Dividend Portfolio Strategy
What is more powerful than Compound Interest? Compound Dividends! Compound Dividends are like compound interest on steroids, figuratively speaking Good dividend stocks yield, tends to stay within a given range, so if dividends are increasing each year, the only way to keep a consistent yield is for the price of the stock to go up. Source: Dividendvalue.com
Historical Comparison: Dividend Paying Stocks Total Return 1928 to 2009 * Non-Dividend Paying Stocks Total Return 1928 to 2009 ** 10.8% - 11.7% 8.28% * Represents 5 th and 4 th quintiles respectively **Compound Annual Return Source: Grant s Interest Rate Observer (October 2010)
Picture this Assuming Buy & Hold over the entire period: If your family had bought $100 worth of quintile-four dividend stocks in 1928, you would have had a portfolio value worth $713,370 in 2009. If your family, on the other hand, had bought non-dividend paying stocks in 1928, you would have had a portfolio value worth $58,127 in 2009. Source: Grant s Interest Rate Observer (October 2010)
The General Pros of Paying Dividends 1.Dividends may appeal to investors who desire stable cash flow but do not want to incur the transaction costs from periodically selling shares of stocks. 2.Behavioral finance argues that investors with limited self-control can meet current consumption needs with high-dividend stocks while adhering to the policy of never dipping into principal. 3. Managers, acting on behalf of the stockholders, can pay dividends in order to keep cash from bondholders. 4.The board of directors, acting on behalf of the stockholders, can use dividends in order to reduce cash available to spendthrift managers. 6.Dividends have long been a signal to investors. A constant dividend assures investors the company is doing well, and views future potential to be equally as sound. 7.The dividend approach gives a greater opportunity to beat inflation, over time, than a bond-only portfolio. Ross,Westerfield,Jaffe (2008) Corporate Finance
Dividends and Taxes Favorable tax treatment recently has hedged dividend returns. For most of the last 80 years, dividends have been taxed at the individual marginal income tax rate. * *Tax facts 2009 Addition Source: Grant s Interest Rate Observer (October 2010)
Process of Capital Allocation Dividend paying stocks will often help an individual hold onto a stock that he/she may come to believe they over paid for when originally bought. EXAMPLE: March 1999 Bought Abbott Labs at $46.59 March 2009 The shares were quoted at $46.89 A 30-cent gain in share price The above happened during a period when Abbott raised sales and earnings by 135%. This halved the PE ratio from 28 to 14. Nearly everything that could go wrong did go wrong during this period. Source: Grant s Interest Rate Observer (October 2010)
Abbott Example Continuation DON T FORGET THE DIVIDENDS! Abbott continued to pay Dividends In 1999, the dividend was 66 cents a share In 2009, the dividend had gone to $1.48 a share If you had reinvested the dividend, you would have earned 25.7% over the 10- year period. The S&P500 had no gain over this time period. On November 1 st, 2010, Abbott stock was worth $50.60 a share Source: Grant s Interest Rate Observer (October 2010) "Investing in dividend stocks is one of the top strategies to survive market instability" Lawrence Carrel, journalist of The Wall Street Journal
Building a Portfolio for Income: In July 2004, Microsoft had a cash hoard of nearly $60 billion. It used cash to: Increase the annual dividend $.32 per share Repurchase about $30 billion of the company s stock over the next 4 years Make a special dividend payment of $3 per share to shareholders With 10 billion shares outstanding the special dividend payment totaled $32.6 billion the largest corporate cash disbursement in history! The total dividends paid by all the companies in the S&P500 for the year totaled $213.6 billion Special dividend represented about 15% of all dividends paid by 500 of the largest companies of the year! When the dividend was sent to investors in December, personal income in the United States rose 3.7%. Without dividend, personal income only rose.3%. This special dividend payment accounted for over 3% of all personal income in the U.S. for the month of December, 2004! Ross,Westerfield,Jaffe (2008) Corporate Finance
Dividend Portfolio Strategy Goal: To concentrate on higher current dividend yields that have also a history of annual dividend increases in order to increase portfolio performance while reducing risk Reason: Tangible confirmation of management s confidence in future earnings growth Generation of higher levels of income over a long period of time if reinvesting dividends
Screening Methodology Objective: To apply quantitative criteria to the wide universe of dividend stocks in order to narrow it down to few companies. This will allow us to concentrate on a more promising group of dividend stocks, our high probability dividend stocks!
Stock Universe Popular List Current List Screen Based List Master List (250 stocks) Scoring Process Top 25 Dividend Stocks
Screening Process STOCK UNIVERSE Screen Based List DRPs High Yield Dividend Growth Dividend Yield High Div & Growth Dividend Yield & Profitability Master List Scoring Process TOP 25 DIVIDEND STOCKS
Description of the Screens DRPs High Yield Screen: DRPs companies with high relative yields, reasonable dividend payout ratios and high growth Dividend Growth: Looking for stable companies that are in the maturity stage of their life cycle, above-average dividend growth rates. Dividend Yield: Screen that looks for undervalued stocks using the dividend-yield approach (companies with secure dividends example: specifying a maximum level of dividend payout ratio of less than 50%) High Div&Growth: Screen that focuses on high-quality growth stocks that have higher dividends and lower price volatility Dividend Yield & Profitability: Screen that looks for companies with increasing profitability and reasonable dividend yield Current List: List that comes from our experienced advisors.
