Archive for the ‘Commentary’ Category.

A Look At Global Aristocrats Index

The international index that I have picked is the S&P Global Dividend Aristocrats Index. Its ETF is the SPDR S&P Global Dividend ETF, WDIV.

The Global Dividend Aristocrats Index is based on the S&P Global BMI (Broad Market Index). Stocks in the Global BMI must have a market cap of at least USD $100 million, must meet liquidity standards (at least 20% of a stock’s market cap should be traded in a twelve-month period for stocks based in developed markets, 10% for emerging markets), be in a developed or emerging market, have at least 50% of their shares available for public trading, and it only includes common stocks (no fixed-dividend shares, closed-end funds, investment trusts, convertible bonds, unit trusts, equity warrants, mutual fund shares, limited partnerships, business development companies (BDCs) and no preferred stock with a guaranteed fixed return).

The S&P Global Dividend Aristocrats Index is weighted by yield. The criteria are:
– The stocks are taken from the S&P Global BMI (Broad Market Index)
– It includes stocks with market caps of at least USD $1 billion.
– Stocks have a maximum payout ratio of 100%, or not have a negative EPS
– Max yield of 10%
– The goal is for the index to contain 100 stocks (there are rules for what happens if less that 100 meet the criteria)
– No more than 20 stocks can come from one country (right now, US and Canada each have 20)
– Stocks must have increased or at least maintained their dividend for at least 10 years (since the index is weighted by yield, I do not know if a dividend grower would take priority over a dividend maintainer)

I assume one reason they include dividend maintainers is that raising dividends may not be as common in some countries. In many countries, companies do not pay a set amount every quarter like American companies do.

There is an S&P International Dividend Aristocrats Index. It is the Global Aristocrats Index without any US stocks. Its ETF, FID, has a high expense ratio of 0.60%. I find it odd that the ETF page on ETFDB does not have a link to the actual ETF. Even though it has a high ratio, the website looks cheap and does not inspire confidence. I find it odd that index providers do not license their indexes (or at least related indexes) to one firm. Or at least reputable firms. Frankly, I don’t trust anybody from Wheaton.

“S&P”, “Dividend Aristocrats”, and possibly a few other terms are trademarks of S&P Dow Jones Indices LLC.

Big Jim will invest his money with companies he thinks he can trust.

“Behold The Bridegroom” by Γύζης Νικόλαος (Nikolaos Gyzis) (1842 -1901), on exhibit at the National Gallery in Athens, assumed allowed under Fair Use.

A Look At Dividend Aristocrats

My look at dividend indexes brings me to the Grandaddies of all dividend indexes: The S&P Dividend Aristocrats and the S&P High-Yield Dividend Aristocrats.

The S&P Dividend Aristocrats is a subset of the S&P 500, and the S&P High-Yield Dividend Aristocrats of the S&P Composite 1500, which is a combination of the large-cap S&P 500 (stocks with market capitalization of $6.1 billion or more), the mid-cap S&P 400 (stocks with market caps between $1.6 billion to $6.1 billion) and the small-cap S&P 600 (stocks with market caps between $450 million and $1.6 billion).

The S&P Composite 1500 index has the following criteria:
– The stock must be for a US-based company (filing a 10-K, having a plurality of its assets in the US, or traded on a US exchange
– The stock must be traded on one of the following exchanges: NYSE, NASDAQ, Investors Exchange (IEX), a Cboe exchange (BZX, BYX, EDGA, E)
– Only common stocks and REITs are eligible
– At least 50% of the shares outstanding must be available for trading (not held by insiders, private equity or venture capital firms or sovereign wealth funds; presumably they would buy and sell on private markets)
– The stocks should have positive GAAP earnings for the most recent quarter, or averaged over the most recent four quarters
– The stocks should have adequate liquidity (such as trading 250,000 shares a month)

The Dividend Aristocrats Index has the following criteria:
– Stocks must be part of the S&P 500.
– Each stock must have a history of increasing dividends for at least 25 consecutive years.
– Each stock must have a market cap of at least $3 billion as of the rebalancing reference date. The S&P 500 has a minimum cap of $6.1 billion; I am not sure why there is a discrepancy.
– Each stock should have a daily trading volume of at least $5 million for the three months prior to the rebalancing reference date.
– The index should have at least 40 members. Hands will be waived if the number is below 40.
– No sector should constitute more than 30% of the index.

The Dividend Aristocrats Index is an equally weighted index. It currently has 57 stocks.

The High Yield Dividend Aristocrats Index has the following criteria:
– It includes stocks that are part of the S&P Composite 1500.
– Stocks must have raised their dividend every year for at least 20 years.
– Stocks should have a market cap of at least $2 billion on the rebalancing reference date.
– Each stock should have a daily trading volume of at least $5 million for the three months prior to the rebalancing reference date.
– No stock should make up more than 4% of the index.

The High Yield Dividend Aristocrats Index is weighed by yield, so higher yielding stocks make up a greater proportion of the index. It could have stocks with low yields, they just wouldn’t make up much of the index. Perhaps “High Yield” is a misnomer. It currently has 111 stocks.

Out of all of the indexes I have looked at, I think I like these two the best. There are no proprietary eligibility criteria, there are no analysts estimates or consensus; it is all data and rules driven. Yes, it looks backwards, but I prefer that over someone’s guess about the future. We cannot argue about whether the past happened, just about what it tells us. And no buybacks. It is all about the payouts, baby.

The Morningstar US Dividend Growth Index eliminates stocks whose yield puts them in the top decile, I do not think it is a necessary step for a dividend growth index. I think a couple of decades of dividend increases will make disaster less likely to happen.

The fund for the Dividend Aristocrats, NOBL, has an expense ratio of 0.35%. The fund for the S&P High Yield Dividend Aristocrats Index, SDY, also has an expense ratio of 0.35%. SDY has a nice yield. I will read the prospectus and perhaps sell my shares in VIG and VYM and get SDY.

“S&P”, “Dividend Aristocrats”, and possibly a few other terms are trademarks of S&P Dow Jones Indices LLC.

