1. Summary
After six straight positive readings, the Timing Outlook fell last time to 5.5 or “neutral.” But the Timing Outlook's ten components include six technical indicators, and the market’s rally in the last two weeks turned five of them positive. The result is a very high “positive” reading this time of 9.0.
The S&P 500 is now 45% above its March 9 low. The index has stayed above its March 9 close for 20 consecutive weeks, so it is still possible that the March 9 low marked the end of the 16-month bear market that began in late 2007. Some would say that it has already achieved that status.
2. Market Performance Since Last Outlook
New Outlook (7/25/09): 9.0 (POSITIVE)
Last Outlook (7/10/09): 5.5 (NEUTRAL)
S&P 500 last time (7/10/09): 879
S&P 500 now: 979 Change: +11%%
S&P 500 at beginning of 2009: 903
S&P 500 now: 979 Change YTD: +8%
S&P 500 at close 3/9/09: 677
S&P 500 now: 979 Change since 3/9/09: +45%
3. Indicators in Detail
· Conference Board Index of Leading Economic Indicators: New report issued this week went up, the third straight month of increase. That improves this indicator from neutral to positive. +10
· Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. Fed Chairman Ben Bernanke announced recently that he foresees no rate increases in the near future. +10
· S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E rose from 14.3 to 15.8. At a value below 17.4, this indicator remains positive. +10
· Morningstar’s Market Valuation Graph is 1.00, up from 0.92 last time. This means that Morningstar feels that the 2000-or-so stocks they cover, taken as a whole, are fully valued. That makes this indicator neutral. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent [and all-time] low of 0.62 coincides with market’s March 9 low.) +5
· S&P 500 Short Term Technical Trend: The S&P 500’s rally, which began on March 10, turned backward in a four-week span in late June and early July, but caught fire since then. The index is up 11% in the last two weeks. The index and its three key simple moving averages (SMA) now line up in the most positive way. For this indicator, we look at the two shorter SMAs: index > 20-day SMA > 50-day SMA. Positive. +10
· S&P 500 Medium Term Technical Trend: This indicator considers the index and the two longer SMAs. We have index > 50-day SMA > 200-day SMA. Positive. +10
· DJIA Short Term Technical Trend: Similar to the S&P 500 situation, except here, the 20-day and 50-day SMAs are essentially identical. That makes this indicator neutral. +5
· DJIA Medium Term Technical Trend: Same as the S&P’s medium term technical trend. Positive. +10
· NASDAQ Short Term Technical Trend: Same as S&P 500. Positive. +10
· NASDAQ Medium Term Technical Trend: Same as S&P 500. Positive. +10
TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE
Remember, the Timing Outlook is meant to increase the value of buy and sell decisions by helping them get off to positive starts. Dividend investors are faced with many fewer buy and sell decisions, because their focus is on rising dividends, not the prices of stocks. Learn more about The Top 40 Dividend Stocks for 2009 by clicking here.
Saturday, July 25, 2009
Thursday, July 23, 2009
Investment Lessons from the Financial Crisis
There's a great article in this month's AAII Journal on what we all should learn from the financial crisis and bear market. I'm going to summarize it here and add a few comments of my own. All quotes are from the article "Bear Market Grads: What You Should Learn from the Financial Crisis," by William Reichenstein and Larry Swedroe, AAII Journal, July, 2009.
1. Mix high-grade bonds and stocks to lower portfolio risk.
High-grade bonds and stocks are fundamentally different assets. Bad years for stocks are sometimes good years for high-grade bonds, and vice-versa. High-grade is the key qualification here, meaning highly-rated corporate or government bonds. I don't know much about bonds myself, so all my bonds are held via mutual funds. Avoid junk bonds, also known as high-yield bonds. The reason they have high yields is that they are risky, and their value tends to move up and down in tandem with stocks. That eliminates their diversification benefits, which is what you are seeking.
2. Avoid complex investment products.
"Wall Street likes to create complex products that appear desirable, but are designed to separate capital from investors." Personally, I consider anything with even a single level of indirectness (that is, a derivative value one or more levels removed from the value of the underlying asset itself) to be too complex for me. I have never bought an option (put or call), nor a future. I have never sold short, nor used leverage (margin). I know many investors who design complex strategies around such instruments, but I like to keep it simple: I either own stocks or I don't, own bonds or not. No derivatives. Any investment that has to be sold (via seminars, free lunches, and the like) is dangerous. Just say no.
3. Stick to simple, transparent investments.
"Individual investors can create prudent portfolios by combining stocks, bonds, mutual funds, and exchange-traded funds." I would add, of course, cash (money-market funds and certificates of deposit). "They do not need to resort to non-transparent products like CMO's, CDO's, hedge funds, and funds of hedge funds....Investors should not trust opaque strategies that seem to offer returns that are too good to be true." Bernie Madoff's clients would second that.
4. Avoid leveraged investments.
There is already risk in any investment other than cash. Leverage, of course, means borrowing--that magnifies returns, either up or down, and therefore increases the inherent risk already there. Again, many investors use leverage heavily (buying stocks on margin, for example). I don't. Besides magnifying the risk, the loan itself costs money (the interest on the loan). Practically every huge financial blow-up during this financial crisis has involved heavy leverage. If the experts (banks and investment companies) can't get it right, you probably can't either.
5. There is no "smart money" or investors who are consistently smarter than others.
Actually, I disagree with this one. I know what the authors mean: That some experts are using inside information, superior investment models, greater access to information, or outright manipulation to get better returns. That Wall Street only employs the "best and the brightest," and how can you compete with them? But to me, any individual investor can be smart by following simple guidelines such as in this article. That's why the article is presented. I turn the statement inside-out: There is certainly dumb money and investors who are consistently stupider than others. They make the same mistakes repeatedly. Don't be one of them. You can be the smart money. Use common sense, stay within your circle of competence, and you will be way ahead of many investors.
