Tag Archives: seeking-alpha

After The Fall: The Dividend Aristocrats Detailed

Summary Loss averse investors with long-run horizons should not be heading to the sidelines, but rather looking to buy quality businesses on weakness. An index tracking the Dividend Aristocrats has outperformed the S&P 500, producing higher average returns with lower variability of returns over the trailing quarter-century. This article details the components of this index, with current valuation and year-to-date performance, to highlight companies that may outpeform through the next bout of volatility. In yesterday’s article entitled ” Stocks Will Go Higher “, I showed readers that over ten year periods, stocks almost invariably produce positive returns, and suggested the readers plan to buy high quality businesses on weakness and be prepared to hold these investments for long time periods. If history is a guide, such a strategy is very likely to come out a winner. (click to enlarge) Sources: Standard and Poor’s; Robert Shiller (Blue Line is price returns and pink line includes dividends) That article was spurred by a recent quote by famed investor and CEO of Berkshire Hathaway ( BRK.A , BRK.B ), Warren Buffett, who stated in an August 10th interview on CNBC that ” Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years for now .” In this same interview, Buffett went further stating that “my game is to own decent businesses and decent prices and you are going to make a lot of money over time.” A strategy populated by good businesses that have generated market beating returns over times is the Dividend Aristocrats. The Dividend Aristocrats are S&P 500 (NYSEARCA: SPY ) constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years. To be included in this index, these companies, at a minimum, have paid increasing dividends through the Eurozone Sovereign Crisis, the Global Financial Crisis, the Tech Bubble, and the early 1990s recession. These are the types of businesses that would be likely to produce market-beating risk-adjusted returns through the next downturn as well. Heeding Buffett’s advice, perhaps buying these businesses on weakness will spur market beating returns prospectively. Demonstrating this success, below is the cumulative total return of the S&P 500 Dividend Aristocrats Index, which is replicated by the ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ). (click to enlarge) Source: Standard and Poor’s; Bloomberg The Dividend Aristocrats have produced higher average annual returns, outperforming the S&P 500 by 2.5% per year. This approach has also produced returns with roughly three-quarters of the risk of the market, as measured by the standard deviation of annual returns. This long-run outperformance saw this strategy included in my “5 Ways to Beat the Market .” Given the weak domestic equity market performance in August, I wanted to detail the Dividend Aristocrat components for Seeking Alpha readers with current P/E ratio and year-to-date performance. (click to enlarge) For the broad “Investing for Income” community on Seeking Alpha, I have also sorted the list of Dividend Aristocrat constituents descending by dividend yield. (click to enlarge) If you are a long-term investor, looking to buy solid businesses on weakness, perhaps this list of companies who can weather another bout of market-related volatility. If readers find this helpful, I will also put together a list of the constituents of the Low Volatility Index, another factor tilt towards high quality businesses that has generated long-run alpha. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long NOBL, SPY. (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.

Why The Drop In Stocks Feels So Painful

Summary The last week and a half has certainly been a roller-coaster ride of emotions in the stock market. Many investors may be surprised at how deeply their accounts fell, despite the intention of having a relatively balanced or even conservative asset allocation. One of the most underwhelming asset classes during this sell-off in stocks has been the lack of performance in high-quality bonds. The last week and a half has certainly been a roller-coaster ride of emotions in the stock market. After a 3-day sell-off that culminated in extreme levels of fear, broad-based equity benchmarks managed to stage a sharp rally that has alleviated (some) feelings of panic. By the numbers, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) fell 12% from its all-time July high to the depths of the August lows. It has subsequently rebounded half of that decline as we head into the first days of September. While there is still a great deal of work to be done in order to recoup the full extent of those losses, examining how your portfolio performed in the midst of the chaos can be a helpful exercise. Many investors may be surprised at how deeply their accounts fell, despite the intention of having a relatively balanced or even conservative asset allocation . The Shock Absorber Is Missing In Action One of the most underwhelming asset classes during this sell-off in stocks has been the high-quality bonds. Since SPY peaked on July 20, the iShares U.S. Aggregate Bond ETF (NYSEARCA: AGG ) has gained just 0.39%. This weak follow-through was mirrored in the iShares Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) and the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ), which gained a timid 0.19% and 1.57% respectively. Typically, during periods of extreme stock market volatility, we see a flight to quality in bonds that helps cushion the drawdown in our portfolios. This is one of the primary benefits of multi-asset diversification, and helps alleviate overwhelming conviction in a single high-risk outcome. Those who have come to rely on the strength of bonds during a sell-off have been let down over the last several weeks. Put simply, if your bonds aren’t marginally offsetting the losses in stocks, you are going to feel the pain of those losses more acutely. In my opinion, most of this indecision in the bond market is due to three factors: We had a strong sell-off in Treasury yields (jump in bond prices) during June and July that left fixed-income investors near the high end of relative valuations. This put the bond market in a precarious spot right as the mini-stock storm descended. Many investors in stocks are wary about transitioning to high-quality bonds in front of a near-term interest rate hike by the Federal Reserve. After 6 years of zero interest rate policy, there is no way to know exactly how the fixed-income markets will react to this first adjustment. The CBOE 10-Year Treasury Note Yield (TNX) jumped sharply higher as stocks staged a comeback late last week. This may point towards an opportunistic rotation out of bonds and back into stocks for those that were looking for a spot to buy well off the recent highs or feared missing out on a V-shaped recovery. The Bottom Line Most aggregate bond funds are sitting near the flat-line for the year and have yet to participate in a meaningful way for 2015. Nevertheless, I’m not looking to reduce my overall exposure for clients at this juncture. In my opinion, this asset class still represents a solid foundation for balanced or conservative investors to bolster their income and lower total portfolio volatility. I prefer the risk management and security selection that comes with an actively managed ETF, such as the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ). Now more than ever, it is important to be flexible with respect to credit and interest-rate positioning as the Fed transitions to a new fiscal policy phase. I pointed out last week that it’s important to make changes on the stock side of the portfolio that are based on rational intermediate or long-term strategy, rather than short-term fear. This may include lightening up overexposure into a rally or taking advantage of new opportunities from your watch list during a correction. Above all, don’t let these periods of uncertainty get the better of you. Make sure you have a game plan for what you are going to hold or when it makes sense to fold . That way you are prepared for multiple outcomes and able to implement a decisive investment strategy to improve your long-term results. Disclosure: I am/we are long TOTL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

