Tag Archives: health

If You Like Inner Beauty, This Is Your Dividend ETF

Summary DVY offers a solid dividend yield of 3.27%, but the real beauty goes much deeper. The holdings in the top 10 look excellent and reflect a great portfolio. The sector allocations are even better and include high allocations to sectors that are often ignored in high dividend yield ETFs. The iShares Select Dividend ETF (NYSEARCA: DVY ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a great ETF. Investors may quibble on whether the allocations are perfect or merely good, but there is far more to like than to hold against the fund. Expense Ratio The expense ratio is .39%. That is by far the biggest challenge for the fund because the rest of the fund is simply great. Holdings Investors should always look to the holdings as part of the process in making the decisions. Who doesn’t like this allocation? We have Philip Morris International (NYSE: PM ) at the number 2 slot. That looks like a good dividend bet to me. I’m not a fan of their products, but I am I fan of the revenue and earnings they can generate with those products. That can be a tricky situation, but in the investment mindset I just can’t toss away the opportunity to have companies with highly addictive products. We see McDonald’s (NYSE: MCD ) at the number 4 slot. The case for McDonald’s is fairly similar. I don’t love the product that they were creating over the last several years, but I do love the way the restaurant leverages their real estate and enormous size to generate great economies of scale. We also have Kimberly Clark Corp (NYSE: KMB ) and Clorox (NYSE: CLX ) in the top ten. While I don’t cover these companies on an individual basis, it is encouraging to see three entries for consumer staples in the top holdings of the ETF. You look a little further down the list and you see Nextera Energy Inc. (NYSE: NEE ) leading a batch of three utilities. For comparison sake, I’ve often looked into defensive ETFs or high dividend yield ETFs and seen utilities only composing 0% to 5% of the portfolio. Since I like dividend ETFs to be stuffed with companies that can sell their product regardless of the economic environment, the utility sector is a great fit. Sector Allocations The next chart breaks down the sector allocations across the entire ETF and the choices are beautiful. I looked at this chart and knew I was going to like the ETF right away. Assuming proper diversification across individual companies, this is just a wonderful sector allocation. The utility sector comes in very heavy at 33% of the portfolio which is great for investors that care about getting strong sustainable dividends. I assume that is the only reason anyone is interested in this ETF. The dividend yield is currently running 3.27% and I’d be fairly confident in that dividend being maintained and growing over time. Consumer Staples Besides utilities, I’m very fond of the consumer staples sector since these are companies that are designed to whether the downturn in the economy. The products they sell can hold up remarkably well during down economies and it is the presence of reliable sales that helps a company survive the hard times. Between the consumer staples and utilities sector we have almost 45% of the portfolio. Information Technology This is a really shocking one for me. The allocation here is only 1.51%. For many dividend focused ETFs an allocation that larger or larger is given to Microsoft (NASDAQ: MSFT ) alone. On the other hand, MSFT currently only yields around 2.67% so I can see the smaller allocations. Broad market ETFs tend to be fairly heavy on information technology, so I’m just fine with seeing a lower weight for a dividend focused ETF. Investors using the iShares Select Dividend ETF as one part of their portfolio should be able to benefit from the diversification advantages of the different sector weights. What to Add I don’t like to be heavily overweight on information technology, but if an investor is using this as the core of the portfolio then I think it would be wise to use a small allocation to a broad market ETF or a very small allocation specifically to the information technology sector. The other place that I would consider adding a bit is the health care industry. There is plenty of demand for their goods and services from the baby boomer population. If an investor happens to be a baby boomer and plan to retire on the dividends, it would be nice to own part of the company that makes the medication they will want. If prices go up and profits soar, those investors should see higher dividends to offset the higher costs they are facing in their daily lives. I wouldn’t mind adding a little bit more exposure on consumer staples either, but that can be considered a personal preference thing. I would love to see this allocation running closer to 20% which would lead to utilities and consumer staples exceeding 50% of the portfolio when combined. That sounds like a nice secure dividend to me. Conclusion The expense ratio is a bit high for my taste, but the portfolio is beautiful. From the individual companies selected to the sector allocations, there is far more to like about this portfolio than to dislike. I think some investors putting in new money might seek ways to replicate the portfolio through a combination of lower fee ETFs, but it is a testament to the design of the ETF that it would be worth looking into those strategies. If the expense ratio dropped down to around .10% to .14%, it would come in as a solid 10/10.

