Monday, May 24, 2010

4 High Yield Dividend ETFs.

Thanks in part to the market crash in 2008, investors have rediscovered the importance of dividends. Dividends are also important in times of high volatility - like we are experiencing these days - because they help to smooth out the bumps and make for a smoother ride. Here are 4 high yield dividend ETFs that help provide dividend exposure, but limit the risk (compared to picking individual stocks).

Vanguard Dividend Appreciation (VIG)

What I like.
The Vanguard Dividend Appreciation ETF focuses on dividend growth and not just dividend yield. It follows an index of companies who have increased their dividend payouts over the past 10 years, and dumps companies that miss payments.

What I don't like so much.
The index is weighted by market cap and currently holds about 200 stocks; including Coke, Proctor & Gamble, and Johnson and Johnson. I don't really like market cap weighting because a few very large companies can dominate the index, and decrease diversification.

The VIG lost about 9% less than the S&P 500 in 2008 (see chart below), currently has a yield of approximately 1.90%, an expense ratio of 0.23% and an annual turnover rate of 20%.

SPDR S&P 500 Dividend (SDY)

What I like.
The S&P SPDR is even more selective than Vanguard Dividend Appreciation. The SPDR's index holds companies of all sizes that have increased dividend payouts every year for the past 25 years. Also, instead of holding 200 stocks and weighting by market cap, the SPDR selects only the stocks with the 50 highest yields and then weights them by yield.

The largest holdings are utilities, industrial and consumer related stocks, and companies that fail to make their dividend payout are cut from the list. The yield at the time of writing this post is 3.56% and the expense ratio is 0.35%.

PowerShares International Dividend Achievers (PID)

Why I like it.
The PowerShares International Dividend Achievers ETF focuses on high yield companies that have increased dividend payouts over the past 5 years and trade on the U.S. stock market as American depository receipts (which means the company must file reports under U.S. accounting standards, so there is less room for the shadier side of book cooking ;-) ). This is a great way to get foreign exposure without sacrificing yield.

What I don't like about it.
With only 5 years of dividend raising, the companies in this basket don't have a long a history as those in the above mentioned ETFs, but maybe the ETFs above are strictly domestic stocks. Also, the expense ratio for PID is 0.57%, and the fund is more active than either VIG or SPY with an annual turnover rate of 50%.

Wisdom Tree Emerging Markets Equity Income (DEM)

Why I like it.
The Wisdom Tree Emerging Markets Equity Income ETF also has foreign exposure, as one might expect by its name, and focuses on dividend paying stocks from emerging market countries. It currently sports a yield of about 2.97% and holds the top 30% of dividend paying emerging market stocks by yield.

What I don't like about it.
33% of its holdings are in Taiwan, which could be a bit too risky for my taste. Also, it doesn't have a long history since it was only launched in 2007. It's also more expensive and active than any other ETF on this list with an expense ratio of 0.63% and a turnover rate of 67%.

Wednesday, May 19, 2010

6 Ways Dividends Are Important.

Dividends are an important part of investing - especially if you are an income or value investor. Investing for income is all about dividend yield, but dividends have many other virtues - even if generating income from your investments isn't of paramount concern.

  1. Dividends are a large part of a stock's overall return. In fact, dividends account for about 43% of the S&P 500's average annualized return of 10%.

  2. Dividends are more predictable than a company's growth and earnings rate and certainly more predictable than a stock's price.

  3. Dividends grow over time, unlike the yield of most bonds which is fixed. Many companies also tend to boost their dividend payments over time. Standard & Poor's keeps a list of blue chip companies that have increased dividends every year for at least the last 25 consecutive years, called the S&P 500 Dividend Aristocrats.

  4. Dividends are taxed at a maximum rate of 15% - regardless of income tax rate. That is, until the Bush tax cuts expire at the start of 2011. After that, they will be taxed as income - up to 39.6%.

  5. Dividend paying stocks (as a group) are less volatile than non-dividend paying stocks. In fact, the average volatility of a dividend stock is 50% less than non-dividend stocks.

  6. Dividend payers hold more of their value in stock market collapses. dividend paying stocks lost an average of 39% in the 2008 collapse, compared with 45.5% lost by non-dividend paying stocks. The contrast was even more stark in the tech bubble burst where dividend payers lost only 11%, compared to the 30% loss of non-dividend payers

Wednesday, May 12, 2010

Is Cramer Describing Why Fundamentals Win Out in the Stock Market?

I wondered on to this article at MSN Money by Jim Cramer (yes, that Jim Cramer) that I found interesting.

The article is titled This is a loser's market, which is I think he means to be controversial, but it's what he says below the fold that I find interesting:

Suddenly, people can't get enough of it. It was underowned and hated, and now it is loved. I believe that's a testament to the fact that the stock has no profits in it.

He is talking about Costco (COST). Boring old, stodgy, hum-drum Costco. He's lamenting the fact that "boring" companies like these that have slow but steady profits are coming out winners suddenly.

The whole thing is just so stupid. You can run a screen of stocks that have done nothing since the year began and throw darts at them to find winners.

