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VYM: High-Quality Dividend Investing To Mitigate Volatility In Uncertain Markets

Summary The dividend space offers many long quality attributes: decreased volatility, healthy yields, moderate risk and a hedge against downside risk in the face of uncertain market. High-quality dividend investing often gives rise to share buybacks, rendering an effective way to further drive shareholder value via returning capital to shareholders by repurchasing stock. VYM has outperformed the S&P 500 in past two down markets in 2008 and 2011 by 4.9% and 8.4%, respectively. VYM has more than doubled its dividend payouts over the past 5 years giving rise to a superior cash flow and yields. Introduction: Dividend investing lacks trading excitement when compared to high-flying stocks such as Netflix (NASDAQ: NFLX ), Facebook (NASDAQ: FB ) or Amazon (NASDAQ: AMZN ) or sectors on a whole such as the biotechnology sector. Despite this lack of excitement, when considering the long attributes the dividend space offers, such as decreased volatility, healthy yields, moderate risk exposure and a hedge against downside risk, it may be an ideal synergy for any long portfolio. This is exemplified as the markets have been highly volatile due to weakness in China, an imminent fed rate hike and persistently low oil prices. Historically, companies that have an established track record of not only paying dividends but growing their dividends over the long-term have generally outperformed the their respective index with decreased volatility. I will be utilizing the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ) as a proxy for a high-quality cohort of large-cap centric dividend paying stocks. This type of dividend portfolio may prove to be a meaningful piece of an overall growth retirement strategy while providing a reasonable level of income and mitigating risk. The allocation within VYM offers a broad dividend paying portfolio and access to all sectors throughout the large-cap space without sacrificing diversification and in turn can generate sustained long-term growth and income while navigating volatile markets. Mitigating risk and volatility with a high-quality cohort of dividend paying stocks: VYM is composed of high yielding dividend-paying large-cap companies and weighted by market capitalization. This domestically focused dividend paying ETF provides access to some of the biggest names across many different sectors that provide a healthy dividend yield, equity appreciation, diversification and decreased volatility. These domestically centric companies may provide additional protection when largely extraneous events are impacting U.S. markets. The top 10 holdings consist of high-quality companies: Exxon Mobile (NYSE: XOM ), Microsoft (NASDAQ: MSFT ), Johnson & Johnson (NYSE: JNJ ), Wells Fargo (NYSE: WFC ), General Electric (NYSE: GE ), Proctor & Gamble (NYSE: PG ), JPMorgan Chase (NYSE: JPM ), Pfizer (NYSE: PFE ), AT&T (NYSE: T ) and Verizon Communications (NYSE: VZ ). These top 10 holdings make up roughly 30% of the portfolio by weight and covers technology, energy, healthcare, industrials, financial and consumer defensive. The vast majority of companies that comprise the ETF portfolio are large-cap companies spanning value, blend and growth. Large value and blend categories account for roughly 75% of the portfolio holdings. Outside of these top 10 holdings, high-quality companies reside in market capitalization weighted proportions across a broad range sectors in its top 25 holdings (Figure 1). (click to enlarge) Figure 1 – Morningstar top 25 dividend paying holdings for VYM Decreased volatility and outperformance during bear markets: As a consequence of its high-quality dividend paying centric portfolio, the ETF has a majority of its holdings in more robust and financially stable companies that are the least impacted during economic turbulence domestically and abroad. The ETF specifically focuses on large-value companies within consumer defensive, health care and utilities. The weighted allocation within VYM that is dedicated to consumer defensive, health care and utilities is 14.7%, 12.4%, 7.7%, respectively. This defensive position equates to approximately 35% of the portfolio by weight (Figure 2). In terms of performance throughout bear markets, VYM has outperformed the S&P 500 in 2008 and 2011 by 4.9% and 8.4%, on an annualized basis respectively (Figure 2). These data exemplify the risk mitigation that is commonly intrinsic throughout large cohort of high-quality dividend paying stocks. (click to enlarge) Figure 2 – Morningstar sector breakdown of VYM (click to enlarge) Figure 3 – Morningstar annual returns of VYM relative to the S&P 500 index The potential duel synergy of dividends and share buybacks: Many of the companies within the VYM portfolio not only offer a dividend but also reward shareholders via share buybacks. Share buybacks can serve as an effective way to drive shareholder value via returning capital by repurchasing its own stock. I’ll discuss this dual synergy in greater detail in my part 2 of navigating