1. Mix high-grade bonds and stocks to lower portfolio risk.
High-grade bonds and stocks are fundamentally different assets. Bad years for stocks are sometimes good years for high-grade bonds, and vice-versa. High-grade is the key qualification here, meaning highly-rated corporate or government bonds. I don't know much about bonds myself, so all my bonds are held via mutual funds. Avoid junk bonds, also known as high-yield bonds. The reason they have high yields is that they are risky, and their value tends to move up and down in tandem with stocks. That eliminates their diversification benefits, which is what you are seeking.
2. Avoid complex investment products.
"Wall Street likes to create complex products that appear desirable, but are designed to separate capital from investors." Personally, I consider anything with even a single level of indirectness (that is, a derivative value one or more levels removed from the value of the underlying asset itself) to be too complex for me. I have never bought an option (put or call), nor a future. I have never sold short, nor used leverage (margin). I know many investors who design complex strategies around such instruments, but I like to keep it simple: I either own stocks or I don't, own bonds or not. No derivatives. Any investment that has to be sold (via seminars, free lunches, and the like) is dangerous. Just say no.
3. Stick to simple, transparent investments.
"Individual investors can create prudent portfolios by combining stocks, bonds, mutual funds, and exchange-traded funds." I would add, of course, cash (money-market funds and certificates of deposit). "They do not need to resort to non-transparent products like CMO's, CDO's, hedge funds, and funds of hedge funds....Investors should not trust opaque strategies that seem to offer returns that are too good to be true." Bernie Madoff's clients would second that.
4. Avoid leveraged investments.
There is already risk in any investment other than cash. Leverage, of course, means borrowing--that magnifies returns, either up or down, and therefore increases the inherent risk already there. Again, many investors use leverage heavily (buying stocks on margin, for example). I don't. Besides magnifying the risk, the loan itself costs money (the interest on the loan). Practically every huge financial blow-up during this financial crisis has involved heavy leverage. If the experts (banks and investment companies) can't get it right, you probably can't either.
5. There is no "smart money" or investors who are consistently smarter than others.
Actually, I disagree with this one. I know what the authors mean: That some experts are using inside information, superior investment models, greater access to information, or outright manipulation to get better returns. That Wall Street only employs the "best and the brightest," and how can you compete with them? But to me, any individual investor can be smart by following simple guidelines such as in this article. That's why the article is presented. I turn the statement inside-out: There is certainly dumb money and investors who are consistently stupider than others. They make the same mistakes repeatedly. Don't be one of them. You can be the smart money. Use common sense, stay within your circle of competence, and you will be way ahead of many investors.
Sunday, July 12, 2009
Great Article About Annuities
I know that many investors' ultimate goal is sufficient income to live on in retirement. One tool that financial planners often suggest is the annuity. The following article is taken from the Wall Street Journal, dated July 10, 2009. It was written by Brett Arends, and I think it provides an excellent, clear explanation about annuities. You may want to check out the website cited in the article, http://www.immediateannuities.com/, and play around with their calculator.
In a future post, I will explore some scenarios that compare annutities to dividend stock portfolios.
Thanks to the financial crisis many people will have to reconsider the legacy they'll leave behind.
Ross Schmidt, a financial advisor in Denver, sat down with a well-to-do client last fall, just after the stock market had collapsed. The client was in her sixties, divorced, with two adult sons. "We were scrambling to stem losses in her portfolio" and re-evaluate retirement plans, Mr Schmidt recalls. He asked his client how much she wanted to leave her sons.
"Well, now, nothing," she replied.
She will not be the last to reach this decision -- especially if the stock market stays down.
Millions of families are struggling with new financial realities, including heavy losses in many retirement accounts, and more prosaic expectations for future investment returns. Those near retirement face the hardest choices. Should they keep working for longer? Revise their retirement plans? Scale back their standard of living now to conserve money for later?
One idea that should be in the mix, much to the dismay of your children: Leave less to your heirs. Or even nothing at all.
Single-premium immediate annuities, an insurance product that converts a lump sum into a lifelong income stream, let you squeeze a bigger annual income out of your retirement savings than you otherwise could. That's because people who buy them both give up their financial legacy, and effectively pool longevity risk with other customers.
If you want to live off your investments' income, you should make sure they will last if you live into your nineties or beyond. But this strategy can limit the amount you can withdraw safely each year.
But if you buy an annuity, those who die quite young subsidize those who live to 110. (Another insurance product, Longevity Insurance, offers an alternative way to handle this.)
Annuities come in a variety of styles. They can have fixed or variable payments. Joint Survivor, for a couple, will keep paying until both spouses have died. So-called "period certain" annuities guarantee payments for five or ten years, so if you die one month after buying it your heirs don't lose everything.
Web sites such as immediateannuities.com offer comparison-shopping tools for the curious or the confused.
Here's how they work: Metlife this week said a 67-year-old woman with $1 million could convert that into an income of about $75,500 a year until she dies. For a couple a joint survivor policy would pay about $68,000.
What Metlife doesn't mention about that woman's million, of course, was that in this scenario, her kids get nothing.
The annuity route isn't for everyone. David Hultstrom, a financial planner in Woodstock, Georgia, points out three concerns. Annuities aren't a great deal right now, he notes, because interest rates, which drive returns, are pretty low. Investors still face credit risk -- insurers can collapse, and state backup pools may only protect part of your policy.
Furthermore, he adds, typical annuities leave you vulnerable to inflation, which is a widespread and growing concern. To allay concerns, some insurers have started offering inflation-protected annuities. But inflation protection comes at a price, in the form of a lower starting income.
Converting your savings into an annuity also entails giving up liquidity and control over your money in exchange for an annual income. And, as usual, when dealing with complex financial products you need to keep an eagle eye on costs.
But most people's concerns may be more familial than financial. Is it OK to leave nothing to your kids -- especially if you inherited a bundle from your own parents?