Big Jim is looking at the tried and true.

Painting of the Visitation by Giotto di Bondone (1267 – 1337), assumed allowed under Fair Use.

A Look at Another Dividend Growth Index

One fund I am thinking about buying is the iShares Core Dividend Growth ETF (DGRO) (ETFDb page here, iShares page here).  It tracks the Morningstar US Dividend Growth Index.

You can get the methodology docs for Morningstar indexes here. I do not think you can get to their index page from their main page or vice versa. I had to google to find it. Their methodology documents have some graphics summarizing the base criteria, and are probably the easiest methodology documents that I have gone through so far (out of the three firms’ documents).

The Morningstar US Dividend Growth Index is a subset of the Morningstar US Market Index. The Morningstar US Market Index has the following criteria:
– It includes mostly common stocks, REIT, or tracking stocks which trade on one of the three major U.S. exchanges: The New York Stock Exchange, Nasdaq, or the NYSE Market LLC. It may include ADRs if there is no corresponding stock.
– Each security must have no more than 10 nontrading days in the prior quarter
– Each security must be in the top 75% of remaining companies based on liquidity score, determined by trading volume over the prior six months.

The Morningstar US Dividend Growth Index takes the Morningstar US Market Index, and includes stocks with the following criteria:
– It only includes stocks that pay qualified income as dividends (so REITs are out)
– A stock’s dividend yield must not be in the top 10% of the parent index (so companies with super high yields are excluded)
– A stock must be currently paying dividends and have at least five years of uninterrupted annual dividend growth
– “Security must have a positive consensus earnings forecast and a payout ratio less than 75%.”
– If a stock does not raise or decrease its dividend, but does execute a share buyback, it can remain in the index

There are a few things that I like about this index, and a few things that I do not like.

Obviously, I like the fact that it is a dividend growth index. Five years is a short threshold, but it’s better than none. I also like that they exclude stocks with the highest yields. Sometimes a high yield can be a sign of trouble. I think more dividend indexes should do this, particularly those (like the FTSE High Dividend Yield Index) that are not dividend growth indexes. This exclusion becomes less necessary with a higher time threshold.

I do not like that it considers buybacks as some sort of equivalent to dividend increases. A lot of people say that buybacks “return cash to shareholders”, but that is not true. It’s just another example of the Greater Fool Theory. Dividends are actual cash to shareholders, not “I hope somebody will buy it for more than I did”, which does not always work. And as we saw during the Great Recession, will probably not happen when you really need it to happen. I think buybacks are a plague on the financial ecosystem. We got along fine without them until 1981, I think we should go back to that. After all, it is the “Morningstar US Dividend Growth Index”, not the “Morningstar US Dividend Growth Or Something That Only Stupid People Think Is Close Enough Index”. Either a company increases its dividend, or it does not. End of story. If I wanted to deal with the stupidity of buybacks, then I would find a buyback ETF.

I am also leery of this criterion: “Security must have a positive consensus earnings forecast and a payout ratio less than 75%.” First off, whose consensus? I do not like the idea of someone’s guesses forming the basis of my retirement. And I am not too sure about the payout ratio criterion either. While a lower ratio is better, sometimes companies have to go into debt to maintain their dividend, and have better ratios when things turn around. For example, I did not buy shares in Old Republic International (ORI) when I started looking at DGI stocks because although they were increasing their dividend, they were losing money. But now they seem to be doing fine. How will this index do in a recession?

How this index would do in a recession is a concern to me. The methodology document states: “The inception date of the index is April 7, 2014, and the performance inception date of the index is December 19, 2003, when the first back-tested index value was calculated.” However, I have not been able to find any performance data for this index going back to 2003. Plus, since they are using consensus forecasts, it is not truly rules-based, so backtesting may not be too useful.

So far, I think I like the NASDAQ US Broad Dividend Achievers Index (DAA) index the best, but its ETF has pretty high costs.

“Morningstar” and other terms with the word “Morningstar” (like the names of their indexes) are trademarks of Morningstar, Inc.

Big Jim thinks that an index should not rely on someone’s opinion.

Painting of the Resurrection (“Noli me tangere”, aka “I’m too sexy for you”) by Giotto di Bondone (1267 – 1337), assumed allowed under Fair Use.

Too Damn High” image from ImgFlip, based on “The Rent Is Too Damn High” meme, assumed allowed under Fair Use.

A Look at High Yield Index

One of the funds that I am invested in is the Vanguard High Dividend Yield ETF (VYM).  Another one is the Vanguard International High Dividend Yield ETF (VYMI). They both track the FTSE High Dividend Yield Index, with VYM holding companies that are based in the USA or trade on American stock exchanges, and VYMI holding stocks from the rest of the world. The FTSE High Dividend Yield Index is a subset of the FTSE All-World Index (you can find the methodology at this link). All of the dividend indexes are sub-indexes of general global or national stock indexes.

They have a lot of rules about what happens when there is a stock split, or a merger, and how often the stocks are rebalanced. I am not going to go into too much detail about any of those rules since they are generally the same, and not too relevant.

The FTSE All-World Index has the usual requirements about longevity, market cap and liquidity as other world indexes. It excludes MLPs, LLPs and LLCs. For developed markets, at least 5% of the voting shares have to be owned by “unrestricted shareholders”, which I think means entities not associated with the company. The companies have to have a free float of at least 5%. The company, exchange and country should have few restrictions on foreign ownership. The liquidity threshold is that at least 0.04% of a company’s shares should turn over every month.

The FTSE High Dividend Yield Index excludes REITs and any companies that are not forecast to pay any dividends over the next 12 months, and ranks what is left by yield. The stocks in the index are weighted by “investable market capitalisation, i.e. after taking account of free float and foreign ownership restrictions”. It calculates the dividend yield using “the most recent I/B/E/S forecast DPS value”.  (Forecast by whom? I am not too clear.) I think I/B/E/S refers to Institutional Brokers’ Estimate System (IBES) It is made by Thompson Reuters.