Momentum Traps – How To Avoid The Siren Song Of Overhyped Stocks

Faced with choosing between a $10 bottle of wine and a $90 bottle of wine, which would you go for? In one experiment – with the prices of each wine clearly marked – nearly twice as many people preferred the taste of the most expensive bottle. But unknown to the volunteers, the two wines were exactly the same. This test was carried out by American researchers investigating how pricing can influence the brain’s perception of how ‘pleasant’ something is. Told it’s expensive, we tend to like it all the more. It’s an example of what behavioral scientists say is a flaw in human emotions that causes us to be overly-influenced by a good story. The read across for investors could hardly be more stark. Stories in the stock market are like a magnet. With herds of followers, these popular shares typically boast eye-catching price momentum. Yet a good proportion of them hide deteriorating fundamentals and stretched valuations that can be harder to spot (and, for some, easy to ignore). These are the market’s glamour stocks which may well be Momentum Traps – stocks where a sudden change in sentiment could see their momentum crash. Of all the dangers that investors face, perhaps none is more seductive than the siren song of stories. Stories essentially govern the way we think. We will abandon evidence in favour of a good story – James Montier Signs of a Momentum Trap Small cap stocks soared through 2013, and by early the following year some valuations looked frothy. Swept up in a wave of bullish exuberance, popular ‘blue sky’ companies like Blur ( OTC:BLURF ), Monitise ( OTC:MNQQY ) and Cloudbuy ( OTC:CDLBF ) were showing some of the classic signs of being momentum traps. As sentiment towards small caps drifted through the next 12 months, the price of each share was pummelled. The common traits shared by these and other momentum traps was that their strong price momentum hadn’t been matched by improving fundamentals. Yet, they looked expensive and their low QualityRanks pointed to firms that either weren’t profitable at all or were flagging as potentially distressed. Importantly, these were some of the most talked about small caps at the time, promoted by brokers and heavily traded by investors. They were the polar opposite of traditional ‘value’ shares but investors lapped them up all the same. In The Little Book of Behavioural Investing , James Montier of investment firm GMO, says that one of the reasons why people shy away from value investing is that value shares tend to come with poor stories. As a result, they end up being despised rather than admired. He explains: “Which would you rather own? Psychologically, we know you will feel attracted to the admired stocks. Yet the despised stocks are generally a far better investment. They significantly outperform the market as well as the admired stocks.” Indeed, evidence that momentum stocks underperform dates back to a 1993 study by three researchers who made a personal fortune from their findings. Josef Lakonishok, Andrei Shleifer and Robert Vishny showed that investors consistently overestimate future growth rates of glamour stocks relative to value stocks. They said this was because investors typically make judgement errors and extrapolate too much of the past to make predictions about the future. They proved their point by going on to run billions of dollars in their own fund management firm called LSV. Testing the performance of Momentum Traps In Stockopedia’s taxonomy of stock market winners (and losers), Momentum Traps typically have StockRanks that reflect strong momentum but poor value and quality. We can build a screen for these stocks by setting the following filters: Momentum Rank > 80 (i.e. high Momentum) QV Rank < 40 (i.e. poor combined Quality and Value) Market Cap > 100 (i.e. to focus on the more well-known shares) Top 25 stocks by Momentum Rank (i.e. 25 highest Momentum shares in the set) We’ve used the Stockopedia StockRank archives to generate the performance history of a 25 stock portfolio rebalanced annually since April 2013. The results are quite startling (click to enlarge) What happens so often with Momentum Traps is that they outperform the market dramatically… but only for a while. This strong price performance lulls investors into a false sense of security and draws in the suckers right at the wrong time. Most investors buy these stocks at the top, and