Wiping out your wealth when you go -- "filing Chapter Heaven," as it were -- might sound like a scorched-earth plan. The cynical might even suggest it fits well with the locust-like financial behavior of the Baby Boomers, who consumed a golden legacy and have left their successors trillions in extra national debt.
Maybe it's selfish, maybe it isn't. Either way, unless financial markets recover soon, many may find they have few other options.
In a future post, I will explore some scenarios that compare annutities to dividend stock portfolios.
Thanks to the financial crisis many people will have to reconsider the legacy they'll leave behind.
Ross Schmidt, a financial advisor in Denver, sat down with a well-to-do client last fall, just after the stock market had collapsed. The client was in her sixties, divorced, with two adult sons. "We were scrambling to stem losses in her portfolio" and re-evaluate retirement plans, Mr Schmidt recalls. He asked his client how much she wanted to leave her sons.
"Well, now, nothing," she replied.
She will not be the last to reach this decision -- especially if the stock market stays down.
Millions of families are struggling with new financial realities, including heavy losses in many retirement accounts, and more prosaic expectations for future investment returns. Those near retirement face the hardest choices. Should they keep working for longer? Revise their retirement plans? Scale back their standard of living now to conserve money for later?
One idea that should be in the mix, much to the dismay of your children: Leave less to your heirs. Or even nothing at all.
Single-premium immediate annuities, an insurance product that converts a lump sum into a lifelong income stream, let you squeeze a bigger annual income out of your retirement savings than you otherwise could. That's because people who buy them both give up their financial legacy, and effectively pool longevity risk with other customers.
If you want to live off your investments' income, you should make sure they will last if you live into your nineties or beyond. But this strategy can limit the amount you can withdraw safely each year.
But if you buy an annuity, those who die quite young subsidize those who live to 110. (Another insurance product, Longevity Insurance, offers an alternative way to handle this.)
Annuities come in a variety of styles. They can have fixed or variable payments. Joint Survivor, for a couple, will keep paying until both spouses have died. So-called "period certain" annuities guarantee payments for five or ten years, so if you die one month after buying it your heirs don't lose everything.
Web sites such as immediateannuities.com offer comparison-shopping tools for the curious or the confused.
Here's how they work: Metlife this week said a 67-year-old woman with $1 million could convert that into an income of about $75,500 a year until she dies. For a couple a joint survivor policy would pay about $68,000.
What Metlife doesn't mention about that woman's million, of course, was that in this scenario, her kids get nothing.
The annuity route isn't for everyone. David Hultstrom, a financial planner in Woodstock, Georgia, points out three concerns. Annuities aren't a great deal right now, he notes, because interest rates, which drive returns, are pretty low. Investors still face credit risk -- insurers can collapse, and state backup pools may only protect part of your policy.
Furthermore, he adds, typical annuities leave you vulnerable to inflation, which is a widespread and growing concern. To allay concerns, some insurers have started offering inflation-protected annuities. But inflation protection comes at a price, in the form of a lower starting income.
Converting your savings into an annuity also entails giving up liquidity and control over your money in exchange for an annual income. And, as usual, when dealing with complex financial products you need to keep an eagle eye on costs.
But most people's concerns may be more familial than financial. Is it OK to leave nothing to your kids -- especially if you inherited a bundle from your own parents?
Wiping out your wealth when you go -- "filing Chapter Heaven," as it were -- might sound like a scorched-earth plan. The cynical might even suggest it fits well with the locust-like financial behavior of the Baby Boomers, who consumed a golden legacy and have left their successors trillions in extra national debt.
Maybe it's selfish, maybe it isn't. Either way, unless financial markets recover soon, many may find they have few other options.
Saturday, July 11, 2009
Timing Outlook Drops Significantly, from Positive to Neutral
1. Summary
After 6 straight positive readings, the Timing Outlook fell significantly in the past two weeks, from 7.5 to 5.5, or “neutral.”
The S&P 500 is still 30% above its March 9 low, but both June (-3%) and the first 10 days of July (-5%) have seen the market slide backwards. The S&P 500 index has stayed above its March 9 close for 18 consecutive weeks, but it’s going in the wrong direction now. I have halted my purchases of SPY (the ETF that tracks the index), and in fact the various purchases are only a percent or so from hitting the 8% trailing sell-stop that I have been using.
I think this is a market dominated by sentiment. There has been a slowdown--to a trickle--of good news ("green shoots") over the last several weeks. At the same time, more and more investors are becoming impatient with the pace of economic recovery. They are no longer satisfied with "less bad," they want to see actual "good," that is, an upturn in major economic indicators. I think that if the flow of good news resumes, the rally will start back up. If not, the market will probably just drift slowly lower. If there is significant bad news, the market could suffer significant drops.
The second-quarter earnings season just began, so as results roll in, there will be plenty of news for investors and traders to react to. The market typically becomes volatile during earnings season. Trading volume has been low for several weeks, suggesting that a lot of people are on vacation and/or are waiting for a good reason to do something.