He goes on to describe speculating as little more than gambling in stocks. He doesn't use those terms, but that's basically what he's saying. I think what he's talking about really just illustrates why fundamentals win out long run and why Warren Buffet's strategy works.

It's not exciting or entertaining like Cramer's typical picks, but I think those are largely for short-term traders.

What say you? Is Cramer just describing fundamentals taking center stage instead of momentum, or am I missing something here?

Friday, May 7, 2010

Large Cap Stocks Poised for Growth? Is this 1983 All Over Again?

I just read this Morningstar article, titled 1983 Revisited that I thought I'd share. The author makes the case for large cap stocks by drawing a number of comparisons to the early 1980's and 2008-2010, and what happened from 1983-1987.

By now, the parallels to the early 80's are seemingly everywhere. Mostly by way of comparing that recession to the current one, but I've also been seeing a lot of comparisons to the stock market of the day as well. Here are some of the comparisons raised in the article:

  • Small cap stocks had been on a tear for a number of years, and led the market out of the bear market in 1982.

  • As a result, large cap stocks were under valued compared to small cap stocks.

  • For the 1st 9 months of the '82-'87 bull market, small caps outperformed large caps and small cap stocks like Apple quadrupled in value.

  • Small caps have dramatically outperformed large caps since 2000.

Indeed, it's that last point that seems to sum up much of the talk I've been reading about large vs. small cap stocks - the small cap bull is long in the tooth, and it's just time for large caps to take the reigns.

Is that true?

I don't know. I'm not a pro, and I doubt any of the pros really know for sure. It's easy to say that small cap stocks typically lead the rally, then get out of the way as the economy picks up steam and large caps charge back. But these are also not typical times, so who really knows.

Also, while much of the early 80's economic news was dominated by extremely high unemployment, much was also focused on extremely high inflation and interest rates left over from the 1970's stagflation era. Inflation and interest rates are about as far from that environment as this country has seen in generations, and I wonder how much of the stock market and large cap performance was due to the fed breaking the back of inflation. In which case, does the period from 1983 -1987 bear any resemblance on the next 5 years?

Tuesday, May 4, 2010

3 Structured CDs With Big Potential.

Structured CDs (Certificates of Deposit) offer some upside under certain market conditions of environments where traditional CDs only offer safety of principal. In a general sense, the value of a structured CD is based on some underlying asset. This is usually done by the use of some kind of index to track that asset. Here are 3 structured CDs, based on 3 different indexes.

Inflation indexed CDs.

Tradition CDs are often touted as "safe investments" because the principal is guaranteed as is the interest rate. But the hidden risk to a traditional CD is the same as the risk to a savings account or a bond - inflation.

For example, if you bought a 5 year CD that was paying 2.63% (the average at the time of this post) and 2 years later inflation jumped to 5% for the remainder of the CD term, you would have actually lost money.

Inflation indexed CDs seek to eliminate this risk, by offering a lower rate but tying it to the inflation rate. For example, Wells Fargo offers a 5 Year CD that yields Inflation + 1.4%. As of last year, paid 3.25% until June 2012. After that, it resets to 1.4% above CPI. If the inflation rate in 2012 is as high as it was in 2008, you'd make over 5%. It could go even higher if 70's style inflation hit.

This sounds great - and it is for protecting against inflation - but you wouldn't want to put all of your money in this type of CD because:

  1. It's only guaranteeing you 1.4% return (after inflation).

  2. If inflation drops or holds steady at a lower rate, you may not really make much more than a traditional CD and you could even make less.

Stock or equity indexed CDs.

One of the tradeoffs of traditional CDs is safety in place of high returns. You simply aren't going to make as much from a CD as you can in the stock market. That's because there is much more risk in stocks than certificates of deposit.

But a new bread of CD aims to fix that, somewhat. Stock indexed CDs offer a stable floor for your return along with a potential upside if the stock market does well. For example, Harris Bank offers a 5-year stock indexed CD that yields the return of the S&P 500 returns. It's capped at up to 20% annually, and you don't get any of the dividends. The downside is that if S&P 500 goes down, investors only get to keep their principal.

Obviously, this is an upside when compared to what would happen in the stock market. For example, owning a fund that tracked the S&P 500 in 2008 would have lost you 40% of your money, whereas owning a stock indexed CD would have saved you from that 40% loss.

But when you compare that to a gain of 2-3% for a traditional CD, it's still a loss. It all depends on your benchmark and purpose in investing.

Currency indexed CDs.

Finally, we have the currency indexed CD, which usually offers a variable yield based on the currencies of one or more foreign countries. For example, Wells Fargo recently offered a 3-year CD that tracked the currencies of BRazil, Russia, India and China (BRIC countries).

At the end of the 3 year term of the CD, the holder is paid a yield based on whatever those currencies have gained against the dollar, plus 30%. If the dollar falls, investors earn 30% plus the difference. But if the dollar rises, investors get nothing.

Monday, May 3, 2010

Investor Psychology: Overconfidence And Your Portfolio (VIDEO)

What does a Finnish military exam have to do with investing? Watch the video of
Nick Barberis, professor of finance at Yale University, explaining the link as it relates to overconfidence in investing.