Dividend Screens*
Screen 1: DRPs with High Yield Provides DRP plan Yield >= 3 Dividend 12m >= Dividend Y1 Dividend Y1> Dividend Y2 Dividend Y2>Dividend Y3 Dividend Y3 > Dividend Y4 Dividend Y4>Dividend Y5 Dividend Y5>Dividend Y6 Dividend Y6>Dividend Y7 Dividend Gr. 5Y> Industry Div-Gr. 5Y Yield > Yield-Avg. 5 Y Payout ratio 12 <= 60% EPS-Gr. 5 Yr >= Industry EPS-Gr.5Y ADR/ADS Stock is false
Screen 1: DRPs with High Yield FIELD OPERATOR COMPARE TO: STOCKS Provides DRP Plan is True 0 Yield >= 3 959 Dividend 12M >= Dividend Y1 6100 Dividend Y1 > Dividend Y2 1504 Dividend Y2 > Dividend Y3 1590 Dividend Y3 > Dividend Y4 1684 Dividend Y4 > Dividend Y5 1470 Dividend Y5 > Dividend Y6 1366 Dividend Y6 > Dividend Y7 1272 Dividend-Growth 5yr > Industry Dividend-Growth 5yr 967 Yield > Yield-Average 5 years 677 Payout ratio 12m <= 60 2696 EPS-Growth 5yr <= Industry EPS-Growth 5yr 2832 ADR/ADS Stock is False 6007 As of 4 th Quarter 2018, 2 companies passed the screen! 3rd QUARTER, 2018 SYMBOL SECTOR COMPANY NAME 1NJR Utilities New Jersey Resources Corp 2 WEC Utilites Wisconsin Energy Corp
Current List Stock Universe Screen Based Master List Top 250 Dividend Stocks
Master List Top 250 Dividend Stocks Scoring Process Criteria for scoring: - Consistent Growth - Increasing Profitability - Good Financial Health - High Dividend Yield TOP 25 DIVIDEND STOCKS
Capital Asset Pricing Model (CAPM) A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. General idea behind CAPM: investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The risk is represented by beta and calculates the amount of compensation the investor needs for taking on additional risk (risk premium) The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. Investopedia, March 2013
10/1/2018 TICKER COMPANY Growth Score Yield Score Dividend Yield TOTAL SCORE Beta Rf* Rm CAPM BGCP BGC Partners, Inc. 69.0833 93.00 6.00 81.04 1.02 2.09 0.7113 0.6837 T AT&T Inc. 61.9167 93.00 6.00 77.46 0.40 2.09 0.7113 1.5385 AVGO Broadcom Inc 69.9722 83.00 3.00 76.49 0.94 2.09 0.7113 0.7940 BX Blackstone Group LP 58.8889 93.00 6.00 75.94 1.37 2.09 0.7113 0.2012 ABBV AbbVie Inc 63.5000 88.00 4.00 75.75 1.54 2.09 0.7113-0.0332 VZ Verizon Communications Inc. 60.1944 89.00 4.40 74.60 0.69 2.09 0.7113 1.1387 VLO Valero Energy Corporation 65.1944 82.00 2.70 73.60 0.98 2.09 0.7113 0.7389 LAZ Lazard Ltd 59.6389 87.00 3.70 73.32 1.79 2.09 0.7113-0.3779 PRU Prudential Financial Inc 59.4167 87.00 3.60 73.21 1.49 2.09 0.7113 0.0357 AYR Aircastle Limited 53.2500 92.00 5.40 72.63 1.80 2.09 0.7113-0.3916 RDS.B Royal Dutch Shell plc (ADR) 48.8611 93.00 5.80 70.93 1.06 2.09 0.7113 0.6286 IBM International Business Machine 52.1111 89.00 4.20 70.56 0.87 2.09 0.7113 0.8905 ETN Eaton Corporation PLC 56.7778 84.00 3.00 70.39 1.38 2.09 0.7113 0.1874 PFE Pfizer Inc. 56.3611 84.00 3.20 70.18 0.96 2.09 0.7113 0.7665 BUD Anheuser Busch Inbev NV (ADR) 48.5000 91.00 4.80 69.75 0.93 2.09 0.7113 0.8078 ORI Old Republic International Cor 53.3333 86.00 3.40 69.67 1.22 2.09 0.7113 0.4080 PEP PepsiCo, Inc. 53.4444 85.00 3.20 69.22 0.66 2.09 0.7113 1.1801 IP International Paper Co 47.8889 86.00 3.60 66.94 1.50 2.09 0.7113 0.0220 MSFT Microsoft Corporation 62.0556 71.00 1.50 66.53 1.25 2.09 0.7113 0.3666 JPM JPMorgan Chase & Co. 50.6111 82.00 2.80 66.31 1.16 2.09 0.7113 0.4907 KKR KKR & Co Inc 49.9444 80.00 2.50 64.97 1.63 2.09 0.7113-0.1573 WMT Walmart Inc 51.7222 77.00 2.20 64.36 0.51 2.09 0.7113 1.3869 KO The Coca-Cola Co 39.1111 86.00 3.40 62.56 0.74 2.09 0.7113 1.0698 CSCO Cisco Systems, Inc. 39.6667 82.00 2.80 60.83 1.06 2.09 0.7113 0.6286 GM General Motors Company 32.6111 89.00 4.40 60.81 1.55 2.09 0.7113-0.0470 Beta Rf Rm CAPM Current Portfolio Yield: 3.824 1.14 2.09 0.7113 0.5183% Per Month Rf Treasury Bill Rate - 4 weeks 9/25/2018 CAPM of Portfolio 6.40% Annualized Current Portfolio Yield 3.82% * Growth and Yield Score based on 4Q/2018 Screening Expected return of the Portfolio 10.22%