2. Market Performance Since Last Outlook
New Outlook (7/10/09): 5.5 NEUTRAL
Last Outlook (6/29/09): 7.5 (POSITIVE)
S&P 500 last time (6/29/09): 927
S&P 500 now: 879 Change: -5%
S&P 500 at beginning of 2009: 903
S&P 500 now: 879 Change YTD: -3%
S&P 500 at close 3/9/09: 677
S&P 500 now: 879 Change since 3/9/09: +30%
3. Indicators in Detail
· Conference Board Index of Leading Economic Indicators: No new report since last time. The indicator stays neutral. +5
· Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. +10
· S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E fell from 14.9 to 14.3. At a value below 17.4, this indicator remains positive. +10
· Morningstar’s Market Valuation Graph is 0.88, down from 0.92 last time. This takes the 2000-or-so stocks covered by Morningstar to 12 % below “fairly valued” and turns this indicator from neutral to positive. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) Positive. +10
· S&P 500 Short Term Technical Trend: The S&P 500’s rally, which began on March 10, turned backward in June (down 3%) and continued downward in July, falling from 923 to 879 (or -5%) so far. The index is now below its 20-day simple moving average (SMA), which in turn is below the 50-day SMA. So the readings are lined up in a negative way: index < 20-day SMA < 50-day SMA. In other words, the falling index is pulling down the 20-day and 50-day SMAs, exactly the opposite of what you want. That pattern drops this indicator to negative . +0
· S&P 500 Medium Term Technical Trend: The 50-day SMA remains above the 200-day SMA, but the index itself has dropped below the 50-day SMA and is exactly even with the 200-day. The order is thus: 50-day SMA > 200-day SMA = index. You may recall that a few weeks ago, the 50-day SMA crossed upward through the 200-day, a "golden cross" that was positive. The reversal of the index means that it is now pulling the 50-day SMA down. That drops this indicator to ambiguous and neutral. +5
· DJIA Short Term Technical Trend: Same situation as the S&P 500’s short-term technical trend. Negative. +0
· DJIA Medium Term Technical Trend: Similar to the S&P’s medium term technical trend, except here, the index has fallen clearly below the 200-day SMA. So we have 50-day SMA > 200-day SMA > index. This is going in a bad direction, but still qualifies as ambiguous and neutral, because the 50-day SMA is still above the 200-day. +5
· NASDAQ Short Term Technical Trend: The index is below the 20- and 50-day SMAs, but the 20-day is still above the 50-day. This is ambiguous and neutral. +5
· NASDAQ Medium Term Technical Trend: The index has fallen below the 50-day SMA, but both are still above the 200-day SMA. That makes this chart ambiguous and neutral. +5
TOTAL POINTS: 55 NEW READING: 55 / 10 = 5.5 = NEUTRAL
Remember, the Timing Outlook is meant to increase the value of buy and sell decisions by helping them get off to positive starts. Dividend investors are faced with many fewer buy and sell decisions, because their focus is on rising dividends, not the prices of stocks. Learn more about The Top 40 Dividend Stocks for 2009 by clicking here.
After 6 straight positive readings, the Timing Outlook fell significantly in the past two weeks, from 7.5 to 5.5, or “neutral.”
The S&P 500 is still 30% above its March 9 low, but both June (-3%) and the first 10 days of July (-5%) have seen the market slide backwards. The S&P 500 index has stayed above its March 9 close for 18 consecutive weeks, but it’s going in the wrong direction now. I have halted my purchases of SPY (the ETF that tracks the index), and in fact the various purchases are only a percent or so from hitting the 8% trailing sell-stop that I have been using.
I think this is a market dominated by sentiment. There has been a slowdown--to a trickle--of good news ("green shoots") over the last several weeks. At the same time, more and more investors are becoming impatient with the pace of economic recovery. They are no longer satisfied with "less bad," they want to see actual "good," that is, an upturn in major economic indicators. I think that if the flow of good news resumes, the rally will start back up. If not, the market will probably just drift slowly lower. If there is significant bad news, the market could suffer significant drops.
The second-quarter earnings season just began, so as results roll in, there will be plenty of news for investors and traders to react to. The market typically becomes volatile during earnings season. Trading volume has been low for several weeks, suggesting that a lot of people are on vacation and/or are waiting for a good reason to do something.
2. Market Performance Since Last Outlook
New Outlook (7/10/09): 5.5 NEUTRAL
Last Outlook (6/29/09): 7.5 (POSITIVE)
S&P 500 last time (6/29/09): 927
S&P 500 now: 879 Change: -5%
S&P 500 at beginning of 2009: 903
S&P 500 now: 879 Change YTD: -3%
S&P 500 at close 3/9/09: 677
S&P 500 now: 879 Change since 3/9/09: +30%
3. Indicators in Detail
· Conference Board Index of Leading Economic Indicators: No new report since last time. The indicator stays neutral. +5
· Fed Funds Rate: No change. The Fed Funds rate remains < 0.5%. Ten cuts (with no increases) since 8/07 brought the rate to near zero, plus many Federal programs continue to inject money into the economy. +10
· S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E fell from 14.9 to 14.3. At a value below 17.4, this indicator remains positive. +10
· Morningstar’s Market Valuation Graph is 0.88, down from 0.92 last time. This takes the 2000-or-so stocks covered by Morningstar to 12 % below “fairly valued” and turns this indicator from neutral to positive. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) Positive. +10
· S&P 500 Short Term Technical Trend: The S&P 500’s rally, which began on March 10, turned backward in June (down 3%) and continued downward in July, falling from 923 to 879 (or -5%) so far. The index is now below its 20-day simple moving average (SMA), which in turn is below the 50-day SMA. So the readings are lined up in a negative way: index < 20-day SMA < 50-day SMA. In other words, the falling index is pulling down the 20-day and 50-day SMAs, exactly the opposite of what you want. That pattern drops this indicator to negative . +0
· S&P 500 Medium Term Technical Trend: The 50-day SMA remains above the 200-day SMA, but the index itself has dropped below the 50-day SMA and is exactly even with the 200-day. The order is thus: 50-day SMA > 200-day SMA = index. You may recall that a few weeks ago, the 50-day SMA crossed upward through the 200-day, a "golden cross" that was positive. The reversal of the index means that it is now pulling the 50-day SMA down. That drops this indicator to ambiguous and neutral. +5
· DJIA Short Term Technical Trend: Same situation as the S&P 500’s short-term technical trend. Negative. +0
· DJIA Medium Term Technical Trend: Similar to the S&P’s medium term technical trend, except here, the index has fallen clearly below the 200-day SMA. So we have 50-day SMA > 200-day SMA > index. This is going in a bad direction, but still qualifies as ambiguous and neutral, because the 50-day SMA is still above the 200-day. +5
· NASDAQ Short Term Technical Trend: The index is below the 20- and 50-day SMAs, but the 20-day is still above the 50-day. This is ambiguous and neutral. +5
· NASDAQ Medium Term Technical Trend: The index has fallen below the 50-day SMA, but both are still above the 200-day SMA. That makes this chart ambiguous and neutral. +5
TOTAL POINTS: 55 NEW READING: 55 / 10 = 5.5 = NEUTRAL
Remember, the Timing Outlook is meant to increase the value of buy and sell decisions by helping them get off to positive starts. Dividend investors are faced with many fewer buy and sell decisions, because their focus is on rising dividends, not the prices of stocks. Learn more about The Top 40 Dividend Stocks for 2009 by clicking here.