In section 5 of the methodology document, it says: “The FTSE All-World High Dividend Yield Index aims to contain the highest yielding stocks accounting for 50% of the investable market capitalisation of the Eligible Securities as defined in Section 4.” I guess this means they take the stocks with the highest yield and go down the list until they get enough stocks to make up 50% of the total market capitalization.

Like the pages about IBES linked above say, it uses analysts’ estimates. Why should I base my retirement on analysts’ estimates? Why not just use past data like other indexes? I know that past performance is not a guarantee of future results, but neither is someone’s guess. Besides, we are dealing with publicly traded corporations. Why not just use the publicly available data?

This is NOT a dividend growth index. This is just looking at stocks based on how big analysts think the yields will be. So it could have a lot of weak companies that are struggling to maintain their dividends.

If a company increases its dividend for a decade, it is probably in pretty good shape. Why rely on someone’s guess on companies that do not increase dividends?

The use of estimates over historical data is one reason that I am thinking about selling these funds. Another is that they are not really dividend growth funds. I admit, I got them to juice performance a bit, but I am starting to reconsider that. Another thing that bothers me is that they just take all stocks that have a yield. As any good investor knows, a yield can be too high, even a sign of trouble. Some indexes exclude stocks whose yield puts them in the top decile in terms of yield. Granted, if a fund has a few hundred stocks, then any fallout from bad stocks would be minimized.

Nevertheless, since these funds are not true DGI funds and use analysts’ estimates as opposed to historical data, I am considering replacing them. Honestly: Did Vanguard get all the crappy indexes? Is that why they are so cheap?

FTSE refers to the FTSE Group.

Big Jim has decided to be more focused with his ETF investments.

Byzantine icon of Mary Magdalene, assumed allowed under Fair Use.

A Look At Dividend Appreciation Index

One of the funds that I am invested in is the Vanguard Dividend Appreciation ETF (VIG). It has stocks in the NASDAQ US Dividend Achievers Select Index. The index has the symbol DVG, although you cannot trade the index directly. There is no stock or ETF with the symbol DVG.

All of the dividend indexes are sub-indexes of general global or national stock indexes. They have a lot of rules about what happens when there is a stock split, or a merger, and how often the stocks are rebalanced. I am not going to go into too much detail about any of those rules since they are generally the same, and not too relevant. There are also a lot of rules about how the daily prices of the indexes are calculated.

The NASDAQ US Dividend Achievers Select Index is a subset of stocks that are in the NASDAQ US Broad Dividend Achievers Index (DAA). The NASDAQ US Broad Dividend Achievers Index itself is a subset of the NASDAQ US Benchmark Index (NQUSB).

As far as I can tell, the NASDAQ US Benchmark Index (NQUSB) is covered in the document “NASDAQ Global Index Family Methodology” (go to https://indexes.nasdaqomx.com/Resource/Index/Methodology and search for “Global”).

Section 2 gives the basic criteria:

  • Must be listed on an Index Eligible Stock Exchange (section 2.2.1). Generally, an exchange is eligible if it does not put too many restrictions on foreign ownership.
  • Must be an eligible security type (section 2.2.2). Common shares are eligible, as are preferred shares, REITs and depository receipts. Generally, ETFs, preferred shares, closed-end funds, limited partnerships, limited liability companies and pass-through entities are not eligible.
  • Must have a minimum worldwide market capitalization of $US 150 million (section 2.2.3)
  • Must have a minimum three-month average daily dollar trading volume of $US 100 thousand (section 2.2.4)
  • Must have a minimum free float of 20% (or in some cases 5%) (section 2.2.5)
  • Must have “seasoned” for at least three months on an eligible stock exchange (section 2.2.6)
  • Must be in a country classified as Developed or Emerging (sections 3.1 and 3.2)
  • Must not be issued by an issuer currently in bankruptcy proceedings (section 6.2.1). I guess in some countries a bankrupt company can still be traded; I am pretty sure in the USA bankrupt companies are delisted.

So I guess the NASDAQ US Benchmark Index (NQUSB) has stocks that are eligible to be in the NASDAQ Global indexes and trade on US exchanges.

The NASDAQ US Broad Dividend Achievers Index (DAA) is comprised of US accepted securities with at least ten consecutive years of increasing annual regular dividend payments. Index eligibility is limited to specific security types only. The security types eligible for the Index include common stocks, limited partnership interests, shares or units of beneficial interest and shares of limited liability companies.

To be eligible for inclusion in the Index a security must meet the following criteria:
– be included in the NASDAQ US Benchmark Index (NQUSB) except for limited partnerships;
– limited partnerships must be listed on the Nasdaq Stock Market® (Nasdaq®), the New York Stock Exchange, NYSE American, or the CBOE Exchange;
– have a minimum three-month average daily dollar trading volume of $1 million;
– have at least ten consecutive years of increasing annual regular dividends based on ex-date;
– one security per issuer is permitted. If an issuer has multiple securities, the security with the highest three-month average daily dollar trading volume will be selected for possible inclusion into the Index;
– may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being Index eligible; and
– may not be issued by an issuer currently in bankruptcy proceedings.

The NASDAQ US Dividend Achievers Select Index (DVG) is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments. DVG only includes common stocks.

To be eligible for inclusion in the Index a security must meet the following criteria:
– be included in the NASDAQ US Broad Dividend Achievers Index (DAA) excluding limited partnerships and REITs; and
– additional proprietary eligibility are applied.

So it is interesting that limited partnerships are not in the general US index, allowed in the DAA, and excluded again in the DVG.

One thing that really bugs me about DVG is the “additional proprietary eligibility” criteria. What are the additional proprietary criteria? Am I wrong to get hung up on this? I would like to know how my golden years are going to be funded. But they won’t tell me. Besides, “proprietary criteria” sounds like active management, not indexing.

I have downloaded the holdings for the indexes, and DAA has oil and gas companies and more utilities; DVG has one oil company and a few utilities companies. For telecom, DAA has AT&T, Inc., Telephone & Data Systems, Inc and Verizon Communications, Inc., while DVG only has Telephone & Data Systems, Inc. Lots of profitable stuff is not in DVG, and I think it is due to the mysterious “additional proprietary eligibility”.

