Dividends And Compounding Returns

Includes: ABBV, ABT, BRK.A, BRK.B, CVX, GE, GM, GOOG, GOOGL, IBM, JNJ,

Summary

This article links together two recent academic research pieces and describes strategies that may capture the findings of these works.

Skewness in stock returns and the lower tendency of dividend payers to experience stock crashes both fit into a narrative around the types of companies that outperform long term.

The article illustrates that stable dividend payers have been among the small number of companies that have generated the bulk of shareholder wealth in the United States.

I have written two recent articles on fascinating, recently published academic research. In my article "Why Many Investors Fail", I described research that showed that the equity risk premium in the United States has been historically attributable to only a small number of stocks whose outstanding performance skewed average returns higher. In "Dividends and Stock Crashes," I described research that showed that dividend-paying stocks are less prone to large stock price corrections. Both of these papers are interesting on a standalone basis, but I believe they are even more powerful for Seeking Alpha readers when considered together.

Why Many Investors Fail

Arizona State University's Henrick Bessembinder's "Do Stocks Outperform Treasury Bills?" is a fascinating paper. We know that the simple answer to the titular question is a resounding "Yes." Over long time intervals, the equity market has, on average, paid an investor a premium for taking equity risk.

In tracking nearly 26,000 stocks, Bessembinder found that a whopping 58% of stocks failed to outperform Treasury bills over their lifetimes in the dataset. On average, stocks outperform over long time intervals, but the median stock in the U.S. equity market has actually produced negative alpha, an average return that trailed risk-free Treasury bills. That's not the type of alpha we are collectively seeking, and this stat should be of great interest to stock pickers out there.

Bessembinder's paper is essentially on skewness, and the idea behind why the stock market has generated long-run excess returns, but most stocks have not produced a better return than bonds. It makes intuitive sense. Over very long time intervals, the maximum you are going to lose is 100%, but cumulative gains can be astronomical. The right tail of the distribution is much longer. Unfortunately, the most common cumulative return over a decade-long holding period for stocks in the database is -100%. The positive excess returns for the market are a function of that long right tail.

Dividends and Stock Crashes

Over a long enough time period, companies go out of business. In "Dividend Payments and Stock Price Crash Risk," authored by Jeong-Bon Kim of University of Waterloo, Le Luo of Huazhong University of Science and Technology, and Hong Xie of the University of Kentucky, the authors demonstrated the negative correlation between dividend payments and stock price crashes. The paper suggested that a firm's commitment to dividend payments reduces agency costs and lowers the risk of large-scale stock price drops. It stands to reason that companies not experiencing large-scale price drops are more likely to make it into the hallowed right tail.

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While this data in this article was based on weekly returns, I believe there are still long-run implications. In Bessembinder's article, he listed in the exhibits the 30 best-performing stocks in the dataset stretching from 1926-2015 as excerpted below:

These 30 stocks have cumulatively generated nearly one-third of the total wealth creation from U.S. stocks over a period pre-dating the Great Depression.

It should come as no surprise that this list is populated by royal blue-chips. A company would need to have grown into a market leader to rank highly on this list. Another interesting observation from this table is the commonality in the other lists that these companies populate.

From this list of 30 companies, 3M (NYSE:MMM), Abbott Labs (NYSE:ABT), AT&T (NYSE:T), Chevron (NYSE:CVX), Coca-Cola (NYSE:KO), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), McDonald's (NYSE:MCD), PepsiCo (NYSE:PEP), Proctor & Gamble (NYSE:PG), and Wal-Mart (NYSE:WMT) are all members of the Dividend Aristocrats (NOBL, SDY). Counting both Exxon and Mobil, 40% of this list is populated by companies that have at least a 25-year history of increasing dividend payments to shareholders. This type of consistent dividend growth has been one of my 5 Ways to Beat the Market. Companies with the discipline and financial wherewithal to return increasing amounts of cash to shareholders over multiple business cycles are likely to be in the right tail of the distribution, where you can bet on seeing compounding returns over long-time intervals.

Another one of my preferred dividend strategies is to focus on low-volatility, high-dividend companies (NYSEARCA:SPHD). Abbott spin-off AbbVie (NYSE:ABBV), AT&T, Chevron, Coca-Cola, Exxon Mobil, General Electric (NYSE:GE), General Motors (NYSE:GM), International Business Machines (NYSE:IBM), Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Proctor & Gamble are each part of the 50-member S&P 500 Low Volatility High Dividend Index, which tracks the 50 lowest-volatility members of the 75 highest-dividend paying S&P 500 constituents. Companies that pay sustainable levels of dividends and have lower realized volatility are less likely to experience stock crashes and more likely to experience compounding returns.