Dividend Scoring Q4 2018
Dividend Scoring Based on Fundamental Data In-Depth Dividend Analysis: Dividend Yield Dividend Growth Margin of Safety Dividend Valuation Based on a combination of dividend strategies Provides Ex-Dividend date
Dividend Analysis Yield Growth: Combination of dividend yield and dividend growth rate analysis. High value on this category indicates stocks with above average yield and long-term growth. Dividend Analysis: In-depth analysis of dividend stocks considering payout ratio, P/E ratio, earnings yield and dividend yield. Dividend Growth: Concentrates on sustainable growth rate, the maximum growth rate that a firm can sustain without having to increase financial leverage. Strong Dividend Valuation: Focuses on strong dividend stocks: a record of dividend increases over time. Margin of Safety: Determines the margin of safety of the stock based on dividend valuation approach.
Importance of Ex-Dividend Date Investment term related to the payment of dividend. Defined by the IRS as the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Theoretically, the closer to the ex-dividend date, the higher the stock price. On the ex-dividend date the stock will drop the amount by the dividend amount.
Dividend Strategy Long-term Strategy. Looking for strong financial quality firms: Growth Profitability Financial Health Relative Strength Involves a cyclical rotation of the dividend strategies Combinations of the dividend strategies will reduce risk.
Dividend Buy Signals SYMBOL Current Price Yield (%) BIGFOOT DIVIDEND SCORING Monthly Trade Sheet Q4-2018 Monday, October 01, 2018 NOTE: All Transactions are at Market Price Ex-Dividend Date Payable Signal 1 ABBV $94.18 4.08% 10/12/2018 11/15/2018 BUY 2 AVGO $245.43 2.85% 9/18/2018 9/28/2018 BUY 3 AYR $20.90 5.36% 8/30/2018 9/14/2018 BUY 4 BGCP $11.50 6.26% 8/17/2018 9/5/2018 BUY 5 BUD $89.67 5.33% 5/1/2018 5/30/2018 BUY 6 BX $38.57 6.02% 7/27/2018 8/6/2018 BUY 7 CSCO $48.41 2.73% 10/4/2018 10/24/2018 BUY 8 ETN $86.91 3.04% 8/2/2018 8/17/2018 BUY 9 GM $33.73 4.51% 9/6/2018 9/21/2018 BUY 10 IBM $151.61 4.14% 8/9/2018 9/10/2018 BUY 11 IP $50.95 3.73% 8/14/2018 9/17/2018 BUY 12 JPM $115.02 1.95% 10/4/2018 10/31/2018 BUY 13 KKR $28.00 2.43% 8/3/2018 8/21/2018 BUY 14 KO $45.85 3.40% 9/13/2018 10/1/2018 BUY 15 LAZ $48.22 3.65% 8/3/2018 8/17/2018 BUY 16 MSFT $113.98 1.47% 11/14/2018 12/13/2018 BUY 17 ORI $22.42 3.48% 8/31/2018 9/14/2018 BUY 18 PEP $111.50 3.33% 9/6/2018 9/28/2018 BUY 19 PFE $43.68 3.11% 8/2/2018 9/4/2018 BUY 20 PRU $101.10 3.56% 8/20/2018 9/13/2018 BUY 21 RDS.B $71.01 5.30% 8/9/2018 9/17/2018 BUY 22 T $33.35 6.00% 7/9/2018 8/1/2018 BUY 23 VLO $116.52 2.75% 8/6/2018 9/5/2018 BUY 24 VZ $53.14 4.54% 10/9/2018 11/1/2018 BUY 25 WMT $94.59 2.20% 12/6/2018 1/2/2019 BUY Average Yield 3.81%
Dividend Sell Signals Sell signals will be based on: Dividend picking process News on fundamentals Drastic drop of dividend
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