You can only download this information from the NASDAQ site during standard business hours. I would prefer being able to get this info 24/7, since I am at work during standard business hours. You can get the annual reports for the ETFs anytime.

So between the lack of information about the holdings from NASDAQ, the lack of a few profitable companies and industries from DVG and the “additional proprietary eligibility”, I am starting to sour on DVG. I will look at other indexes. I like the fact that Vanguard has super-low cost, but I don’t like getting a low-cost black box. I really do not like the “additional proprietary eligibility” part. If I wanted that, I would go with an actively managed product. Maybe all the good indexes were taken by the time Vanguard decided to make some dividend growth ETFs.

Some of the material in this post was taken from material for the NASDAQ indexes. Some of the terms used in this post are NASDAQ trademarks. Generally any phrase with the word “NASDAQ” in it.

Big Jim likes his indexes to be transparent.

The Immaculate Conception” by Giovanni Battista Tiepolo (March 5, 1696 – March 27, 1770), assumed allowed under Fair Use.

I Am Looking Into a Commodities Fund

 I am thinking about buying shares in a commodity fund. I am looking at the iShares Commodities Select Strategy ETF.

I was inspired to look at this fund after an episode of one of the podcasts I listen to called The Index Investing Show with Ron DeLegge. He also runs a couple of other sites: Portfolio Report Card and ETF Guide.

Ron DeLegge thinks everyone’s portfolio should have three parts to it. The first is the Margin of Safety. This is money that does not lose value and that you cannot afford to lose. He never calls it an FDIC-insured savings account, but that is what it sounds like. The second is your Core Portfolio, which should be at least 51% of your portfolio. It should be in low-cost index ETFs covering all the major asset classes: Stocks (domestic and international), bonds (domestic, international, government, corporate), commodities, real estate and cash. Whether the Margin of Safety can count as the cash part is a bit unclear to me, but I think it should be cash in your brokerage account. The final part is the Non-Core Portfolio. This can be individual stocks, futures, day trading, currencies, venture capital and private equity, or a fund that only covers part of the commodity sector.

He liks to criticize Jim Cramer, but that is similar to what Cramer says: You should put most of your money in indexes and only play with any “Mad Money” left over. At least, that is what I got out of his books [Note 1].

Ron also does Portfolio Report Cards. He grades people on risk (whether your portfolio’s risk level matches your self-description), cost, taxes, performance and diversification. He judges diversification based on whether or not you have split your portfolio into the three sections above, and if your Core Portfolio has all the major asset classes covered.

One thing that he has noticed is that a lot of people have no or too little exposure to commodities, and he says he does not understand why this is. I cannot speak for all investors, but I can tell you why I have not had any commodity exposure until now.

One reason is that a lot of commodity funds do not pay dividends. If a stock or fund does not pay, then I do not play.

Another reason is that a lot of commodity funds send a K-1 for tax purposes. I do not want to deal with a K-1. 1099s are just simpler. I know MLPs are going out of style, but I have read that if your have income above a certain threshold from an MLP in a Roth IRA, you could still pay taxes on it. I think that is true of any partnership and anything that uses a K-1 if the asset is held in a Roth IRA. Partnerships do not pay tax because they just send the profits to the partners. (This is why I do not think the “double taxation” of dividends is a bad thing: Corporations exist to shield their members from liability.) But if an investment in a Roth uses a 1099, then you are in the clear. The ETF that Ron uses as his reference, GCC, violates both of my criteria.

When I sold my stocks and got into ETFs, I put my money into dividend stock ETFs, bond ETFs, and for the first time I got into real estate ETFs. For all three of these, I got both domestic and international ETFs. I also got a utilities ETF for a bit more juice. But all the commodities funds were either K-1 funds or had no payout.

A caller asked about GMOM (Cambria Global Momentum ETF) and Ron recommended GAL, the SPDR SSgA Global Allocation ETF. They are multi-asset funds. I think the caller wanted to be in one fund that could cover the Core Portfolio. I was inspired to look at multi-asset ETFs from the top three issuers (Vanguard, State Street and BlackRock’s iShares). This led me to COMT.

COMT is in all the commodities sectors, it uses a 1099, and it pays a dividend. I am going through the prospectus and reports. I am leaning towards buying it.

I might not get an A if I get a Portfolio Report Card, but Ron DeLegge has influenced my thinking. But he is a bit too crypto-friendly for me. I really do not think crypto will amount to anything. People who hate the government used to be happy just complain and shake their fists at the cloud. Now they use enough electricity to power an entire country.

Ron DeLegge does not really make predictions. Unlike gold bugs and inflation bears, he helps you to prepare for any market scenario.

Note 1: There was a trader who went by the handle Airelon who (if I remember correctly) had a similar idea. He tried a few times to trade, and kept losing everything. Then he came across the idea of trading buckets, and put each bucket into different types of assets, depending on risk. If his riskiest trade lost money, he did not use his “safe” money to bail the bad investment out. He had a podcast for a while, as well as a blog. He was on Seeking Alpha. He left to be part of some company called Sharpe Trade, but the website is gone and the Twitter account was rebooted and is now all crypto. (I think Airelon might have some crypto, but would be skeptical of the “Cryptocurrency will save civilization!!” claims going around.) His YouTube channel is empty, but somehow a few people have preserved them in playlists: Airelon Trading and Psychology – Aileron Trading.  He moved to Mexico and got off of social media. I did have a brief chat with him on Twitter in 2014, but he seems to have disappeared from Twitter. He does have a private Instagram account, but since it’s private, I have no idea when he last posted. He has a Google Plus account with posts up to mid-2016.

Big Jim is looking into commodities because he is a down to earth guy.

 “Dormition of the Virgin”, a holy snuff painting by El Greco (1541 – 7 April 1614), at El Greco’s site, assumed allowed under Fair Use.

Stock Buying Rules

As I was going through my stuff, I found a list of rule for buying stocks. I assume I wrote them while watching Jim Cramer.

