Tag Archives: vanguard

Forget Dividend Growth Investing: I Want My Dividends And I Want Them Now

Summary In a previous article, I featured the Vanguard Dividend Appreciation ETF, and my reasons for including it in my personal portfolio. In this article, I feature a different ETF, one that you may select if you wish to receive a higher level of current income. In the course of this article, I will also examine the question: “Should I perhaps hold both in my portfolio?” Towards the end, I also offer a link that will give you a peek into my own portfolio. This article is designed to be read in conjunction with the most popular article I have managed to write to-date for Seeking Alpha, with over 7,750 web and mobile views and counting. In that article, I featured the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ). I explained why, after considering attempting to build a little 10-stock “mini ETF” of my own, I decided instead to add to my weighting in that particular ETF. While noting that VIG carried a rather modest SEC yield of 2.19%, I featured the structural reasons that one could expect this dividend to grow over time. But what if you are an investor who says: “Forget dividend growth! I want my dividends and I want them now!” As it happens, I have just the ETF for you. This article will discuss another Vanguard ETF that forms a piece of the “bedrock” of dividend income that supports my portfolio; namely the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). When I say “read in conjunction with,” what I mean is that I will attempt not to bore the reader by repeating the information and concepts developed in that previous article, but rather expand on them, clarify similarities and differences between the two ETFs, and ultimately attempt to address the question: “Why might I want to have both ETFs in my portfolio?” Expense Ratio and Composition While, at times, other ETF providers make a wonderful marketing splash by being able, for example, to at least temporarily tout that they offer the world’s cheapest ETF , one of the things I admire about Vanguard is that it offers a wide variety of ETFs – including some that are specialized – at extremely low expense ratios. VYM is no exception. Like its stablemate VIG, its expense ratio is a mere .10%. In this case, what do you get for your .10%? Here’s a quick overview from VYM’s fact sheet on the Vanguard website: Right off the bat, then, we see that VYM tracks the FTSE High Dividend Yield Index and does so in passive fashion, using a full-replication approach. As it turns out, this index represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . From the linked fact sheet, we find that: This index comprises stocks that are characterized by higher-than-average dividend yields. REITs are removed from this index, because they do not generally benefit from currently favorable tax rates on qualified dividends. Additionally, stocks forecast to pay a zero dividend over the next 12 months are also removed. Finally, the remaining stocks are ranked by annual dividend yield and included in the index until the cumulative market cap reaches 50% of the total market cap of the universe of stocks under consideration. The index is reviewed semi-annually, in March and September. Finally, the associated Vanguard Advisor’s page reveals that “buffer zones” are utilized during the annual rebalancing exercise, to reduce portfolio turnover. This index is a little broader than the one utilized for VIG. Currently, VIG contains 179 stocks, and VYM contains 435. The fund currently has $15.6 billion in Assets Under Management (AUM), with daily average trading of $43.41 million. It has an average trading spread of 0.02%. Finally, the fund’s current SEC yield is 3.14%. Comparing VYM With VIG. Should You Hold One? Both? In this section, I will expose the differences and similarities between VYM and VIG. Ultimately, it is my hope that it helps you to decide whether you would like to add one or the other to your portfolio or, like I do, maintain a target weighting in both. To help you conceptualize the differences, I first used the charting capabilities of Excel to visually display the differences in their sector breakdowns, with all percentages being taken directly from the Vanguard fact sheets. From that graphic, you likely noticed that VIG is much more heavily weighted in: Consumer Goods Consumer Services Industrials In contrast, VYM tends to feature: Financials Oil & Gas Telecommunications Utilities When it comes to Basic Materials, Healthcare, and Technology, the weightings are very similar. Next, have a look at the comparative Top-10 holdings of the two ETFs, to see how these themes play out in their largest holdings: There are perhaps two intuitive takeaways from this: VYM tends to feature what might be described as slightly “stodgier” companies. These are certainly not rapid growers. Rather they are established companies in low-growth businesses which deliver a large part of their earnings to shareholders in the form of dividends. VIG tends to feature companies with lower current payouts, but slightly faster growth. If you decide to include both in your portfolio, there is some overlap (3 similarly-weighted sectors, 3 stocks in the Top-10 holdings of both). However, it could be argued that there is a greater level of variance (3-4 sectors with very different exposure, 7 stocks which are not found in both Top-10 holdings). Let’s next turn to relative performance. In reviewing the comments