Thank you for a superb piece of work. (And thank you for quoting me - unnecessary, but typical of your courtesy and professionalism.)
I'd been wondering how a comparison of dividend to non-dividend stocks could account for differences between sectors. (For example, utility and telecom stocks often pay dividends, whereas tech stocks don't.) By using PEG ratios, you found an elegant and simple solution to this problem.
It would be a great service to dividend investors if you could keep an eye on these metrics, perhaps by publishing an update to this article periodically.
Thank you again for an excellent piece of work. - David
Testing A Harry Browne Permanent ETF Portfolio [View article]
This is fascinating. Has anyone tested using an emerging market stock ETF instead of a US stock ETF like SPY?
The theory for it would be that emerging market stocks are like US stocks with added beta, and in the long term (say next 10 years) will perform better due to higher GDP growth.
How Can You Tell If A Dividend Stock Is Overvalued? [View article]
Sorry for diverting the conversation somewhat by mentioning dividend ETFs. I think the key issue is how to measure valuation (and identify overvaluation) in a way that's most useful for dividend stock investors. There are three possible approaches for looking at an individual stock's valuation:
1. Compare the valuation of a stock to its historical average. 2. Try to come up with some "absolute" valuation of a stock (eg. current discounted value of future earnings or dividends). 3. Compare the valuation of a stock to its peers.
For dividend investors who are picking from a universe of dividend paying stocks, they also face the risk that dividend stocks generally - ie. their "universe" - has become overvalued.
To asses that, we'd need to compare valuations of a large group of dividend stocks to non-dividend stocks. That's what I was getting at when I suggested calculating the valuation metrics for the dividend ETFs.
However, because dividend stocks tend to be concentrated in certain sectors (eg. utilities and financials but generally not technology), I guess we'd have to compare dividend stocks to others in their sectors. And that raises its own issues...
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Smarty_Pants,
Perhaps the key issue here is ease of risk management. Sometimes stock picking distracts you from focusing on the real sources of risk in your portfolio. See http://seekingalpha.co...
Portfolio Changes: Looking More Like The Market [View article]
Roger, As always, an excellent and thought-provoking post. Two questions:
1. How do you track whether these top-down tactical asset allocation decisions are successful over time? Is it easy to separate out the impact of those decisions vs. which particular instruments you choose to implement a top-down strategy?
2. Do you think individual investors should be making tactical asset allocation decisions like this, or would they get sucked into the emotions of the market, resulting in buying high and selling low?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
SmartyPants, thanks for mentioning "Market Wizards" by Jack Schwager. I read it a number of years ago, and remember that I tremendously enjoyed it, but hadn't remembered the frequent insights about risk management. Thank you for the reminder!
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Cam,
Agree -- the strategy you outlined is particularly powerful in taxable accounts, where the cost of incurring capital gains might outweigh the benefits of rebalancing. Dividend stocks would be equally inefficient in taxable accounts, as you'll be paying tax on the dividends.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
giorgiolb,
On "John Bogle became quite rich selling index funds, so it's no surprise he feels that way":
You're right to be mindful of someone's self-interest when evaluating their advice. People are often affected by self-interest even without realizing it.
On the other hand, the best businesses are created by people, like Steve Jobs, who passionately believe in their products and generate enormous value for their customers.
I think John Bogle falls into the category of people who passionately believe in their product for all the right reasons. You get a strong sense of that when you read his book "On Investing", included in my list of The Best Investing Books Of All Time here: http://bit.ly/xQx0bM
A Dividend Bull Considers How A Recession Might Play Out [View article]
PompanoFrog, there's a real risk that dividend stocks will get significantly overvalued due to low rates and millions of people entering retirement, so the issue of dividend stock over-valuation is critical for many people.
Can you share any data re. your statement that "Dividend stock portfolios are selling at substantial premiums to non dividend stocks. And I dont mean 20% premiums"?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Lawrence, thanks for the links and resources. I was particularly interested in backtests of different rebalancing strategies. William Berstein article tests different frequencies for rebalancing, but I haven't seen anyone comparing periodic rebalancing to rebalancing triggered by deviations from target allocation.