  1. Never buy on margin.
  2. Never use market orders.
  3. Know what you own.
  4. Do not own too many low-priced stocks.
  5. Be diversified.
  6. Own dividend stocks.

I have bought with market orders. I plan on owning stocks/ETFs for a long time, so I don’t think that paying a bit more is that big of a deal. Plus, many times when I put in limit orders, they sit unfilled for weeks, so I just bite the bullet and buy. So far it has worked out.

Big Jim knows the way to succeed in the stock market is to have a plan.

First vision of Hildegard von Bingen (1098-1179), assumed allowed under Fair Use.

Revisiting Bad Dividend Advice

A little over two years ago I commented on an article recommending people buy Frontier Communications because it had a high dividend yield of 9.6%. I explained that choosing a stock simply because it has a high yield is a bad idea. I wrote that “dividend growth investing”  (or DGI) is a subset of “dividend investing”, and why it was better than simply chasing yield. I also outlined the general criteria that DGI investors use to select stocks. Even though I put most of my money into dividend ETFs, I still think DGI is the way to go and is a good method for selecting stocks. I think that what has happened to Frontier Communications over the past two years shows that.

First off: They are no longer paying their dividend on their common stock. Their last dividend was announced on October 17, 2017, and paid on December 15, 2017. According to their press release page, the only dividend since then was on their preferred stock. I think we can ignore this for a few reasons:

  1. The October 17, 2017 announcement was for both common and preferred stock.
  2. Most people (and institutional investors) buy more common stock than preferred stock.
  3. The article I was responding to in 2016 did not mention preferred stock, so I assume they were talking about common stock.

They started paying dividends in 1972 to 1998, with a few cuts along the way. Then, a telecommunications company stopped paying dividends during the dot-com boom. They resumed in 2004. There were a few dividend raises, but not enough to meet even a DGI threshold of 5 years, which is the lowest I have seen from any DGI investor. But there were more freezes and cuts than raises. They also had a reverse split in 2017, which is never a good sign. If you look waaaaaay at the bottom, there is a row for 2018 that says “Dividend omitted.” I admit, I did not see the row for 2018 at first. Probably because they put it at the bottom out of order.

Here is their dividend data from their web site:

Year Div In Cents
Total dividends in 2017 3.441667
Total dividends in 2016: 6.30
Total dividends in 2015: 6.30
Total dividends in 2014: 6.00
Total dividends in 2013: 6.00
Total dividends in 2012: 6.00
Total dividends in 2011: 11.25
Total dividends in 2010: 13.125
Total dividends in 2009: 15.00
Total dividends in 2008: 15.00
Total dividends in 2007: 15.00
Total dividends in 2006: 15.00
Total dividends in 2005: 15.00
Total dividends in 2004: 37.50

If you were hoping to get bailed out by capital gains (never a good idea), you were disappointed there too. On February 1, 2016, the stock was around $70. It peaked at $84 in April, 2016. It hit $70 in August, 2016, and just kept dropping. Now it is at about $7.69. Granted, I always say that price alone is not important, but a drop from $84 to $7 is bad. But I think the DGI criteria are a good signal of the health of a company. A lot of people invest based on price, and they think that a fall in price is a problem. The reality is that a fall in price is the result of underlying problems.

The drop in price would not be a surprise if you looked at their cash flow statements. According to Morningstar, here is their net income from their cash flow statements for the past 10 quarters:

Quarter Profit or (Loss) in Millions
2015-12 (103)
2016-03 (186)
2016-06 (27)
2016-09 (80)
2016-12 (80)
2017-03 (75)
2017-06 (662)
2017-09 (38)
2017-12 (1029)
2018-03 20

So in 2018, they made $20 million, after spending two years losing $2.2 billion. Good times.

A lot of indexers might look at this company and point to it as an example of why dividend investing is a bad idea. People need to realize that DGI investors do not simply chase yield. DGI investors look at the cash flow, the payout ratio and the dividend history. Using the DGI criteria is not a guarantee, but it increases the odds of success. You cannot just point to an individual stock and say to someone, “If you put money in that stock, you would have lost all of it! Therefore, your style does not work!” That objection assumes that a DGI investor would have put money into a bad stock, like Frontier Communications. I think for Frontier, using DGI criteria would have saved an investor from disaster.

Big Jim likes sustainable cash flow.

“DGI” can refer to “dividend growth investing” or “dividend growth investor”, and yes, sometimes I write “DGI investor”, which could be redundant.

Image from Memgenerator, assumed allowed under Fair Use. I have no idea if the misspelling of “advice” is intentional.

Why Investing For Dividends Is Better Than Capital Gains

There are many ways to invest in the stock market.

There are a few I will not discuss here, such as options and other derivatives. I don’t have time to try to understand them, and I honestly think that a lot of the people that deal with these instruments on a daily basis do not understand them too well themselves.

I will discuss two ways in this piece. The first is investing for capital gains. This is done by trying to buy at a relatively low price and hoping to sell later at a higher price. The other is investing for cash flow. This is what I do by investing in stocks that increase their dividends every year.

Even when I was growing up, I would hear people say that the way to make money in the stock market is to buy low and sell high. The capital gains model is drilled into people, and most people never become aware of any alternative. I did not until stocks started going down in 2008. It was not until later that I learned that reinvesting dividends are responsible for at least half of the gains in the stock market in the 20th century. Until about the 1980s, investing for dividends was more common. It is a self-reinforcing cycle. Almost every financial site has charts for stock prices. Technical analysis is mostly about looking at charts of the stock price. But there are far fewer charts for dividends.

During the dot-com boom, prices were rising at an accelerating rate. Why invest for a 3% yield when your stock doubles every year? Because eventually it will stop doubling every year. We saw this again in 2008: Many stocks went down in price by a lot, even stocks that paid dividends. But many of those dividend paying stocks still increased their payouts.

I think that capital gains investing is no different than the Greater Fool Theory.

