Dividend Portfolio Strategy
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Transcript of Dividend Portfolio Strategy
Dividend Portfolio Strategy
The Power of Compound Interest
"Compound interest is the eighth wonder of the world.
He who understands it, earns it ... he who doesn't ... pays it."
Albert Einstein
Albert Einstein when asked what he considered to be the most powerful force in the universe answered: “Compound interest! What you have become is the price you paid to get what you used to want.”
Mignon McLaughlin, American Journalist
The Power of Compound Interest
Interest Rates Really Are Interesting"Yeah, interest. It's an amazing thing.
You make money without doing anything..."
"Y'know, I have friends who try to base their whole life on that principle."
"Really? Who?""Nobody you know...“
Jerry and George - Seinfeld TV Show
What is more powerful than Compound Interest?
Compound Dividends!“Compound Dividends are like compound interest on steroids,
figuratively speaking”
“Good dividend stocks’ yield, tends to stay within a given range, so if dividends are increasing each year, the only way
to keep a consistent yield is for the price of the stock to go up.”
Source: Dividendvalue.com
Historical Comparison:
Dividend Paying Stocks Total Return
1928 to 2009 *
Non-Dividend Paying Stocks Total Return
1928 to 2009 **
10.8% - 11.7% 8.28%* Represents 5th and 4th quintiles respectively**Compound Annual Return
Source: Grant’s Interest Rate Observer (October 2010)
Picture this
If your family had bought $100 worth of quintile-four dividend stocks in 1928, you would have had a portfolio value
worth $713,370 in 2009.
If your family, on the other hand, had bought non-dividend paying stocks in 1928, you would have had a portfolio
value worth $58,127 in 2009.
Assuming Buy & Hold over the entire period:
Source: Grant’s Interest Rate Observer (October 2010)
The General Pros of Paying Dividends1.Dividends may appeal to investors who desire stable cash flow but do not
want to incur the transaction costs from periodically selling shares of stocks.
2.Behavioral finance argues that investors with limited self-control can meet current consumption needs with high-dividend stocks while adhering to the policy of never dipping into principal.
3. Managers, acting on behalf of the stockholders, can pay dividends in order to keep cash from bondholders.
4.The board of directors, acting on behalf of the stockholders, can use dividends in order to reduce cash available to spendthrift managers.
6.Dividends have long been a signal to investors. A constant dividend assures investors the company is doing well, and views future potential to be equally as sound.
7.The dividend approach gives a greater opportunity to beat inflation, over time, than a bond-only portfolio.
Ross,Westerfield,Jaffe (2008) Corporate Finance
Dividends and Taxes Favorable tax treatment recently has hedged
dividend returns. For most of the last 80 years, dividends have
been taxed at the individual marginal income tax rate. *
*Tax facts 2009 Addition
Source: Grant’s Interest Rate Observer (October 2010)
Process of Capital Allocation Dividend paying stocks will often help an individual
hold onto a stock that he/she may come to believe they over paid for when originally bought.
EXAMPLE:March 1999 – Bought Abbott Labs at $46.59
March 2009 – The shares were quoted at $46.89A 30-cent gain in share price
The above happened during a period when Abbott raised sales and earnings by 135%. This halved the PE ratio from 28 to 14.
Nearly everything that could go wrong did go wrong during this period.
Source: Grant’s Interest Rate Observer (October 2010)
Abbott Example Continuation…DON’T FORGET THE DIVIDENDS!
Abbott continued to pay Dividends…In 1999, the dividend was 66 cents a share
In 2009, the dividend had gone to $1.48 a shareIf you had reinvested the dividend, you would have earned 25.7% over
the 10-year period.The S&P500 had no gain over this time period.
On November 1st, 2010, Abbott stock was worth $50.60 a share
"Investing in dividend stocks is one of the top strategies to survive market instability" Lawrence Carrel, journalist of The Wall Street Journal
Source: Grant’s Interest Rate Observer (October 2010)
Building a Portfolio for Income:
In July 2004, Microsoft had a cash hoard of nearly $60 billion. It used cash to: Increase the annual dividend $.32 per share Repurchase about $30 billion of the company’s stock over the next 4 years Make a special dividend payment of $3 per share to shareholdersWith 10 billion shares outstanding – the special dividend payment totaled
$32.6 billion – the largest corporate cash disbursement in history!The total dividends paid by all the companies in the S&P500 for the year
totaled $213.6 billion – Special dividend represented about 15% of all dividends paid by 500 of the largest companies of the year!
