.S. Select Dividend Index is easy to understand and is a reasonable filter. It is not too narrow and takes a bit more risk than other Dividend Growth ETFs like VIG. Stocks included in the index need to have paid increasing dividends over the last 5 years, have a 5-year average payout ratio less that 60%, paid dividends in each of the last five years, and have daily trading volume of 200,000 shares in ensure liquidity.

    Following are the key metrics that support a strong case for DVY:

    Expense ratio: 0.40%

    Dividend Yield: 3.51%

    Beta: 0.58

    Standard Dev: 12.70%

    3-yr Sharpe Ratio: 1.74

    Commissions: Free if traded through Fidelity

    Why not a Dividend Growth strategy? It most likely will underperform other more risky asset classes like small cap and emerging markets on a total return basis, but still provide good risk-adjusted return. Exposure to other asset classes is needed to optimize the long-term total portfolio total return.

    Disclosure: I am long DVY.

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Comments (3)
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  • Tony ...

     

    Nice overview but not sure I agree with industrials being listed among the least volatile sector. Most are high beta. What are your thought on new Russell Etf - HDIV? High yield of 4.3% might make it more suitable as an income stream for retirees.

     

    Thanks
    Bob
    8 May 2012, 02:04 PM Reply Like
  • Author’s reply » Yes, you are right, in general industrials are cyclical and high beta. Some of the best dividend payers, though, are less volatile and lower beta industrials like Waste Management, Lockheed Martin, and Watsco. Stay away from high beta industrials.

     

    I haven't spent much time on HDIV. I checked the filter methodology and it looks reasonable, too, if not more troublesome to rationalize. For example, not sure if price momentum should or should not be a filter? And not sure how they use it. DVY filter feels more intuitive.
    8 May 2012, 02:53 PM Reply Like
  • Thank you. This Artcile gave me an awareness about the Dividend growth strategies.This article gives me some hope.http://bit.ly/1fyoIyc
    12 Nov 2013, 06:27 AM Reply Like
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