Granted, these are not entirely mutually exclusive. I have said on this site that “price doesn’t matter”. Actually, it does not matter as much to a dividend investor as it does to a capital gains investor. If one of my stocks goes to $0, then I will get no income out of it. (But it would probably have cut its dividend before that happens.) “Price doesn’t matter as much as you think it does” is more accurate, but has a bit less punch as a catchphrase.

You can only sell once. Dividend investing is like having an animal for its milk or eggs or wool. You can milk a cow, harvest a chicken’s eggs and shear a sheep multiple times throughout its life. But you can only get meat from them once. And you can only sell a share of stock once. If you are only owning something in order to sell it later, you only really get the benefit of owning it when you stop owning it. I think that is pretty strange.

I don’t think pigs produce any goods while they are alive, so perhaps pigs are a better analogy to stocks that do not pay dividends.

You can sell a stock that pays dividends for capital gains. That makes investing for dividends better than just investing for price appreciation. But relying solely on price can be more risky. You can only make money one way, and only at one time: when you sell.

And you are assuming that you will get the price you need when you need it. Liquidity dries up when people need it the most.

Captial gains investing is more like the fixed mindset, and dividend growth investing is more like the growth mindset.

Selling means you are dipping into principal. Eating your seed corn. Someone once compared selling shares for profit like sawing off a tree branch while you are sitting on the wrong side of the branch.

“Bahram Chubina Kills the Lion-Shaped Ape Monster”, Folio from a Shahnama (Book of Kings) by Abu’l Qasim Firdausi (935–1020), available at The Metropolitan Museum of Art, assumed allowed under Fair Use.

Thoughts On Dividend Income

This is a post about dividend income

There has been some drama in the dividend growth investing (DGI) blogosphere. The guy who ran Dividend Mantra sold it to an outside company, and for months there was little original content. The sellers said the original author (henceforth DM) would still provide content, but there was nothing.

There were a lot of comments expressing discontent, and those posts were later deleted.

This led to some discussion on other sites. One was Mr Money Mustache.

Most people there are indexers and said DGI is not as good. Obviously, I disagree.

One person said DM was stupid for only using taxable accounts and putting no money into tax-advantaged accounts. That I agree with.

A few disputed the notion in DGI that selling shares is like sawiing off a tree branch while you are sitting on it. I agree with that metaphor. You can only sell shares once. But many companies pay dividends for years. It’s sort of like a cow or a chicken. You can get milk or eggs from them multiple times, but you can only eat them one time. You can only sell a share once. My goal is to never sell and to live off the dividend income.

Some on the forum that the DGI investors might not reach the goal of living off dividends. That is true, but that is not a valid objection to DGI. ANY plan could fail. If that invalidates DGI, it invalidates everything.

One person pointed out that while index investing can be judged by total return, DGI should be judged by the growth of the dividend income. Many on the forum disagreed, and insisted total return is the ONLY way to judge a portfolio. I disagree. While it is bad if a stock goes to 0, the point of DGI is to not rely on price alone. We saw a lot of people get hosed relying only on price in the dot com bust with stocks, and for just about every asset class in the Great Recession. Meanwhile, many DGI stocks kept paying. The funny thing about relying on price is that when you really need money, usually the price goes down. Dividends are not guaranteed, but neither are capital gains. And you might not get them when you REALLY need them.

Maybe things will change in the future, but if the same thing happens for two cycles in living memory, you should pay attention.

Plus, I invest in some pretty big companies. If my stocks go to 0, then whatever you are investing in is probably hosed too.

I don’t think a lot of indexers understand DGI. Some of them accused DGI investors of chasing yield. As I have mentioned in the past, for many DGI investors, a high yield is actually interpreted as a sign to get out. Most prudent DGI investors also look at P/E ratio, payout ratio, and dividend history.

To me, “chasing yield” is holding a stock that pays 10% for a year and then selling. Most of the stocks that DGI investors are interested in have yields from 2% to 4%, and we intend to hold for a long time. Ideally, for life.

I am considering going more towards DGI ETFs. That is sort of like indexing. It’s like “indexing without the bad stuff”. But I really have no desire to buy the whole domestic market if I can avoid it. My 401K through work offers regular index funds, but no DGI funds; in this blog I mostly talk about accounts that I have full control over. As I said, I do not want to rely on capital gains. I want cash flow. Not potential cash flow. Not theoretical cash flow. Not cash flow dependent on getting a higher price. But actual cash flow. As Josh Peters wrote in The Ultimate Dividend Playbook, when a private equity firm want to take a company private, their offer price will be based on the company’s cash flow. Why not get that money now? Why wait until I sell? If the only time you benefit from owning a stock is when you sell (in other words, when you stop owning it), then it is pretty dumb to own that stock in the first place. Why should my money go into firms that are not paying dividends? As far as I am concerned, US stocks that do not pay dividends are dead weight.

Granted, with foreign firms, it is a different story. There are not as many DGI ETFs for foreign stocks. Directly buying a stock listed on a foreign exchange would cause more tax headaches than it is worth. But for stocks on domestic exchanges, and as for my house, we stick with DGI.

One person said indexing is better, and asked if us DGI investors thought we were smarter than the market, and advised us to listen to what the market is telling us. Well, it has shown that companies that have grown their dividends do better than the total market. S & P has a page on the Dividend Aristocrats, and it has a chart applet that you can use to compare the Dividend Aristocrats against the S & P 500. Guess what? The Dividend Aristocrats do better than the overall market. So, no, I don’t think I am smarter than the market. Unlike you, pompous indexer, I am listening to what the market is telling me.

The High Yield Dividend Aristocrats also did better than the S & P 500, but not quite as much.

Also, if you look at the fact sheets for those indexes, the “High Yield” Dividend Aristocrats index yields about 3%, while the regular Dividend Aristocrats index yields about 2.52%. The High Yield Dividend Aristocrats index has stocks that have increased dividends for 20 years, while the Dividend Aristocrats index has stocks that have increased dividends for 25 years. So I guess “High Yield” is relative.