from other Seeking Alpha articles, I have noticed some skepticism regarding dividend-paying stocks, and therefore related ETFs, on two fronts: In good times, they tend to underperform the S&P 500. Conversely, they often don’t hold up so well when the market experiences a sharp downturn. In that vein, you may find the following charts helpful to review. First, I started by laying both VIG and VYM against the S&P 500 index over the past 5 years. VYM data by YCharts Interestingly, I actually find VYM’s performance to be rather stunning. Though it has trailed the S&P 500 by roughly 6% over that time frame, as the next chart shows it has also consistently delivered a dividend in the range of 2.75-3.25%. In contrast, on both counts, VIG’s comparative performance over this period appears slightly underwhelming. VYM Dividend Yield (TTM) data by YCharts Next, though, let’s have a look at the last extended major downturn, covering the period between 10/1/2007 and the bottom on 3/9/2009: VYM data by YCharts In this drastic negative environment, VIG emerged as the clear winner, besting the S&P 500 by a full 8.5% and VYM by over 10%. However, again using the S&P 500 as our benchmark, VYM also held up comparatively well. Summary and Conclusion I am of the belief that dividends are an invaluable component of a solid, well-balanced portfolio. In my case, I have elected to maintain modest holdings in both AT&T (NYSE: T ) and Verizon (NYSE: VZ ) in my personal portfolio for the express purpose of having a solid foundation of dividends. The linked article also explains my rationale for not automatically reinvesting my dividends, and what I do instead. That is why VYM forms an integral part of my portfolio as well. Currently, it stands at 5.18%, augmenting my 7.22% weighting in VIG, for a total of 12.40% between the two ETFs. Should you hold both VYM and VIG in your portfolio? If you are interested in a steady stream of dividends while at the same time benefiting from both great diversification and a low expense ratio, I believe the above evidence suggests that you should. VYM offers a higher current dividend yield while VIG may offer both a little more growth as well as better protection in the event of a market downturn. As always, whatever your personal choices, I wish you. Happy investing!

Ivy Portfolio December Update

The Ivy Portfolio spreadsheet track the 10-month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets . Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages. The Ivy Portfolio spreadsheet tracks both the 5 and 10 ETF Portfolios listed in Faber’s book. When a security is trading below its 10-month simple moving average, the position is listed as “Cash.” When the security is trading above its 10-month simple moving average the positions is listed as “Invested.” The spreadsheet’s signals update once daily (typically in the late evening) using dividend/split adjusted closing price from Yahoo Finance. The 10-month simple moving average is based on the most recent 10 months including the current month’s most recent daily closing price. Even though the signals update daily, it is not an endorsement to check signals daily or trade based on daily updates. It simply gives the spreadsheet more versatility for users to check at his or her leisure. The page also displays the percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10-month simple moving average, using both adjusted and unadjusted data. If an ETF has paid a dividend or split within the past 10 months, then when comparing the adjusted/unadjusted data you will see differences in the percent an ETF is above/below the 10-month SMA. This could also potentially impact whether an ETF is above or below its 10-month SMA. Regardless of whether you prefer the adjusted or unadjusted data, it is important to remain consistent in your approach. My preference is to use adjusted data when evaluating signals. The current signals based on November 30th’s adjusted closing prices are below. This month Vanguard Total Stock Market ETF (NYSEARCA: VTI ) and Vanguard REIT Index ETF (NYSEARCA: VNQ ) are above their moving average and the balance of the ETFs, the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ), the Vanguard Small Cap ETF (NYSEARCA: VB ), the SPDR DJ International Real Estate ETF (NYSEARCA: RWX ), the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) , the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ) , the iShares S&P GSCI Commodity-Indexed Trust ETF (NYSEARCA: GSG ), the Vanguard Total Bond Market ETF (NYSEARCA: BND ), and the iShares TIPS Bond ETF (NYSEARCA: TIP ) , are below their 10-month moving average. The spreadsheet also provides quarterly, half year, and yearly return data courtesy of Finviz . The return data is useful for those interested in overlaying a momentum strategy with the 10-month SMA strategy: (click to enlarge) I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. This document tracks the 10 month moving averages for four different portfolios designed for TD Ameritrade, Fidelity, Charles Schwab, and Vanguard commission-free ETF offers. Not all ETFs in each portfolio are commission free, as each broker limits the selection of commission-free ETFs and viable ETFs may not exist in each asset class. Other restrictions and limitations may apply depending on each broker. Below are the 10-month moving average signals (using adjusted price data) for the commission-free portfolios: (click to enlarge) (click to enlarge) Disclosures: None.