When the dividend was sent to investors in December, personal income in the United States rose 3.7%. Without dividend, personal income only rose .3%.
This special dividend payment accounted for over 3% of all personal income in the U.S. for the month of December,
2004!
Ross,Westerfield,Jaffe (2008) Corporate Finance
Dividend Portfolio StrategyGoal: To concentrate on higher current dividend yields
that have also a history of annual dividend increases in order to increase portfolio performance while reducing risk
Reason: Tangible confirmation of management’s
confidence in future earnings growth Generation of higher levels of income over a long
period of time if reinvesting dividends
Screening MethodologyObjective:
To apply quantitative criteria to the wide universe of dividend stocks in order to narrow it down to
few companies. This will allow us to concentrate on a more promising group of dividend stocks,
our high probability dividend stocks!
Stock Universe
Popular List
Current List
Screen Based List
Master List (250 stocks)
Scoring Process
Top 25 Dividend Stocks
Scoring Process
TOP 25 DIVIDEND STOCKS
STOCK UNIVERSE
Master List
Dividend Yield
High Div & Growth
DRPs High Yield
Dividend Growth
DividendYield &
Profitability
Screen Based List
Screening Process
Description of the Screens
DRPs High Yield Screen: DRPs companies with high relative yields, reasonable dividend payout ratios and high growth
Dividend Growth: Looking for stable companies that are in the maturity stage of their life cycle, above-average dividend growth rates.
Dividend Yield: Screen that looks for undervalued stocks using the dividend-yield approach (companies with secure dividends – example: specifying a maximum level of dividend payout ratio of less than 50%)
High Div&Growth: Screen that focuses on high-quality growth stocks that have higher dividends and lower price volatility
Dividend Yield & Profitability: Screen that looks for companies with increasing profitability and reasonable dividend yield
Current List: List that comes from our experienced advisors.
Dividend Screens*
*The formulas have been altered to protect Proprietary Information
Screen 1: DRPs with High Yield Provides DRP plan Yield >= 3 Dividend 12m >= Dividend Y1 Dividend Y1> Dividend Y2 Dividend Y2>Dividend Y3 Dividend Y3 > Dividend Y4 Dividend Y4>Dividend Y5 Dividend Y5>Dividend Y6 Dividend Y6>Dividend Y7 Dividend Gr. 5Y> Industry Div-Gr. 5Y Yield > Yield-Avg. 5 Y Payout ratio 12 <= 60% EPS-Gr. 5 Yr >= Industry EPS-Gr.5Y ADR/ADS Stock is false
Screen 1: DRPs with High YieldFIELD OPERATOR COMPARE TO: STOCKS
Provides DRP Plan is True 1089Yield >= 3 1678Dividend 12M >= Dividend Y1 9238Dividend Y1 > Dividend Y2 1638Dividend Y2 > Dividend Y3 1315Dividend Y3 > Dividend Y4 1126Dividend Y4 > Dividend Y5 1616Dividend Y5 > Dividend Y6 1817Dividend Y6 > Dividend Y7 1795Dividend-Growth 5yr > Industry Dividend-Growth 5yr 1232Yield > Yield-Average 5 years 939Payout ratio 12m <= 60 3818EPS-Growth 5yr <= Industry EPS-Growth 5yr 4421ADR/ADS Stock is False 9528
17 companies passed the screen!3rd QUARTER, 2012
SYMBOL SECTOR COMPANY NAME1ABT Health Care Abbot Laboratories2AROW Financial Arrow Financial Corporation3AUBN Financial Auburn National Bancorporation4CVX Energy Chevron Corporation5DRI Services Darden Restaurants, Inc.6GIS Consumer Non-Cyclical General Mills, Inc.7 INTC Technology Intel Corporation8MCD Services Mcdonald’s Corporation9MDP Services Meredith Corporation
Screen Based
Current List
Stock Universe
Master ListTop 250
Dividend Stocks
Criteria for scoring:- Consistent Growth - Increasing Profitability- Good Financial Health- High Dividend Yield
TOP 25 DIVIDEND STOCKS
