Scalper1 News
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. Scalper1 News
Scalper1 News