Noisy Market Hypothesis: Tilt Your Portfolio To Achieve Superior Returns (Part 1)

Summary In previous articles, we’ve shown how maintaining a diversified portfolio “beats the average retail investor”. In this articles, we will raise the bar and review the ways of “beating the market”. Initial building blocks (i.e. list of ETFs) for Satellite Portfolio are presented. This is the third article in the series that aims to develop portfolio investment approach that “beats the market”. The goal is to equip readers both with “knowledge about the path” and “confidence to stay on the path”. In the previous two articles, we’ve reviewed the ways of “beating the average retail investor”: These two articles serve as a practical guide to structuring core portfolio. We now move to the next step – satellite portfolio. We are raising the bar We saw what it takes to “beat average investor” and that doing so is pretty easy. All you need to do is maintain a diversified allocation to various asset classes. The key word is “maintain”; in other words, an investor should choose consistency over chasing the next “hot” stock or industry. As a reminder, please see the graph below; I hope that it will serve as a motivation: (click to enlarge) Source: J.P. Morgan and Dalbar Inc. Of course, managing emotions and staying the course is easier said than done. Especially, if your approach performed poorly for few years while your friend keeps on bragging about “that great stock” which made him a small fortune. How astonishing it is to see that few years of performance guide our long-term decisions. Just take a look at reactions that the second article in this series stirred up. It is true that commodities had very poor performance during last 4-5 years (and so did emerging market stocks). However, I wonder if half a decade performance warrants calling the commodities inappropriate for the portfolio [1]. History of the stock market is full with examples when the stock market pundits would conclude that some asset classes are no longer appropriate for portfolio, e.g. “stocks are dead” (typically, at the bottom of the market), just to observe market come back with a vengeance and prove all naysayers wrong. Putting short-termism aside, let’s go back to our long-term perspective. Commodity futures deliver equity-like returns (and risks as well) and have less than perfect correlation with stocks (i.e. provides diversification benefit). However, the focus of this article is not commodity futures, not even “Core Portfolio”. Our focus is “Satellite Portfolio” and how we can achieve even better returns through employing proven strategies. Our focus is on raising the bar. Noisy Market Hypothesis (NHM) and how to “beat the market” NHM provides a more realistic depiction of stock market dynamics when compared to Efficient Market Hypothesis (EMH). EMH claims that stock prices at every point in time represent the unbiased estimate of the true value of the firm. Such claims would have been true in ideal worlds where investors and speculators would not face liquidity constraints, tax considerations, institutional limitations, and many other externalities. Add to this list “popular delusions and madness of crowds” and you start questioning whether the even weak form of EMH is possible. I’m not suggesting to discard EMH. In the long term, information gets embedded in stock prices, but it may take a while. Quoting the “father of value investing” (Benjamin Graham): “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” In other words, in the short term, market “noise” might drive prices of particular stocks or even group of stocks significantly away from its intrinsic value and keep it there for a while. Just think of any stock market bubble. Unfortunately, taking advantage of such cases of mispricing is not easy. John Maynard Keynes reminds us that “the market can stay irrational longer than you can stay solvent.” As such one should expect that no trading strategy will consistently produce superior returns. This is one of the main implications of NMH. However, no need to despair. Based on academic research, Jeremy Siegel (father of NMH) concludes that over the long term it is possible to achieve better risk-adjusted return than holding very broadly diversified a portfolio. Jeremy Siegel mentions that taking advantage of “noise” might be achieved through “fundamental indexation” (i.e. weighting your holdings based on “fundamental factors”) instead of capitalization-weighted indexation. In other words, if the investor is able to stomach underperformance of his/her portfolio in short- and medium-term (which would be years), they might be well compensated in the long term for taking advantage of “fundamental factors”. We will discuss two of such fundamental factors – size (small caps) and style (value stocks) – in this article. Why value stocks and small capitalization stocks “beat the market”? Efficient Market Hypothesis (EMH) implies that strategy achieving higher absolute return is likely to be higher risk strategy. In other words, investors are compensated for taking the risk (only systematic risk, according to MPT) and, therefore, high risk equals potentially high return. As such, EMH advocates would claim that long-term outperformance of small caps and value stocks is due to higher risk. One can see why small caps would be a riskier proposition, however, value stocks are already selling at discount – how can they represent increased risk? One would expect that high-flying “hot” stocks with high multiples would expose investors to larger potential crash in price, compared to already “cheap” value stocks. However, EMH advocates would remind us about “value” trap. It’s when value stock continues to remain cheap for years and potentially keeps on getting worse. Instead of presenting you with arguments and counterarguments of various schools of thought, let me present you my version of why value and small-caps outperform. Small caps: Are riskier: typically higher volatility, higher chance to experience financial troubles (i.e. small to secure stable funding sources or access markets