Master ListTop 250 Dividend
Stocks
Scoring Process
* Yield Score and Growth Score as of July 1, 2012 - from 3rd Quarter Screener
As of: 8/1/2012RANK # TICKER COMPANY Growth Score Yield Score Dividend Yield TOTAL SCORE
1 LINE Linn Energy, LLC 72.00 96.00 7.54 84.002 AVA Avista Corp 80.00 88.00 4.17 84.003 UNS UNS Energy Corp 80.00 88.00 4.23 84.004 NLY Annaly Capital Management, Inc 58.00 99.00 12.75 78.505 MCD McDonald's Corporation 74.00 82.00 3.13 78.006 MSFT Microsoft Corporation 76.00 79.00 2.69 77.507 HTS Hatteras Financial Corp. 56.00 99.00 12.41 77.508 CLF Cliffs Natural Resources Inc 64.00 90.00 5.94 77.009 ARCC Ares Capital Corporation 54.00 98.00 8.84 76.00
10 INTC Intel Corporation 68.00 82.00 3.43 75.0011 LMT Lockheed Martin Corporation 62.00 88.00 4.47 75.0012 SCCO Southern Copper Corp 56.00 94.00 6.24 75.0013 CTL CenturyLink, Inc. 52.00 95.00 6.95 73.5014 ETN Eaton Corporation 60.00 86.00 3.50 73.0015 COP ConocoPhillips 56.00 89.00 4.74 72.5016 RAI Reynolds American, Inc. 52.00 91.00 5.06 71.5017 JNJ Johnson & Johnson 58.00 84.00 3.53 71.0018 OLN Olin Corporation 56.00 86.00 3.88 71.0019 ABT Abbott Laboratories 58.00 83.00 3.06 70.5020 T AT&T Inc. 50.00 90.00 4.68 70.0021 AFL AFLAC Incorporated 58.00 82.00 2.96 70.0022 CVX Chevron Corporation 56.00 84.00 3.24 70.0023 SYY SYSCO Corporation 56.00 84.00 3.69 70.0024 KMB Kimberly Clark Corp 56.00 84.00 3.47 70.0025 CLX Clorox Company, The 52.00 84.00 3.57 68.00
Capital asset pricing model (capm) A model that describes the relationship between risk and expected
return and that is used in the pricing of risky securities. General idea behind CAPM: investors need to be compensated in two
ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in
the formula and compensates the investors for placing money in any investment over a period of time.
The risk is represented by beta and calculates the amount of compensation the investor needs for taking on additional risk (risk premium)
The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium.
Investopedia, January 2011
Expected Return on Dividend Portfolio
August 1, 2012
As of: 8/1/2012RANK # TICKER COMPANY Growth Score Yield Score Dividend Yield TOTAL SCORE Beta Rf Rm CAPM
1 LINE Linn Energy, LLC 72.00 96.00 7.54 84.00 0.74 0.02 0.6767 0.50592 AVA Avista Corp 80.00 88.00 4.17 84.00 0.70 0.02 0.6767 0.47973 UNS UNS Energy Corp 80.00 88.00 4.23 84.00 0.64 0.02 0.6767 0.44034 NLY Annaly Capital Management, Inc 58.00 99.00 12.75 78.50 0.28 0.02 0.6767 0.20395 MCD McDonald's Corporation 74.00 82.00 3.13 78.00 0.42 0.02 0.6767 0.29586 MSFT Microsoft Corporation 76.00 79.00 2.69 77.50 1.01 0.02 0.6767 0.68327 HTS Hatteras Financial Corp. 56.00 99.00 12.41 77.50 0.27 0.02 0.6767 0.19738 CLF Cliffs Natural Resources Inc 64.00 90.00 5.94 77.00 2.40 0.02 0.6767 1.59609 ARCC Ares Capital Corporation 54.00 98.00 8.84 76.00 1.77 0.02 0.6767 1.1823
10 INTC Intel Corporation 68.00 82.00 3.43 75.00 1.10 0.02 0.6767 0.742311 LMT Lockheed Martin Corporation 62.00 88.00 4.47 75.00 0.93 0.02 0.6767 0.630712 SCCO Southern Copper Corp 56.00 94.00 6.24 75.00 1.60 0.02 0.6767 1.070713 CTL CenturyLink, Inc. 52.00 95.00 6.95 73.50 0.69 0.02 0.6767 0.473114 ETN Eaton Corporation 60.00 86.00 3.50 73.00 1.51 0.02 0.6767 1.011615 COP ConocoPhillips 56.00 89.00 4.74 72.50 1.12 0.02 0.6767 0.755516 RAI Reynolds American, Inc. 52.00 91.00 5.06 71.50 0.55 0.02 0.6767 0.381217 JNJ Johnson & Johnson 58.00 84.00 3.53 71.00 0.54 0.02 0.6767 0.374618 OLN Olin Corporation 56.00 86.00 3.88 71.00 1.22 0.02 0.6767 0.821119 ABT Abbott Laboratories 58.00 83.00 3.06 70.50 0.31 0.02 0.6767 0.223620 T AT&T Inc. 50.00 90.00 4.68 70.00 0.56 0.02 0.6767 0.387721 AFL AFLAC Incorporated 58.00 82.00 2.96 70.00 1.83 0.02 0.6767 1.221722 CVX Chevron Corporation 56.00 84.00 3.24 70.00 0.78 0.02 0.6767 0.532223 SYY SYSCO Corporation 56.00 84.00 3.69 70.00 0.71 0.02 0.6767 0.486224 KMB Kimberly Clark Corp 56.00 84.00 3.47 70.00 0.31 0.02 0.6767 0.223625 CLX Clorox Company, The 52.00 84.00 3.57 68.00 0.37 0.02 0.6767 0.2630 Beta Rf Rm CAPM