suffer terrible underperformance when gravity reasserts itself. As we can see, the Momentum Trap portfolio has tracked the FTSE All Share over the last two-and-a-half years but broken everyone’s hearts in the interim. Through 2013, the Momentum Traps portfolio was very much an all-cap affair, with stocks ranging from 3i ( OTCPK:TGOPY ) to Nanoco ( OTC:NNOCF ) and Blinkx ( OTC:BLNKY ). There were (and continue to be) some stocks that held on to the momentum and did well. But in 2014, it was weighted much more heavily towards small caps. It’s here that the trouble starts. As sentiment cooled towards smaller stocks, those that were overstretched paid the heaviest price. Companies like eServGlobal, Quadrise Fuels ( OTC:QDRSF ), Johnston Press ( OTC:JHPSY ) and a handful of resources shares have continued to slide. Dodging a momentum trap bullet Using the above rules on today’s data set, we’ve compiled a list below of stocks that could see their momentum turn if investor sentiment changes. The companies include some popular names like Hutchison China MediTech (Pending: HCM ) and Optimal Payments ( OTCPK:NVAFF ). Note that the ‘buy’, ‘hold’ and ‘sell’ recommendations of the brokers that cover each company are broadly positive in their outlook. Detailed research may uncover nothing to worry about with these shares. However, QV Ranks of below 40 (out of 100) certainly warrants close attention and suggests things could be more precarious than the broker recommendations infer. Name Momentum Rank QV Rank # Buy Recs # Hold Recs # Sell Recs Admiral ( OTCPK:AMIGY ) 98 25 1 10 2 OneSavings Bank ( OTC:OSVBF ) 98 29 – 4 – Hutchison China MediTech 96 14 – – 1 Optimal Payments 95 29 4 – – Grainger ( OTC:GRGTF ) 94 10 3 4 – Severn Trent ( OTCQX:STRNY ) 94 25 2 9 1 NMC Health ( OTC:NMHLY ) 93 20 6 – – Dignity ( OTC:DGNTY ) 92 37 – 4 – To avoid the lure of stories and the risk of succumbing to momentum traps, investors should be alert when strong momentum is paired with deteriorating fundamentals or excessive valuation. Momentum is one of the strongest drivers of returns in the stock market, and certainly capable of carrying story stocks some distance. But momentum can crash, particularly in shares with heady valuations and suspect quality. It’s a message best summed up by Montier, who says the key is to focus on facts. “Focusing on the cold hard facts (soundly based in real numbers) is likely to be the best defence against the siren song of stories.” Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

The Fed’s Delay On Rates Makes SDY A Good Buy

The Federal Reserve has delayed raising rates, giving a boost to dividend funds. Rates are likely to remain at historically low levels well into 2016. SDY is heavily weighted towards the financial sector, providing a nice hedge against any rising rates. The purpose of this article is to evaluate the attractiveness of the SPDR Dividend ETF (NYSEARCA: SDY ) as an investment option. To do so, I will evaluate recent market performance, its unique characteristics, and overall market trends in an attempt to determine where the fund may be headed going into 2016. First, a little about SDY. The fund seeks to closely match the returns and characteristics of the S&P High Yield Dividend Aristocrats Index. This index is designed to measure the performance of the highest dividend-yielding companies in the S&P Composite 1500 Index that have also followed a policy of consistently increasing dividends every year for at least 20 consecutive years. This is unique in that many dividend ETFs focus solely on high-yielding companies while SDY has a focus on high yield, but also a track record of a raising payment. Currently, SDY is trading at $77.04 and pays a quarterly dividend of $.49/share, which translates to an annual yield of 2.54%. Year to date, SDY is down 2.2%, not accounting for dividends, which lags the Dow Jones Index’s return of (1.5%) year to date. However, once dividends are accounted for, SDY has slightly outperformed the Dow for the year. There are a few reasons why I feel SDY is a good buy at current levels. The main reason has to do with the Fed’s unwillingness to raise rates from historically low levels. At the beginning of 2015, investors were fairly confident that rates would rise at some point this year, some believed as early as June. This negatively affected dividend ETFs, as investors had piled into funds such as SDY at record levels in search of a