volatile markets covering companies that engage in share buybacks. In brief, theoretically, repurchasing and retiring shares satisfies many pro-shareholder objectives: Reducing the number of shares tilts the supply and demand curve thereby removing shares will decrease supply and in turn increase demand and drive the share price higher. Earnings per share increase since earnings are now divided over fewer shares. If share buybacks are coupled with a dividend, the dividend yield may increase as long as the aggregate quarterly payout amount remains unchanged and as a result the payout will be divided over fewer shares. Microsoft and Wells Fargo are great examples of stocks within the ETF that reward shareholders with dividends and share buybacks. A number of constituents within the ETF help to drive share value with share buybacks while the aggregate holdings payout a dividend yield of 2.8% to augment total return. VYM provides a competitive yield to augment the growth component of the ETF, thus appears to be attractive as a potential candidate for any long portfolio. Established track record in dividend payouts and dividend increases to augment total return: VYM boasts an impressive dividend yield, currently greater than 3% which rivals the majority of high-quality dividend paying stocks. This can be a very effective residual payout to augment total return when reinvesting the dividend distributions over time. Many companies within the ETF have a well-established track record in dividend payouts and dividend growth over time. Bristol-Myers Squibb Co (NYSE: BMY ), AT&T, Verizon, Coca-Cola (NYSE: KO ) and Phillip Morris (NYSE: PM ) are just a few examples of companies within VYM that have regularly increased their dividend payout over the last 15 years. Taken together, this ETF portfolio is comprised of high-quality constituents that have a proven track record of consistent dividend payments and dividend growth. These two attributes can make a meaningful impact as part of any overall long portfolio strategy. Overall, the dividend payout per share of VYM on a quarterly basis has increased from $0.23 in March of 2010 to $0.56 in June of 2015 an increase of over 140% in dividend payouts (Figure 4). (click to enlarge) Figure 4 – Google Finance dividend distributions and cumulative returns over the previous 5 years VYM has yet to differentiate itself in the choppy market of 2015 Despite the mitigation attribute, VYM has not outperformed the broader indices (Figure 5). This may be attributable to its allocation in oil related stocks such as Exxon Mobil, Chevron (NYSE: CVX ), ConocoPhillips (NYSE: COP ), Valero Energy (NYSE: VLO ) and other energy and industrial related holdings. These sectors have been plummeted over the past six months along side the decrease in oil. This has been exacerbated by the strong dollar and weakness abroad for many international companies that reside in this ETF. Once the global economy regains its footing and the dollar normalizes against a basket of currencies, this ETF will likely regain its historical quality attributes of volatility and risk mitigation. (click to enlarge) Figure 5 – Morningstar annualized performance of VYM relative to the S&P 500 and Morningstar’s large value Summary: VYM makes a compelling case for the risk-adverse investor seeking long-term growth and income from a cohort high-quality dividend paying companies. VYM has an expense ratio of 0.10% and a dividend yield of greater than 3%, thus offering access to a high-quality ETF with a healthy rate of return and minimal risk at a very low cost. The mitigating risk aspect is exemplified during bear markets where VYM outperformed the S&P 500 4.9% and 8.4%, respectively in 2008 and 2014. VYM provides a compelling investment opportunity for investors seeking diversity across the large-cap space while mitigating risk and attaining a high yield and overall equity appreciation. Disclosure: The author currently holds shares of CVS (NYSE: CVS ), UnitedHealth (NYSE: UNH ), Target (NYSE: TGT ), Nike (NYSE: NKE ), Home Depot (NYSE: HD ) and Wells Fargo and is long all of these holdings. The author has no business relationship with any companies mentioned in this article. I am not a professional financial advisor or tax professional. I wrote this article myself and it reflects my own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. I am an individual investor who analyzes investment strategies and disseminates my analyses. I encourage all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, I value all responses. Disclosure: I am/we are long CVS, UNH, NKE, TGT, WFC, HD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Market Peak Is In