There was a lot of discussion about the returns of DM. Some said the only reason his portfolio gained was because he added capital to his accounts. Below is a very large table with information about some of my dividend holdings. This shows stocks for periods in which I did not buy any additional shares. I did re-invest the dividends.

For each stock, there are two rows. The first is the first dividend payment I got. The second is a more recent payment. This chart was made earlier in the year, so it does not have the latest. For some, it might have a transaction from a couple of years ago. For each stock, I looked at the earliest and latest for a time period in which I only got new shares through dividend reinvesting. For the second row of each stock, the “Income Increase” is calculated by dividing the second income amount by the first. The “Div Percent Increase” is calculated by dividing the second dividend payout amount by the first. Some stocks split, so that may affect the amounts. I think the “Income Increase” is more consistently useful.

So for ABM, the income from the dividends increased 34%, while the payout amount per share increased 19%. I also went from having 50.3 shares in 2010 to 56.74 five and a half years later. I would say that is a pretty good return.

Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
ABM Industries Inc ABM 2010-05-03 21.91 0.3080 6.75 0.1350 50.3080 0.00 0.00 0.54
ABM Industries Inc ABM 2015-11-02 29.01 0.3110 9.03 0.1600 56.7490 1.34 1.19 0.64
Archer-Daniels-Midland Co ADM 2010-09-09 31.95 0.2850 9.03 0.1500 60.4960 0.00 0.00 0.60
Archer-Daniels-Midland Co ADM 2015-03-10 47.00 0.3860 18.16 0.2800 65.2310 2.01 1.87 1.12
Automatic Data Processing ADP 2010-10-01 42.03 0.4290 18.08 0.3400 53.6200 0.00 0.00 1.36
Automatic Data Processing ADP 2016-01-04 86.98 0.3620 31.49 0.5300 59.7790 1.74 1.56 2.12
AFLAC Inc AFL 2010-12-01 51.50 0.2880 15.07 0.3000 50.5370 0.00 0.00 1.20
AFLAC Inc AFL 2014-03-03 63.86 0.3110 19.52 0.3700 53.0720 1.30 1.23 1.48
Air Products & Chemicals Inc APD 2010-05-10 74.57 0.0920 6.86 0.4900 14.0920 0.00 0.00 1.96
Air Products & Chemicals Inc APD 2015-11-09 138.81 0.0930 12.91 0.8100 16.0290 1.88 1.65 3.24
American States Water Co AWR 2010-09-01 33.33 0.3890 13.00 0.2600 50.3890 0.00 0.00 1.04
American States Water Co AWR 2015-12-01 40.64 0.6200 25.20 0.2240 113.1150 1.94 0.86 0.90
Black Hills Corp BKH 2010-06-01 28.69 0.3810 10.80 0.3600 30.3810 0.00 0.00 1.44
Black Hills Corp BKH 2015-12-01 42.63 0.3450 14.71 0.4050 36.6550 1.36 1.13 1.62
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Chubb Corp CB 2010-04-06 51.90 0.1430 7.40 0.3700 20.1430 0.00 0.00 1.48
Chubb Corp CB 2014-07-15 94.03 0.1170 10.91 0.5000 21.9390 1.47 1.35 2.00
Colgate-Palmolive CL 2010-11-15 78.58 0.3460 26.57 0.5300 50.4830 0.00 0.00 2.12
Colgate-Palmolive CL 2015-11-16 66.86 0.6250 41.79 0.3800 110.6070 1.57 0.72 1.52
Clorox Co CLX 2011-02-14 71.26 0.4210 27.78 0.5500 50.9250 0.00 0.00 2.20
Clorox Co CLX 2015-11-13 122.20 0.3580 43.75 0.7700 57.1720 1.57 1.40 3.08
Chevron CVX 2010-06-10 70.79 0.2000 14.40 0.7200 20.2000 0.00 0.00 2.88
Chevron CVX 2015-12-10 86.87 0.2940 25.54 1.0700 24.1670 1.77 1.49 4.28
Dover Corp DOV 2010-06-15 45.41 0.1240 5.46 0.2600 21.1240 0.00 0.00 1.04
Dover Corp DOV 2015-12-20 63.78 0.1530 9.76 0.4200 23.3960 1.79 1.62 1.68
Consolidated Edison Inc ED 2010-06-15 43.35 0.3480 14.88 0.5950 25.3480 0.00 0.00 2.38
Consolidated Edison Inc ED 2015-12-15 61.85 0.3280 20.29 0.6500 31.5390 1.36 1.09 2.60
Emerson Electric Co EMR 2012-03-09 49.67 0.0000 20.27 0.4000 50.6650 0.00 0.00 1.60
Emerson Electric Co EMR 2015-12-10 48.64 0.5450 26.51 0.4750 56.3560 1.31 1.19 1.90
Eaton Corporation ETN 2011-05-27 50.67 0.3410 17.00 0.3400 50.3410 0.00 0.00 1.36
Eaton Corporation ETN 2015-08-25 55.06 0.5470 30.12 0.5500 55.3170 1.77 1.62 2.20
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Hormel Foods Corp HRL 2010-05-15 41.25 0.1120 4.62 0.2100 22.1120 0.00 0.00 0.84
Hormel Foods Corp HRL 2015-11-16 67.64 0.1780 12.04 0.2500 48.3550 2.61 1.19 1.00
Illinois Tool Works ITW 2011-01-11 54.37 0.3140 17.00 0.3400 50.3140 0.00 0.00 1.36