Current Portfolio
Yield: 5.127 0.89 0.02 0.6767 0.6073%Per Month
Rf Treasury Bill Rate - 4 weeks 8/3/2012 CAPM of Portfolio 7.54% AnnualizedCurrent Portfolio Yield 5.13%
Expected return of the Portfolio 12.66% * Yield Score and Growth Score as of July 1, 2012 - from 3rd Quarter Screener
Dividend ScoringQ3 2012
Deep Thinking in the Scoring Process
36 variables in the Scoring Process, including:- Dividend Growth- Free Cash Flow- Return on Equity- Sales Growth…
Dividend Scoring Snapshot
Dividend Scoring Based on Fundamental Data In-Depth Dividend Analysis:
Dividend Yield Dividend Growth Margin of Safety Dividend Valuation
Based on a combination of dividend strategies Provides Ex-Dividend date
Dividend Analysis
Dividend Analysis Yield Growth: Combination of dividend yield and dividend
growth rate analysis. High value on this category indicates stocks with above average yield and long-term growth.
Dividend Analysis: In-depth analysis of dividend stocks considering payout ratio, P/E ratio, earnings yield and dividend yield.
Dividend Growth: Concentrates on sustainable growth rate, the maximum growth rate that a firm can sustain without having to increase financial leverage.
Strong Dividend Valuation: Focuses on strong dividend stocks: a record of dividend increases over time.
Margin of Safety: Determines the margin of safety of the stock based on dividend valuation approach.
Dividend StrategiesSTRATEGY 1: Combination of high yield stock with low dividend growth. This strategy concentrates on INCOME – High risk and short term benefits
STRATEGY 2: Combination of low yield with high dividend growth. This strategy concentrates on GROWTH – Long term benefits due to compounding nature of the growing dividend.
STRATEGY 3: Combination of low yield and low dividend growth with high risk due to high divided payout ratio.
STRATEGY 4: Combination of high yield stock with high dividend growth.
STRATEGY 5: Mature companies with low but stable dividend. The strategy with the lowest risk and lowest income.
DIVIDEND STRATEGIES:
STRATEGY 1 HIGH YIELD STOCK WITH LOW DIVIDEND GROWTH (INCOME STRATEGY)
STRATEGY 2 LOW YIELD STOCK WITH HIGH DIVIDEND GROWTH (GROWTH STRATEGY)
STRATEGY 3 LOW YIELD AND LOW DIVIDEND GROWTH WITH HIGH RISK
STRATEGY 4 HIGH YIELD STOCK WITH HIGH DIVIDEND GROWTH
STRATEGY 5 MATURE COMPANIES WITH LOW BUT STABLE DIVIDEND
44%
4%
28%
24%
LJCM DIVIDEND STRATEGYSTRATEGY 1 STRATEGY 2 STRATEGY 3 STRATEGY 4 STRATEGY 5
Importance of Ex-Dividend Date Investment term related to the payment of
dividend. Defined by the IRS as “the first date following
the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment.“
Theoretically, the closer to the ex-dividend date, the higher the stock price. On the ex-dividend date the stock will drop the amount by the dividend amount.
Dividend Strategy Long-term Strategy. Looking for strong financial quality firms:
Growth Profitability Financial Health Relative Strength
Involves a cyclical rotation of the dividend strategies
Combinations of the dividend strategies will reduce risk.
Dividend Buy Signals
Dividend Sell Signals Sell signals will be based on:
Dividend picking process
News on fundamentals
Drastic drop of dividend
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