Summary In April I wrote an article that predicted the conditions necessary for a market peak to have occurred. In August these conditions were met. I detail some investment options to consider if a peak has in fact been made. In this article, I will be explaining why I believe the market has peaked or will peak soon, which means this bull run is over. In an article I wrote in April titled ” Constructing A Market Peak Blueprint ” I detailed three metrics that when combined have predicted the end of the previous two market tops in 2000 and 2007. The metrics I looked at were the monthly S&P 500 (NYSEARCA: SPY ) Shiller PE ratio, high-yield bond spreads and interest rates. In the final paragraph, I noted, “While none of these metrics currently are near a point at which all three will align to predict a top, it is still something that investors can watch for in the future. Well, the future I talked about in my article is now! I never like being the bearer of bad news, however since I wrote my article, all three metrics have aligned to the specifications I laid out in my article. That is why I am predicting the market peak is in. Market Peak Conditions The conditions needed to be met to declare a market peak are the following conditions listed below. I collected Shiller PE data from Multipl.com , High-Yield Spread data from the St.Louis Federal Reserve and historical interest rate data from Yahoo Finance . [Note all data is monthly] As the data in the tables below show that in August, all of these conditions were met. Shiller PE of greater than 25 Shiller PE declines 4 Months in a row High Yield Spreads Increase 4 Months in a row 10-year Interest Rate decreases 3 Months in a row Shiller PE High Yield Spreads 10-Year Interest Rate May 26.87 May 4.51 May 2.10 June 26.62 June 4.66 June 2.34 July 26.55 July 5.11 July 2.21 August 26.54 August 5.66 August 2.20 Previous Peaks There have been three previous times in the last fifteen years where these conditions have all aligned and those were in November & December 2000 and August 2007. This can be seen graphically in the following two monthly charts, which show the point at which the conditions were triggered. (click to enlarge) (click to enlarge) [Charts from ThinkorSwim Platform] What can investors do? -Don’t Panic! The number one thing is not to panic if the market peak is in. I am in no way saying to go out and panic selling. However, as I detail below, there are some investment actions investors can make to lessen the pain if a market peak has already occurred and a major correction follows. Investment Option #1: Get Defensive With ETFs, investors have a number of choices that are quality ETFs that own defensive equities. The PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA: SPLV ) is attractive because it holds stocks with the lowest volatility in the S&P 500. The Guggenheim Defensive Equity ETF (NYSEARCA: DEF ) is attractive because it holds fundamentally strong, dividend paying companies that have a history of outperforming according to its Fact Sheet . “DEF uses a rules-based quantitative approach, the index selects stocks based on fundamental characteristics such as a strong balance sheet, dividend payments, conservative accounting practices, and a recent history of out-performance during weak market days.” The Barclays ETN+ VEQTOR S&P 500 Linked ETN (NYSEARCA: VQT ) or the PowerShares S&P 500 Downside Hedged Portfolio ETF (NYSEARCA: PHDG ), which both dynamically allocate between stocks, VIX futures & cash. The following chart from the VQT prospectus shows that in late 2008, the allocation to volatility was increased which is shown by the steep increase in the index value. [Chart from VQT Prospectus] Investment Option #2: Add a short position to hedge downside risk The two main options for shorting the overall market are the ProShares Short S&P 500 ETF (NYSEARCA: SH ), which is the DAILY inverse of the S&P 500. The second option is the AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ), which is an actively managed short ETF. Investment Option #3: Consider Adding Precious Metals During the large decline in the market two weeks ago, gold (NYSEARCA: GLD ) & silver (NYSEARCA: SLV ) performed quite well because of investors seeking safety. For those looking for investment choices in the precious metals space there is obviously the GLD or SLV or there is the broad ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA: GLTR ), which holds physical gold, silver, platinum & palladium. Investment Option #4: Employ a barbell approach Investors can employ a barbell approach where they own short-term fixed income to preserve capital and generate some income and high quality growth stocks. The PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) is an actively managed ultra-short term bond ETF designed to generate above money market returns and is a good capital preservation tool. In addition, if you still want capital preservation but are looking for a higher yield, a quality choice is the Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ), which invests in short-term investment grade corporate bonds and currently yields just less than 1.90%. For the other end of the barbell, investors can look for high growth companies that have growth and have minimal debt. For example, earlier this year I wrote an article , where I determined it was the number one stock in the world was Visa (NYSE: V ). I determined Visa was the number one stock because they have $4.7 billion in cash, no-debt, they pay a dividend, is expected to grow earnings 