Illinois Tool Works ITW 2016-01-07 87.52 0.3350 30.31 0.5500 55.4520 1.78 1.62 2.20
Johnson & Johnson JNJ 2010-06-15 58.42 0.2750 16.20 0.5400 30.2750 0.00 0.00 2.16
Johnson & Johnson JNJ 2014-12-09 108.05 0.2220 23.94 0.7000 34.4250 1.48 1.30 2.80
Kellogg Company K 2014-06-16 67.21 0.6800 46.00 0.4600 100.6800 0.00 0.00 1.84
Kellogg Company K 2015-12-15 70.96 0.7370 52.30 0.5000 105.3460 1.14 1.09 2.00
Kimberly-Clark KMB 2011-04-04 65.38 0.5380 35.44 0.7000 51.1730 0.00 0.00 2.80
Kimberly-Clark KMB 2016-01-05 126.48 0.3930 50.99 0.8800 58.3340 1.44 1.26 3.52
Lowe's Cos Inc LOW 2010-11-03 21.92 0.2580 5.50 0.1100 50.2580 0.00 0.00 0.44
Lowe's Cos Inc LOW 2015-11-04 74.21 0.2040 15.14 0.2800 54.2890 2.75 2.55 1.12
MDU Resources Group Inc. MDU 2010-07-01 18.03 0.4200 7.88 0.1580 50.4200 0.00 0.00 0.63
MDU Resources Group Inc. MDU 2016-01-04 18.56 0.5860 10.88 0.1900 58.5910 1.38 1.20 0.76
3M Co MMM 2010-06-12 78.30 0.0840 6.30 0.5250 12.0840 0.00 0.00 2.10
3M Co MMM 2015-12-14 156.51 0.0890 13.92 1.0250 13.6650 2.21 1.95 4.10
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Northwest Natural Gas Co NWN 2010-08-13 45.93 0.4400 20.85 0.4150 50.6990 0.00 0.00 1.66
Northwest Natural Gas Co NWN 2015-11-13 46.77 0.5950 27.83 0.4675 60.1230 1.33 1.13 1.87
Procter & Gamble PG 2010-11-15 64.33 0.3830 24.69 0.4820 51.6340 0.00 0.00 1.93
Procter & Gamble PG 2015-11-16 76.09 0.5100 38.81 0.6629 59.0910 1.57 1.38 2.65
Piedmont Natural Gas Inc PNY 2010-10-15 28.10 0.4980 14.74 0.2800 50.4980 0.00 0.00 1.12
Piedmont Natural Gas Inc PNY 2015-10-27 39.33 0.4940 20.47 0.3300 59.4300 1.39 1.18 1.32
RLI Corp RLI 2011-03-18 54.72 0.2560 13.93 0.2900 48.2830 0.00 0.00 1.16
RLI Corp RLI 2015-12-22 59.71 0.3890 23.26 0.1900 122.8370 1.67 0.66 0.76
RPM International Inc. RPM 2010-07-30 18.56 0.5340 10.25 0.2050 50.5340 0.00 0.00 0.82
RPM International Inc. RPM 2015-10-30 45.65 0.3510 15.68 0.2750 57.3680 1.53 1.34 1.10
Questar Corp STR 2011-06-13 17.60 0.4420 7.63 0.1530 50.4420 0.00 0.00 0.61
Questar Corp STR 2015-12-14 18.71 0.6420 12.01 0.2100 57.8280 1.57 1.37 0.84
Sysco Corp SYY 2010-10-22 29.48 0.4320 12.50 0.2500 50.4320 0.00 0.00 1.00
Sysco Corp SYY 2016-01-22 39.55 0.4510 17.98 0.3000 58.4600 1.44 1.20 1.20
Texas Instruments TXN 2010-08-16 24.28 0.2400 6.00 0.1200 50.2400 0.00 0.00 0.48
Texas Instruments TXN 2015-11-16 57.86 0.3660 21.18 0.3800 56.1120 3.53 3.17 1.52
Valspar Corp VAL 2011-01-14 35.30 0.2890 9.96 0.1800 55.6470 0.00 0.00 0.72
Valspar Corp VAL 2015-12-16 82.83 0.2350 19.49 0.3300 59.3040 1.96 1.83 1.32
Vectren Corp VVC 2010-12-01 25.90 0.6540 17.25 0.3450 50.6540 0.00 0.00 1.38
Vectren Corp VVC 2015-12-01 42.13 0.5610 23.64 0.4000 59.6720 1.37 1.16 1.60
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div
Walgreen Co WAG 2010-12-11 36.43 0.2570 9.33 0.1750 53.5580 0.00 0.00 0.70
Walgreen Co WBA 2015-12-11 83.96 0.2490 20.87 0.3600 58.2140 2.24 2.06 1.44
WGL Holdings Inc WGL 2010-05-01 35.83 0.2950 10.57 0.3775 28.2950 0.00 0.00 1.51
WGL Holdings Inc WGL 2015-11-02 61.36 0.2560 15.71 0.4625 34.2320 1.49 1.23 1.85
Exxon Mobil Corp XOM 2011-03-10 84.38 0.2860 24.39 0.4400 55.7210 0.00 0.00 1.76
Exxon Mobil Corp XOM 2013-12-10 95.84 0.3870 36.51 0.6300 58.3360 1.50 1.43 2.52
Intel INTC 2010-06-01 21.42 0.3330 7.09 0.1580 45.3330 0.00 0.00 0.63
Intel INTC 2013-12-02 23.63 0.4730 11.17 0.2250 50.1180 1.58 1.42 0.90
AT&T T 2010-08-02 25.94 0.8030 21.00 0.4200 50.8030 0.00 0.00 1.68
AT&T T 2014-11-03 34.84 0.8050 27.75 0.4600 61.1270 1.32 1.10 1.84
Coca-Cola Co KO 2011-04-01 66.34 0.3620 23.70 0.4700 50.7780 0.00 0.00 1.88
Coca-Cola Co KO 2015-10-01 39.51 0.9380 37.08 0.3300 113.3050 1.56 0.70 1.32
Sonoco Products Co SON 2010-12-10 33.04 0.5150 16.95 0.2800 61.0530 0.00 0.00 1.12
Sonoco Products Co SON 2015-09-10 38.68 0.6200 23.98 0.3500 69.1240 1.41 1.25 1.40
Constituent Name Symbol Bought Shares Price Num Shares Div Income Div/Share Total Shares IncomeIncrease Div Percent Increase Yearly Div

Image generated from an applet on S & P site, assumed allowed under Fair Use. This shows that the Dividend Aristocrats (the blue line) outperformed the S & P 500 (the green line) over the past ten years.

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