Friday, July 10, 2009
22 Dividend Aristocrats That May Be Troublesome
I have written several recent articles and comments on the potential for dividend investors to be misled by S&P’s general statistics and lists. One very popular S&P document that can be hazardous to your portfolio is the Dividend Aristocrats list.
S&P describes their Dividend Aristocrats thusly:
S&P describes their Dividend Aristocrats thusly:
S&P 500 Dividend Aristocrats is designed to measure the performance of
S&P 500 index constituents that have followed a policy of consistently
increasing dividends every year for at least 25 consecutive years.
Naturally, many dividend investors assume that if a stock is a Dividend Aristocrat, it must be a paragon of long-term dividend safety and growth, and a worthy component in any dividend portfolio. They shouldn’t assume that.
There are two main reasons. First, some of the Aristocrats have yields so low that, even with annual increases, they do not return enough to make a logical starting point for a dividend portfolio.
Second, S&P’s regular update schedule for the list is only once per year, each December. That means the list ignores events that happen during the year, such as dividend cuts. Given that the stated purpose of the list is to present stocks that have increased dividends for 25 consecutive years, the annual updating can be very misleading. It’s not as if S&P is not capable of removing a stock on the spot: That’s exactly what they claim to do if the stock is removed from the S&P 500 index itself during the year.
The current Dividend Aristocrats list has 52 members. There are 22 stocks on the current list that do not pass these two simple tests:
- Current yield greater than or equal to 2.5%; and
- Has not cut or frozen its dividend in 2008-2009.
(Current yield figures are from Morningstar.)
- Archer Daniels Midland (ADM). This agricultural processor has a current yield of just 2.1%.
- Avery Dennison (AVY). This manufacturer of pressure-sensitive labels and office products usually raises its dividend in its last quarterly payment of each year. But it kept its dividend frozen throughout 2008. It has now made 7 consecutive quarterly payments without an increase.
- Becton, Dickinson (BDX). The world's largest manufacturer and distributor of medical surgical products, such as needles, syringes, and safe disposal units, has a current yield of under 2%.
- BB&T (BBT). This regional bank holding company cut its dividend by 32% with their third (July) payout of 2009. It still yields almost 3%.
- C. R. Bard (BCR). This manufacturer of medical, surgical, diagnostic and patient-care devices has a current yield of less than 1%.
- Cincinatti Financial (CINF). This bank, which usually increases its dividend with its first payout each year, held its payout flat throughout 2008 and its first two payouts of 2009. It has now made 6 consecutive quarterly payments without an increase.
- Family Dollar Stores (FDO). This chain of low-price stores has a current yield of about 1.7%.
- Gannett (GCI). This dying newspaper company cut its dividend by 90% earlier this year, to $0.04 per share.
- General Electric (GE). This iconic American company, the only remaining member of the original Dow Jones Industrial Average, cut its dividend 68% with its second quarterly payment this year.
- W. W. Grainger (GWW). This maker of facility maintenance products has a current yield of about 2.3%.
- Johnson Controls (JCI). This supplier of HVAC controls, auto parts, and batteries usually increases its dividend with its fourth quarterly payment each year. But it held its dividend flat throughout 2008 and through its first three payments in 2009. It has now made 7 consecutive payouts without an increase.
- Leggett & Platt (LEG). This diversified manufacturer usually increases its second payout each year. But after breaking the pattern with two increases in 2007 (2nd and 4th payouts), it has held its dividend flat ever since. It has made 7 consecutive quarterly payouts without an increase.
- Legg Mason (LM). This large asset manager slashed its dividend payment by 87% earlier this year and now yields barely over a half percent.
- Lowe’s (LOW). The well-known home improvement chain is currently yielding under 2%.
- M&T Bank (MTB). This bank has broken its former pattern of dividend increases twice in the past three years. In 2007, it delayed its usual dividend increase to the third quarterly payment (rather than the second), then it has held its payment flat ever since, making 8 consecutive identical payments with no increase.
- Pfizer (PFE). Cut its dividend in half earlier this year to help fund its acquisition of Wyeth.
- Rohm & Haas (ROH). Acquired earlier this year by Dow Chemical. Paid final dividend in April. .
- Sigma-Aldrich (SIAL). Current yield 1.2%.
- Questar (STR): Current yield 1.8%.
- State Street (STT): This large trust bank slashed its dividend by 96%, to a penny per share, and currently yields less than 1/10th of 1%.
- US Bancorp (USB). Another financial giant that ran aground, USB cut its dividend by 88% this year and now yields a little over 1%.
- Wal-Mart (WMT). Current yield is about 2.3%.
Disclosure: I own none of the above-mentioned stocks. They are not worthy. To read more about my Top 40 Dividend Stocks for 2009, click here.
Thursday, July 9, 2009
Dividend Investors: Take S&P 500 Dividend Statistics and General Articles with a Grain of Salt
It is that time of year again when S&P's broad statistics on the quarter just completed are released. Along with this information comes a spate of articles about how the S&P 500 did. This happens four times a year, every January, April, July, and October, right after the year’s fiscal quarters end. While the statistics are factual and the articles informative, they can often mislead. This is especially true for dividend investors.