ETFReplay.com Portfolio September Update

The ETFReplay.com Portfolio holdings have been updated for September 2015. I previously detailed here and here how an investor can use ETFReplay.com to screen for best-performing ETFs based on momentum and volatility. The portfolio begins with a static basket of 14 ETFs. These 14 ETFs are ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 4 are purchased at the beginning of each month. When a holding drops out of the top 5 ETFs, it will be sold and replaced with the next highest ranked ETF. The 14 ETFs are listed below: Symbol Name RWX SPDR Dow Jones International Real Estate ETF PCY PowerShares Emerging Markets Soverign Bond Portfolio ETF WIP SPDR DB International Government Inflation-Protected Bond ETF EFA iShares MSCI EAFE ETF HYG iShares iBoxx $ High-Yield Corporate Bond ETF EEM iShares MSCI Emerging Markets ETF LQD iShares iBoxx $ Investment Grade Corporate Bond ETF VNQ Vanguard REIT Index ETF TIP iShares TIPS Bond ETF VTI Vanguard Total Stock Market ETF DBC PowerShares DB Commodity Index Tracking ETF GLD SPDR Gold Trust ETF TLT iShares 20+ Year Treasury Bond ETF SHY iShares 1-3 Year Treasury Bond ETF In addition, ETFs must be ranked above the cash-like ETF (NYSEARCA: SHY ) in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here . This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009), but it could also reduce total returns by allocating to cash in lieu of an asset class. The cash filter is in effect this month, the same as the previous two months. SHY is the highest-rated ETF in the 6/3/3 system. Therefore, it will continue to be the sole holding in the portfolio. The top 5 ranked ETFs based on the 6/3/3 system as of 8/31/15 are below: 6-mo/3-mo/3-mo SHY Barclays Low Duration Treasury (2-year) VTI Vanguard Total U.S. Stock Market HYG iShares iBoxx High-Yield Corp Bond PCY PowerShares Emerging Mkts Bond (7-9 year) TIP iShares Barclays TIPS In 2014, I introduced a pure momentum system, which ranks the same basket of 14 ETFs based solely on 6-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum are purchased each month. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The top four 6-month momentum ETFs are below: 6-month Momentum SHY Barclays Low Duration Treasury (2-year) PCY PowerShares Emerging Mkts Bond (7-9 year) TIP iShares Barclays TIPS TLT iShares Barclays Long-Term Trsry VTI, a holding for just one month, will be sold for a loss of 6.09%. HYG, a holding since June 30th, will be sold for a loss of 2.88%. EFA, a holding since April 30th, will be sold for a loss of 9.83%. They will be replaced by TIP, PCY, and TLT. The updated holdings for each portfolio are below. 6/3/3 strategy: Position Avg. Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends SHY 84.86 5/29/2015 & 6/30/15 -0.09% Pure Momentum strategy: Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends PCY 27.65 8/31/2015 0.00% SHY 84.86 7/31/2015 -0.09% TIP 111.58 8/31/2015 0.00% TLT 121.42 8/31/2015 0.00% Disclosure: None.