A Reader Asks, I Answer

A reader asks; The comment stream is asking you to elaborate as to that portion of your statement wherein you said owning ‘dividend growers exclusively’ is risky or not advisable…exactly what are the dangers of having an income stream as a primary goal instead of capital appreciation? My answer; I have tried to address this before. This is in part a philosophical issue. My first hand experience with capital markets goes back to 1984 (worked in the industry for a year before starting college) and I have tried to learn about stock market history from before 1984. In my time I have seen plenty of things that could never blowup or otherwise hurt people in fact go on to blowup and otherwise hurt people. I believe you are around 70 but I do not know how long you have been a market participant but you have probably seen more of this first hand than I have. For whatever reason I have a pretty good memory for how the psychology around these things has worked and I believe I see a lot of the same behavior repeating in many of the comments. It may be difficult to believe but the can’t go wrong idea was also applied to the Nifty 50 and Junk Bonds–yes, you can say it was different for this or that but the behavior is not different. In the 1990s Fannie and Freddie were must holds because of how incredibly safe they were. It is simply a matter of philosophy based on personal observation that too much of anything, ANYTHING, increases the risk taken. The debate that...

A Reader Asks, I Answer

A reader asks; The comment stream is asking you to elaborate as to that portion of your statement wherein you said owning ‘dividend growers exclusively’ is risky or not advisable…exactly what are the dangers of having an income stream as a primary goal instead of capital appreciation? My answer; I have tried to address this before. This is in part a philosophical issue. My first hand experience with capital markets goes back to 1984 (worked in the industry for a year before starting college) and I have tried to learn about stock market history from before 1984. In my time I have seen plenty of things that could never blowup or otherwise hurt people in fact go on to blowup and otherwise hurt people. I believe you are around 70 but I do not know how long you have been a market participant but you have probably seen more of this first hand than I have. For whatever reason I have a pretty good memory for how the psychology around these things has worked and I believe I see a lot of the same behavior repeating in many of the comments. It may be difficult to believe but the can’t go wrong idea was also applied to the Nifty 50 and Junk Bonds–yes, you can say it was different for this or that but the behavior is not different. In the 1990s Fannie and Freddie were must holds because of how incredibly safe they were. It is simply a matter of philosophy based on personal observation that too much of anything, ANYTHING, increases the risk taken. The debate that...

Barron’s on Dividends

The Barron’s cover story was about seeking a 4% yield from stocks. It was a broad look across many sectors in the S&P 500 at stocks that have the room to increase their dividends substantially or in some cases initiate a substantial dividend. My take on dividends has been consistent; they are crucial to long term portfolio success but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work. During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011—all with 4%-plus yields—returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates. Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better. Things like utilities, healthcare and staples do better in years like 2011 for two reasons; the dividends of course and more fundamentally the steadiness of the demand for the products. So far in 2012 the S&P 500 is up 4.58% which is pretty good for three weeks. In that same three...

Barron’s on Dividends

The Barron’s cover story was about seeking a 4% yield from stocks. It was a broad look across many sectors in the S&P 500 at stocks that have the room to increase their dividends substantially or in some cases initiate a substantial dividend. My take on dividends has been consistent; they are crucial to long term portfolio success but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work. During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011—all with 4%-plus yields—returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates. Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better. Things like utilities, healthcare and staples do better in years like 2011 for two reasons; the dividends of course and more fundamentally the steadiness of the demand for the products. So far in 2012 the S&P 500 is up 4.58% which is pretty good for three weeks. In that same three...

The 5% Solution?

A few years ago I wrote an article for theStreet.com where I tried to construct a diversified portfolio that yielded 4%. While the overall yield came in just below 4% it covered a lot of bases toward being diversified. The objective was not that anyone should have bought that portfolio but I wanted to try to illustrate my point from the other day (I have been making this point for years) about managing the yield of the overall portfolio, at least that was the intention. The other day I also mentioned that there are now a lot more stocks that yield 3% than there was four years ago, at least this appears to be the case. With yields generally higher I thought it would be interesting to update the 4% portfolio from a few years ago in search of 5%. The names are stocks that I generally keep tabs on (a couple of exceptions) but don’t own which should tell you something. Financials- Westpack Bank (WBK) 7.8% yield; This is one of the big four Aussie banks. If I am wrong about the risks in the housing market then this would be a good hold. The big difference between WBK and ANZ (ANZBY) that I sold in May is that ANZ has a lot more business throughout Asia than WBK. Annaly Capital Mortgage (NLY) 14.2% yield; I am quite certain I am never going to own a mortgage REIT but the name has been a good hold more often than not and many people do recommend the name. I could easily be wrong but whatever happens it will happen...

The 5% Solution?

A few years ago I wrote an article for theStreet.com where I tried to construct a diversified portfolio that yielded 4%. While the overall yield came in just below 4% it covered a lot of bases toward being diversified. The objective was not that anyone should have bought that portfolio but I wanted to try to illustrate my point from the other day (I have been making this point for years) about managing the yield of the overall portfolio, at least that was the intention. The other day I also mentioned that there are now a lot more stocks that yield 3% than there was four years ago, at least this appears to be the case. With yields generally higher I thought it would be interesting to update the 4% portfolio from a few years ago in search of 5%. The names are stocks that I generally keep tabs on (a couple of exceptions) but don’t own which should tell you something. Financials- Westpack Bank (WBK) 7.8% yield; This is one of the big four Aussie banks. If I am wrong about the risks in the housing market then this would be a good hold. The big difference between WBK and ANZ (ANZBY) that I sold in May is that ANZ has a lot more business throughout Asia than WBK. Annaly Capital Mortgage (NLY) 14.2% yield; I am quite certain I am never going to own a mortgage REIT but the name has been a good hold more often than not and many people do recommend the name. I could easily be wrong but whatever happens it will happen...