First, let me make clear what I mean by “dividend investor.” It is someone whose objective is the collection of a rising stream of dividends, and who is working towards that objective by following a sound dividend strategy. Dividend investors may use their dividends for reinvestment and compounding, or just spend them as current income. The important point is that they have a significantly different objective from investing for capital appreciation. While dividend investors don’t enjoy seeing their capital stake decline, they are far less focused on that than on seeing their stream of dividends keep increasing. Dividend investing strategies take years to play out, and dividend investors become accustomed to and accept fluctuating values in their capital stake—so long as the dividends keep going up.
OK. Now it is easier to explain why the S&P statistics and the dividend articles can be misleading. It is because they can make it sound like dividend investors are taking a bath, or even getting slaughtered, when in fact they are doing just fine.
In February, S&P issued a press release headlined, S&P 500 Dividends Projected to Decline 13.3% in 2009; Worst Annual Decline Since World War II. In April, USA Today ran this headline following the first quarter: S&P: Record number of firms cut dividend in Q1. Last week, this was the headline on S&P’s dividend press release for the second quarter: A Record Low 233 Companies Increase Dividend Payments in Q2. Over the next couple of weeks, you can expect to see articles in the financial and popular press with similar dire-sounding headlines. Most of them will be based on the most recent press release and broad S&P statistics, but few will include value-added research or reporting beneath the surface. The analysis will usually be superficial.
The facts will be right. For the first six months of 2009, 65 companies in the S&P 500 either cut or suspended their dividend payment, compared to 20 for the same period in 2008 and 4 in 2007. Dividend increases fell from 158 for the first six months last year to 86 this year. In the second quarter, S&P 500 dividends posted their biggest decline in more than 40 years, dropping by $14.3 billion from a year earlier, according to S&P. More broadly, a record low 233 of the approximately 7,000 publicly owned companies that report dividend information to S&P’s Dividend Record increased their dividend payment during the second quarter of 2009, compared to 455 last year.
Some articles will quote Howard Silverblatt, Senior Index Analyst at S&P, who said, “It’s not a good time for dividend investors. The current trend to conserve cash and cut dividends has become defensive, with even relatively healthy companies choosing to reduce payouts. Until we see the economy better, …many companies will remain gun shy about parting with their cash.”
All of this is correct. But the reason that these headlines, articles, sound bites, and statistics can be misleading is that a well-conceived dividend methodology filters out most stocks with “dividends in peril” before they cut their dividends, while at the same time it identifies stocks that are most likely to raise them. The indicia are there in the companies' business models and financial results for anyone who cares to examine them. Attentive dividend investors routinely perform stock-by-stock analysis. They may not trade often, but they usually manage to drop stocks that are likely to cut their dividends before it actually happens.
So the attentive dividend investor does not hold the stocks that create the headlines. Most well-constructed dividend portfolios will go on producing as before. Most of their stocks will not cut their dividends, they will increase them. To the owners of such portfolios, the S&P numbers, while factual and interesting, are little more than background noise.
In distinction to Mr. Silverblatt’s quote, there are many dividend-paying companies that have given their dividends healthy increases already this year. Examples would be Abbott Labs (ABT) 11%, Procter & Gamble (PG) 10%, Colgate-Palmolive (CL) 10%, Coca-Cola (KO) 8%, Johnson & Johnson (JNJ) 7%, Alliant Energy (LNT) 7%, Waste Management (WMI) 7%, Chubb (CB) 6%, and Pepsico (PEP) 6%. These are not obscure, hard-to-find companies. They are well-known, well-run, solid companies that have been increasing their dividends for many years. They all yield more than 3% right now to new buyers, and they are foundational holdings in many dividend investors’ portfolios. While not as sensational, might not a better headline be Dividend Stalwarts Continue to Increase Payouts Despite Tough Economic Times?
S&P's quarterly release of across-the-board dividend statistics is certainly interesting for broad trends, but no one following a dividend investment strategy should be investing across-the-board in the S&P 500’s dividend-paying stocks. Your portfolio should consist of stocks selected one at a time for the most important dividend characteristics: sufficient initial yield (say 3% or more); consistency and safety of the dividend; and rising dividends.
First, let me make clear what I mean by “dividend investor.” It is someone whose objective is the collection of a rising stream of dividends, and who is working towards that objective by following a sound dividend strategy. Dividend investors may use their dividends for reinvestment and compounding, or just spend them as current income. The important point is that they have a significantly different objective from investing for capital appreciation. While dividend investors don’t enjoy seeing their capital stake decline, they are far less focused on that than on seeing their stream of dividends keep increasing. Dividend investing strategies take years to play out, and dividend investors become accustomed to and accept fluctuating values in their capital stake—so long as the dividends keep going up.
OK. Now it is easier to explain why the S&P statistics and the dividend articles can be misleading. It is because they can make it sound like dividend investors are taking a bath, or even getting slaughtered, when in fact they are doing just fine.
In February, S&P issued a press release headlined, S&P 500 Dividends Projected to Decline 13.3% in 2009; Worst Annual Decline Since World War II. In April, USA Today ran this headline following the first quarter: S&P: Record number of firms cut dividend in Q1. Last week, this was the headline on S&P’s dividend press release for the second quarter: A Record Low 233 Companies Increase Dividend Payments in Q2. Over the next couple of weeks, you can expect to see articles in the financial and popular press with similar dire-sounding headlines. Most of them will be based on the most recent press release and broad S&P statistics, but few will include value-added research or reporting beneath the surface. The analysis will usually be superficial.