Here's an idea I raised in the ETF Guide: You rebalance when allocations get seriously out of alignment with your target, and you then over-adjust. For example, if you're targeting 10% of your portfolio for US large caps and they become 15%, ie. a 20% deviation from your target, you then cut them back to 8%. The reasoning being: - swings in asset classes tend to have momentum, so let it ride to somewhat (in this case all the way to a 20% deviation from target); - rebalancing is based on an assumption that asset classes revert to mean trend. By "overcompensating" in the other direction, you're cutting back on an asset class that has become overvalued.
A Dividend Bull Considers How A Recession Might Play Out [View article]
Long-Term Investors Can Take Advantage Of The Dividend Bubble [View article]
Dividend Stocks Not Overvalued Yet [View article]
Thank you for a superb piece of work. (And thank you for quoting me - unnecessary, but typical of your courtesy and professionalism.)
I'd been wondering how a comparison of dividend to non-dividend stocks could account for differences between sectors. (For example, utility and telecom stocks often pay dividends, whereas tech stocks don't.) By using PEG ratios, you found an elegant and simple solution to this problem.
It would be a great service to dividend investors if you could keep an eye on these metrics, perhaps by publishing an update to this article periodically.
Thank you again for an excellent piece of work.
- David
Testing A Harry Browne Permanent ETF Portfolio [View article]
Testing A Harry Browne Permanent ETF Portfolio [View article]
The theory for it would be that emerging market stocks are like US stocks with added beta, and in the long term (say next 10 years) will perform better due to higher GDP growth.
A Dividend Bull Considers How A Recession Might Play Out [View article]
and ETFs (FLOT) (FLRN). Tack, any thoughts on those?
How Can You Tell If A Dividend Stock Is Overvalued? [View article]
1. Compare the valuation of a stock to its historical average.
2. Try to come up with some "absolute" valuation of a stock (eg. current discounted value of future earnings or dividends).
3. Compare the valuation of a stock to its peers.
For dividend investors who are picking from a universe of dividend paying stocks, they also face the risk that dividend stocks generally - ie. their "universe" - has become overvalued.
To asses that, we'd need to compare valuations of a large group of dividend stocks to non-dividend stocks. That's what I was getting at when I suggested calculating the valuation metrics for the dividend ETFs.
However, because dividend stocks tend to be concentrated in certain sectors (eg. utilities and financials but generally not technology), I guess we'd have to compare dividend stocks to others in their sectors. And that raises its own issues...
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Perhaps the key issue here is ease of risk management. Sometimes stock picking distracts you from focusing on the real sources of risk in your portfolio. See http://seekingalpha.co...
Portfolio Changes: Looking More Like The Market [View article]
As always, an excellent and thought-provoking post. Two questions:
1. How do you track whether these top-down tactical asset allocation decisions are successful over time? Is it easy to separate out the impact of those decisions vs. which particular instruments you choose to implement a top-down strategy?
2. Do you think individual investors should be making tactical asset allocation decisions like this, or would they get sucked into the emotions of the market, resulting in buying high and selling low?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Agree -- the strategy you outlined is particularly powerful in taxable accounts, where the cost of incurring capital gains might outweigh the benefits of rebalancing. Dividend stocks would be equally inefficient in taxable accounts, as you'll be paying tax on the dividends.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
On "John Bogle became quite rich selling index funds, so it's no surprise he feels that way":
You're right to be mindful of someone's self-interest when evaluating their advice. People are often affected by self-interest even without realizing it.
On the other hand, the best businesses are created by people, like Steve Jobs, who passionately believe in their products and generate enormous value for their customers.
I think John Bogle falls into the category of people who passionately believe in their product for all the right reasons. You get a strong sense of that when you read his book "On Investing", included in my list of The Best Investing Books Of All Time here:
http://bit.ly/xQx0bM
Why I'm Short Turkey [View article]
A Dividend Bull Considers How A Recession Might Play Out [View article]
Can you share any data re. your statement that "Dividend stock portfolios are selling at substantial premiums to non dividend stocks. And I dont mean 20% premiums"?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Here's an idea I raised in the ETF Guide: You rebalance when allocations get seriously out of alignment with your target, and you then over-adjust. For example, if you're targeting 10% of your portfolio for US large caps and they become 15%, ie. a 20% deviation from your target, you then cut them back to 8%. The reasoning being:
- swings in asset classes tend to have momentum, so let it ride to somewhat (in this case all the way to a 20% deviation from target);
- rebalancing is based on an assumption that asset classes revert to mean trend. By "overcompensating" in the other direction, you're cutting back on an asset class that has become overvalued.
Interested in thoughts on this...