during rough patches). Are less liquid: low float, low trading volume, and higher bid-ask spreads. Are “under the radar”: not enough analyst coverage and institutional limitations (big asset managers or speculators might find it hard to establish meaningful exposure to single small-cap stock due to the limited amount of available issuance; at the end of the day, we are talking about small-cap stock). Value stocks: Might experience “value trap” (we will discuss how to address this concern in our next article). Are not “hot” names: typically boring names with seemingly mediocre stories. In “Stocks For the Long Run”, Jeremy Siegel presents information regarding the historical performance of small caps and value stocks from 1926-2012. For more details, please refer to his book; here, I’ve provided relevant excerpts: (click to enlarge) Source: Jeremy Siegel (click to enlarge) Source: Jeremy Siegel How do I know that small caps and value stocks will continue outperforming? Past performance is not a guarantee of future performance, isn’t it? “History does not repeat itself, but it often rhymes”. And, I think that’s the blessing for those who will follow the recommendations in these articles consistently and disregard short-term market gyrations. Just because history does not exactly repeat itself, investors tend to lose confidence in proven strategy after few years of underperformance. Some of the main reasons are thought to be human nature and memory. It is only human to throw away proven strategies and jump on the bandwagon as they face “this time it’s different” environment. This was the case during tulip mania of early 1600s and in recent history (just recall peak of the dot-com bubble in 2000). How many of such cases of mass disillusionment were experienced during these 400 years? And what lessons we learned? It either we believe that ” this time it’s different” or memories faded away since the last roller-coaster. Or, perhaps, we remember that experience vividly and will try to outsmart the market this time, by jumping off the train just before it falls into the abyss. There is, of course, an argument that market participants realized the existence of small cap and value phenomenon and traded up these stocks. Supporters of such arguments claim that due to “arbitraging away” these opportunities – small caps do not offer any alpha, it’s purely higher beta play and value stocks correctly reflect the valuation of less than stellar companies (again, no alpha here). We will review if such arguments are warranted in the future articles when we finalize our proposed allocations for a satellite portfolio. Before we discuss execution, let us draw a preliminary conclusion. As a group of investors continue jumping from one bandwagon to another in search of alpha, another more passive investors might benefit from staying put. Unless, you have a crystal ball, it’s advisable to identify portfolio allocation and don’t deviate materially from these target allocations. In the long term, tilting your portfolio in the direction of small caps and value stocks is expected to lead to superior returns. However, it might take years before you achieve superior return; markets might favor large caps and/or growth stocks for long stretches of time. List of ETFs For core portfolio, recommended allocations are presented in previous two articles. For satellite portfolio, I suggest tilting portfolio to small-cap stocks and value stocks. Following are ETFs that I recommend to achieve this goal: (click to enlarge) Source: Vanguard, and my own recommendations As you can notice, all four are Vanguard ETFs. I recommend Vanguard ETFs mainly because of their low fees (I am not affiliated with Vanguard and do not receive any compensation for recommending its products). There are other low-cost ETFs as well; typically, I use other ETFs for very specific tax reason. I will plan to cover this topic in my book (expected to publish in Amazon in December 2015 or January 2016) or potentially in the future Seeking Alpha articles. Following table provides a brief summary about the recommended ETFs: (click to enlarge) Source: Vanguard Size (i.e. small cap) and style (i.e. value) are not the only factors that historically proved to generate superior returns. We will discuss “other” factors in the next articles and determine sensible allocation to various factors. At that point, I will present detailed execution plan (i.e. the list of all ETFs and allocations to each). To conclude, the superior performance of small cap and value stocks (and some other factors that we will discuss in the next article) has been identified decades ago. However, the opportunity is still there. Maybe sometime in the future large portions of stock investors develop longer-term approach, bid up the prices, and bring systematic alpha of small cap and value stocks to zero. That “sometime in the future” could be a so distant phenomenon that might not even happen during my lifetime. To quote from John Maynard Keynes: “In the long run we are all dead.” In a meantime, I don’t mind additional 2-4% return compounding for decades. References/Bibliography Jeremy Siegel, The Noisy Market Hypothesis , Wall Street Journal, June 14, 2006 Jeremy Siegel, The Future for Investors: Why the Tried and the True Triumph Over the Bold , 2005 Jeremy Siegel, Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies , 2014 Next article: Noisy Market Hypothesis: Tilt Your Portfolio to Achieve Superior Returns (Part 2) Disclaimer: I’m not a tax advisor, please consult your tax advisor for any tax related matters. ETFs covered: The Vanguard Mega Cap Value ETF (NYSEARCA: MGV ), the Vanguard Value ETF (NYSEARCA: VTV ), the Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ), the Vanguard Small Cap Value ETF (NYSEARCA: VBR ), the Vanguard Small Cap ETF (NYSEARCA: VB ) and the Vanguard Small Cap Growth ETF (NYSEARCA: VBK ) [1] Once again, I would like to highlight that I’m not supporter of buying spot commodities (e.g. gold bars, silver coins) – I suggest using commodity futures. I will plan to write an article on this topic in the future.