The facts will be right. For the first six months of 2009, 65 companies in the S&P 500 either cut or suspended their dividend payment, compared to 20 for the same period in 2008 and 4 in 2007. Dividend increases fell from 158 for the first six months last year to 86 this year. In the second quarter, S&P 500 dividends posted their biggest decline in more than 40 years, dropping by $14.3 billion from a year earlier, according to S&P. More broadly, a record low 233 of the approximately 7,000 publicly owned companies that report dividend information to S&P’s Dividend Record increased their dividend payment during the second quarter of 2009, compared to 455 last year.
Some articles will quote Howard Silverblatt, Senior Index Analyst at S&P, who said, “It’s not a good time for dividend investors. The current trend to conserve cash and cut dividends has become defensive, with even relatively healthy companies choosing to reduce payouts. Until we see the economy better, …many companies will remain gun shy about parting with their cash.”
All of this is correct. But the reason that these headlines, articles, sound bites, and statistics can be misleading is that a well-conceived dividend methodology filters out most stocks with “dividends in peril” before they cut their dividends, while at the same time it identifies stocks that are most likely to raise them. The indicia are there in the companies' business models and financial results for anyone who cares to examine them. Attentive dividend investors routinely perform stock-by-stock analysis. They may not trade often, but they usually manage to drop stocks that are likely to cut their dividends before it actually happens.
So the attentive dividend investor does not hold the stocks that create the headlines. Most well-constructed dividend portfolios will go on producing as before. Most of their stocks will not cut their dividends, they will increase them. To the owners of such portfolios, the S&P numbers, while factual and interesting, are little more than background noise.
In distinction to Mr. Silverblatt’s quote, there are many dividend-paying companies that have given their dividends healthy increases already this year. Examples would be Abbott Labs (ABT) 11%, Procter & Gamble (PG) 10%, Colgate-Palmolive (CL) 10%, Coca-Cola (KO) 8%, Johnson & Johnson (JNJ) 7%, Alliant Energy (LNT) 7%, Waste Management (WMI) 7%, Chubb (CB) 6%, and Pepsico (PEP) 6%. These are not obscure, hard-to-find companies. They are well-known, well-run, solid companies that have been increasing their dividends for many years. They all yield more than 3% right now to new buyers, and they are foundational holdings in many dividend investors’ portfolios. While not as sensational, might not a better headline be Dividend Stalwarts Continue to Increase Payouts Despite Tough Economic Times?
S&P's quarterly release of across-the-board dividend statistics is certainly interesting for broad trends, but no one following a dividend investment strategy should be investing across-the-board in the S&P 500’s dividend-paying stocks. Your portfolio should consist of stocks selected one at a time for the most important dividend characteristics: sufficient initial yield (say 3% or more); consistency and safety of the dividend; and rising dividends.
Saturday, July 4, 2009
Wanna Bet? A New "Investment" at Your Disposal
Is this what you get from the best and the brightest on Wall Street? On Tuesday, June 30, 2009, a day that should live in financial infamy, investment manager MacroMarkets launched two ETFs designed to track housing values. But they don't own any houses. And they're 3-times leveraged.
They are legalized gambling.
"Investors" can now bet for or against a recovery in the residential real estate market. The two ETFs are designed to mimic the movement of U.S. home prices. The two ETFs are called MacroShares Major Metro Housing Up (UMM) and MacroShares Major Metro Housing Down (DMM).
Incredibly, Robert Shiller, the Arthur M. Okun Professor of Economics at Yale University, and best-selling author of Irrational Exuberance, is involved. In fact, he is MacroShares' co-founder and chief economist. Both ETFs are benchmarked to the well-known S&P/Case-Shiller Composite-10 Home Price Index of home prices in the country's 10 largest cities.
How do they work? The securities are "paired" and feature a 300% leverage factor. "Up" is designed to rise when U.S. housing prices climb. Its counterpart, "Down," goes in the inverse direction, rising when real estate values fall. Unlike most ETFs, Up and Down do not invest directly in a relevant underlying asset such as stocks, bonds, or houses. Instead, they invest in short-term Treasury securities and overnight repurchase agreements. The paired trusts have a binding agreement to pledge assets to one another over time, according to a predetermined formula that is driven by changes in the housing index, based on the movement of housing prices. This transfer of value back and forth gives "investors" exposure to the direction of U.S. home prices. The structure resembles a see-saw as the assets are shuffled between the paired trusts. Because of the pairing requirement, an equal number of shares for each fund will be created. Because of the leverage factor, the Up and Down ETFs will experience changes of 3x the changes in the S&P/Case-Shiller Composite-10 Home Price Index.
This has to be the low point in what has been a distinguished career. Shiller said, "For the first time, the market will have available exchange-traded benchmarks as an indication of where investors believe U.S home prices are headed. Our current financial crisis is largely due to a failure to manage housing risk. At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets." A couple of months earlier, as part of a failed attempt to auction basically these same vehicles, Shiller said, "Our current financial crisis is due to a failure to manage housing risk. MacroShares Housing products will begin to fill this massive void. MacroShares Major Metro Housing Up and Down are market-based solutions to this unprecedented financial crisis."
In what way these ETFs provide a "liquid, transparent market" for homes or provide a way to reverse the "failure to manage housing risk" is unclear. Unlike REITs, they don't buy any real estate. They won't own any homes. They just swap money back and forth between the ETFs, that is between those who place their bets one way or the other on the direction of home prices.
What's next, ETFs based on Manny Ramirez's batting average? The roll of dice? The turn of a card? We already have casinos for that. These bets would be better placed in a sports book in Las Vegas than touted as an "investment" that "provides liquid, transparent markets" on home prices or promises to help begin to solve the "unprecedented financial crisis" created by the housing bubble.
They are legalized gambling.
"Investors" can now bet for or against a recovery in the residential real estate market. The two ETFs are designed to mimic the movement of U.S. home prices. The two ETFs are called MacroShares Major Metro Housing Up (UMM) and MacroShares Major Metro Housing Down (DMM).