higher yield in a low rate environment. Because of this, SDY, along with similar funds, underperformed the Dow and other investment options. However, as we near the end of the year and an official rate hike has yet to be announced, investors are beginning to buy back into SDY as they realize that the low rate environment is here to stay for a little while longer. This is apparent in SDY’s recent rise, as the fund is up almost 7% in the last month. I believe the ETF will continue to move higher, as investors are continuously pushing back their expectations for a rate hike. According to data compiled by the Chicago Mercantile Exchange, “traders now put just a 7 percent chance of a rate move at Wednesday’s Fed meeting and a 36 percent probability for the final one of the year in December”. Traders now give a 59 percent chance of a rate hike during the March 2016 meeting, almost six months away. If that expectation turns in to a reality, SDY could be a very profitable bet in the short term. A second reason I prefer SDY over other funds has to do with its exposure to the financials sector, at roughly 25% of its total portfolio. Below is a breakdown of the sectors, by weighting, that make up SDY’s holdings : Financials 25.47% Consumer Staples 14.95% Industrials 13.54% Utilities 11.83% Materials 11.15% Consumer Discretionary 7.56% Health Care 5.92% Energy 3.41% Telecommunication Services 3.05% Information Technology 2.88% Unassigned 0.22% As you can see from the chart, financials are the top sector weighting in SDY’s portfolio. I view this as a positive, because it provides the fund with a nice hedge against rising rates, when they do eventually rise. General logic will say that these dividend funds will take a large hit once rates rise, because investors will now be able to command higher yields from less risky assets. However, SDY’s exposure to the financials sector will continue to make this fund attractive as financial companies, such as banks and insurance companies, tend to perform better in a rising rate environment. This occurs for a few reasons. One, banks will typically increase the amount they charge for loans at a faster rate than what they pay for deposits, which widens their spread and overall profit. Additionally, these firms typically have to write-off fewer bad loans, as rates generally rise during a time of economic growth. This means companies are performing better and are more likely to meet their debt obligations, and thus, no default on their loans. Therefore, SDY should experience capital appreciation from this exposure, which would cater to investors who are more concerned with the overall return, (stock price and yield), as opposed to just the yield. Of course, investing in SDY is not without risk. Investors could be wrong and interest rates could rise at a much quicker-than-anticipated pace. If this occurs, the market could move sharply lower, or investors could flee dividend funds. SDY’s yield, at only 2.50%, does not provide much of a cushion if the fund were to move rapidly lower. Additionally, SDY also has a strong weighting towards the US consumer, with weightings of 15% and 8% towards the consumer staples and consumer discretionary sectors, respectively. If the US consumer stops spending, or US job growth weakens, these sectors could be dragged lower and take SDY down with them. However, neither of these scenarios are what I expect to occur. Even if rates do rise, Yellen has made it clear that the increases will be slow and gradual. She does not intend to spook the market, and the past few years have showed investors that the Fed is being extremely cautious with regards to rates. Additionally, consumer spending continues to increase, with a 0.6 percent rise last month (September) according to the Commerce Department. Therefore, I expect SDY to perform strongly despite these headwinds. Bottom line: SDY has had a lackluster year, but has rallied recently as the Fed has delayed raising rates. With this scenario continuing, the fund continues to provide investors with an above-average yield in a low-rate environment. Until rates do rise, dividend ETFs will continue to be profitable for investors. With a fee of only .35% and exposure to the financials sector, which will serve as a hedge when rates do rise, SDY provides investors with a cheap way to profit in the short and long term. Going into 2016, I would encourage investors to take a serious look at this fund.