17.74% over the long-term, is buying back shares and in 2016 they start their new deal replacing AMEX (NYSE: AXP ) at Costco (NASDAQ: COST ). Other quality stocks like Gilead Sciences (NASDAQ: GILD ), which have strong balance sheets and clear growth drivers, should be considered when using the barbell approach. Closing Thoughts If a market peak is in fact in, investors need to be mindful and give extra scrutiny to investments for their potential performance during a down market. If a market peak has occurred, as I highly suspect that it has, individual stock selection and/or tactical allocation to ETFs is something that will become extremely important. This kind of environment is where great investors shine. I do not know who said the following quote but it applies to this situation and it goes something like “Anyone can be a good investor in a bull market, however, what separates good investors from great investors is bear market performance.” Disclaimer: See here . Disclosure: I am/we are long SPLV, GILD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Templeton Global Income Is On Sale

Summary Templeton Global Income trades at a -15.72% discount to NAV following last week’s market panic. This discount is historically large and most likely a limited time offer. Mr. Market seems to be rating the investment skill of Michael Hasenstab below average. I disagree. Background Templeton Global Income Fund (NYSE: GIM ) is a closed-end fund. Its investment objective in Templeton’s own words : The Fund seeks high, current income, with a secondary goal of capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in income-producing securities, including debt securities of U.S. and foreign issuers, including emerging markets. Discount To NAV Following last week’s market tantrum, GIM currently trades at a substantial -15.72% discount to net asset value. This discount is large historically speaking (albeit the rolling average discount has been increasing the past five years). Source: CEFconnect.com If we assume the following… NAV is fairly calculated (I do in GIM’s case). GIM’s investment mandate is sufficiently flexible (it is). … then the discount would appear to be Mr. Market’s judgment on the quality of GIM’s management skill. If management skill is well below average, the discount is warranted. If management skill is average or above, the discount represents a buying opportunity (and a margin of safety should our judgment of management skill prove incorrect). I believe management skill is above average. Michael Hasenstab Michael Hasenstab is the key man behind Templeton Global Income. (More specifically, he is the Chief Investment Officer, Global Bonds for Franklin Advisers, Inc, which manages the fund.) His long-term record speaks for itself… Source: Trustnet.com I’m a fan of the guy. He takes chances, which is to say he “actively” manages the portfolio. (Illustrating this point, GIM’s R-Squared is 0.17 vs. its benchmark over the past three years.) Unfortunately, this seems to be a novel approach in an industry where too many fund managers claim to be “active” (to justify higher fees) but in practice hug their benchmark, prioritizing career risk over the actual risks facing their investors. Sometimes Hasenstab’s chances pan out ( Ireland ). Other times they don’t ( Ukraine ). Over the last decade plus, he’s won more than he’s lost and produced solid risk-adjusted returns. I think the combination of his temperament and relatively young age makes it a decent bet GIM’s performance will remain solid. Here are his thoughts on the recent market volatility. For the record, I am far more bearish on China’s prospects than he appears to be from the video. I was short the Direxion Daily FTSE China Bull 3X ETF (NYSEARCA: YINN ) until last week and plan to short it again should government intervention artificially push it back up. That said, I have no qualms with GIM’s latest reported exposures (which do not include China)… (click to enlarge) Other Thoughts On The Merits Behind An Investment In GIM I believe the bulk of a decision to invest in GIM boils down to one’s appraisal of the manager’s skill (above average in my opinion) and the margin of safety should that appraisal be wrong (the CEF’s current -15.72% discount to NAV). Here are three more quick thoughts on the merits behind an investment in GIM though… Fees are reasonable at 0.73%. I believe it is well positioned risk-wise for the current market environment given its low duration (0.6438 years) and closed-end fund structure, which prevents forced selling from redemptions during a market panic. GIM is highly focused on emerging market bonds and currencies. I believe these are currently reasonably priced exposures relative to other asset classes. GMO’s “7‐Year Asset Class Real Return Forecasts” agrees… (click to enlarge) Conclusion The Templeton Global Income closed-end fund is trading at a huge discount following last week’s market panic. Mr. Market is suggesting Michael Hasenstab is a below average investor. I disagree. Long GIM. Disclosure: I am/we are long GIM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.