Incredibly, Robert Shiller, the Arthur M. Okun Professor of Economics at Yale University, and best-selling author of Irrational Exuberance, is involved. In fact, he is MacroShares' co-founder and chief economist. Both ETFs are benchmarked to the well-known S&P/Case-Shiller Composite-10 Home Price Index of home prices in the country's 10 largest cities.
How do they work? The securities are "paired" and feature a 300% leverage factor. "Up" is designed to rise when U.S. housing prices climb. Its counterpart, "Down," goes in the inverse direction, rising when real estate values fall. Unlike most ETFs, Up and Down do not invest directly in a relevant underlying asset such as stocks, bonds, or houses. Instead, they invest in short-term Treasury securities and overnight repurchase agreements. The paired trusts have a binding agreement to pledge assets to one another over time, according to a predetermined formula that is driven by changes in the housing index, based on the movement of housing prices. This transfer of value back and forth gives "investors" exposure to the direction of U.S. home prices. The structure resembles a see-saw as the assets are shuffled between the paired trusts. Because of the pairing requirement, an equal number of shares for each fund will be created. Because of the leverage factor, the Up and Down ETFs will experience changes of 3x the changes in the S&P/Case-Shiller Composite-10 Home Price Index.
This has to be the low point in what has been a distinguished career. Shiller said, "For the first time, the market will have available exchange-traded benchmarks as an indication of where investors believe U.S home prices are headed. Our current financial crisis is largely due to a failure to manage housing risk. At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets." A couple of months earlier, as part of a failed attempt to auction basically these same vehicles, Shiller said, "Our current financial crisis is due to a failure to manage housing risk. MacroShares Housing products will begin to fill this massive void. MacroShares Major Metro Housing Up and Down are market-based solutions to this unprecedented financial crisis."
In what way these ETFs provide a "liquid, transparent market" for homes or provide a way to reverse the "failure to manage housing risk" is unclear. Unlike REITs, they don't buy any real estate. They won't own any homes. They just swap money back and forth between the ETFs, that is between those who place their bets one way or the other on the direction of home prices.
What's next, ETFs based on Manny Ramirez's batting average? The roll of dice? The turn of a card? We already have casinos for that. These bets would be better placed in a sports book in Las Vegas than touted as an "investment" that "provides liquid, transparent markets" on home prices or promises to help begin to solve the "unprecedented financial crisis" created by the housing bubble.
Oh, I forgot to mention a couple of things.
- For one, MacroMarkets warns that the prices of the funds may diverge from underlying value. "For example, the market price of Down will reflect supply, demand, and investor expectations regarding the future path of home prices over the remaining term of the security." So unlike Las Vegas, bettors are also risking that the house (pun intended) won't actually pay off the bets correctly.
- Two, the funds will make quarterly distributions of net income, if any, on the Treasury securities.
- And third, they have an expense ratio of 1.25%. That amounts to the house's "rake" on the pot. Which is all you need to know to understand why these have been introduced.
Technically, these are not exchange-traded "funds," because they own no underlying relevant assets--no houses. They are exchange-traded "products."
So there you have it: A perfect "product" for post-industrial USA. It creates no value, produces nothing tangible, and offers great risk. The only guaranteed payoff is to the offeror. Since the ETFs do not own any relevant assets, one cannot even make a case for efficient price discovery in residential real estate to justify them. They are the antithesis of "investing." They are vehicles for naked gambling. Just bet up or down (black or red). You have a 50% chance of winning.
Thursday, July 2, 2009
Dividend Stalwart Johnson & Johnson Makes Significant Deal
Johnson & Johnson (JNJ) has made a significant improvement to its business. Under a deal announced Thursday, J&J will take a major stake in biotech company Elan (ELN), thereby gaining access to Elan's Alzheimer's disease treatments, in particular leading drug bapineuzumab.
In the transaction, J&J will take a 50.1% ownership in Elan's Alzheimer's program, plus an 18.4% ownership in the remaining part of Elan. In return, Elan gets a $1 billion equity investment and a $500 million commitment to fund further development and marketing of promising Alzheimer's treatments. The major focus will be on further development of and launch activities for bapineuzumab, which is in Phase 3 clinical trials.
With this deal, J&J expands its presence in neuroscience and gets into the game for effective Alzheimer’s therapies. There are estimated to be tens of millions of Alzheimer’s patients globally, the vast majority of those in emerging markets. Bapineuzumab is one of the most promising treatments to slow progression of Alzheimer's disease. J&J also gets access to several earlier-stage Alzheimer's drugs (Elan has four drug candidates in clinical or preclinical testing), plus a toehold in the market for multiple sclerosis treatments through Elan's drug Tysabri.
J&J also becomes the largest stakeholder in Elan, and the deal effectively closes out other potential Elan suitors. Elan has been widely considered to be one of the most likely biotech takeover candidates. Reportedly it has had talks or inquiries from more than 30 companies.
In the transaction, J&J will take a 50.1% ownership in Elan's Alzheimer's program, plus an 18.4% ownership in the remaining part of Elan. In return, Elan gets a $1 billion equity investment and a $500 million commitment to fund further development and marketing of promising Alzheimer's treatments. The major focus will be on further development of and launch activities for bapineuzumab, which is in Phase 3 clinical trials.
With this deal, J&J expands its presence in neuroscience and gets into the game for effective Alzheimer’s therapies. There are estimated to be tens of millions of Alzheimer’s patients globally, the vast majority of those in emerging markets. Bapineuzumab is one of the most promising treatments to slow progression of Alzheimer's disease. J&J also gets access to several earlier-stage Alzheimer's drugs (Elan has four drug candidates in clinical or preclinical testing), plus a toehold in the market for multiple sclerosis treatments through Elan's drug Tysabri.
J&J also becomes the largest stakeholder in Elan, and the deal effectively closes out other potential Elan suitors. Elan has been widely considered to be one of the most likely biotech takeover candidates. Reportedly it has had talks or inquiries from more than 30 companies.
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