There are some notable exceptions in this table. Berkshire Hathaway (BRK.A, BRK.B) has never paid a dividend, choosing to reinvest the cash flow its operating businesses and investments generate. Alphabet (NASDAQ:GOOGL) also does not pay a dividend. Both companies have the balance sheet and capacity to pay steadily increasing dividends, but have chosen not to follow this path. They are, however, exceptions and not the rule.

The takeaways from these two research pieces are that an outsized portion of the equity risk premium is a function of very high long-run returns from a small number of stocks. Those stocks tend to be high-quality dividend payers which are less prone to stock crashes. Both of the dividend strategies I described in this article have handsomely outperformed the S&P 500 over time with lower variability of returns. These strategies are populated by long-run stable dividend payers that typically avoid crashes and compound successfully over time.

Acknowledgement - http://www.stockpiqs.com/p/thanks.html

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

By Ploutos 

Disclosure: I am/we are long SDY, SPHD, NOBL.

Source:https://seekingalpha.com/article/4060388-dividends-compounding-returns

How To Beat The Market By 20 Percentage Points

Hedge funds are much better investors than you are made to believe by the financial press. Even hedge fund indices hide the truth about hedge funds’ amazing talent in picking winners and losers. Our research has shown that hedge funds’ top small-cap picks outperformed the market by nearly a percentage point per month between 1999 and 2012. We launched an investment newsletter that shares the stock picks of this strategy in real-time. This strategy returned 131.4% between the end of August 2012 and February, 2015. S&P 500 ETF (SPY) gained only 57.2% during the same period. Hedge funds’ top stock picks significantly outperformed the market.

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However our advice to you is to dump your hedge funds.

The fact is that most hedge fund investors don’t make as much money as they did in the nineties and the first half of the past decade, where alpha in excess of 10% was the norm. Aggregately speaking, hedge funds’ alpha has been in decline over the past decade for several reasons. They are as follows:

1) A greater level of competition within the hedge fund industry has caused profit margins to shrink.

2) Hedge funds got bigger and started investing in less profitable areas.

3) There are a lot of unskilled hedge fund managers who are trying to get rich by being “lucky”.

4) Equity hedge funds charge an arm and a leg for beta exposure.

Our research has shown that hedge funds have a small edge when it comes to large-cap stock picks and a large edge when it comes to small-cap stock picks. We created a 50-stock portfolio of the most popular large-cap stocks among fund managers. Between 1999 and 2012, this 50-stock portfolio underperformed the market by less than 1 percentage point per year but its annual alpha was 0.7 percentage points (read the details here).

It should be clear to you, then, that hedge funds’ large-cap stock picks are marginally better than the S&P 500 index because of their lower risk profile. However, if you are a hedge fund client you won’t see much outperformance in this space because you have to surrender 2% of your assets and 20% of each year’s return to your hedge fund manager. If your hedge fund invested entirely in large-cap stocks in 2014, its gross return would have been 13.5% but YOUR net return would have been only 8.8%, because you have to pay 2 percent flat fee and 2.7 percentage points of performance fee as if they accomplished something significant!!

Hedge funds can’t generate enough alpha in the large-cap space to justify their high fees. They invest in the large caps because they have too much money to manage, and they don’t want to give up juicy management fees that enable them buy condos on New York City’s Park Avenue. How do hedge fund managers get away with this?

The answer is simple.

They generate significantly higher alpha in their small-cap stock investments. Generally speaking, there are fewer analysts covering the little guys, and these stocks are less efficiently priced. Hedge funds spend enormous resources to analyze and uncover data about these stocks because this is one of the places where they can generate significant outperformance. Our analysis also shows that this is also a fertile ground for piggyback investors.

Between June 1999 and August 2012, the 15 most popular small-cap stocks among hedge funds managed to return 127 basis points per month.

It is not a typo. Reread it.

This outperformance wasn’t due to high risk either. Our small-cap strategy’s monthly alpha was 81 basis points during this 13-year period (read the details here). This isn’t even the end of the story.

We launched a newsletter at the end of August 2012 that lists the stock picks of this small-cap strategy. During the 2.5 years between September 2012 and February 2015 hedge funds’ most popular small-cap stock picks returned 131.4% vs. 57.2% return for the S&P 500 ETF. This corresponds to an average monthly return of 2.95% for these stocks versus 1.55% for SPY.

Our proposition is very simple: dump your hedge funds and imitate their small-cap stock picks. You don’t have to surrender 2% of your assets and 20% of your returns. You don’t have to invest in hedge funds’ large-cap picks which usually underperform the market. Finally, you don’t have to worry about fraud/mismanagement and you will have instant access to your funds. Click viewer appreciation button on page top to donate for blog upkeep

by Meena Krishnamsetty

Source: http://www.insidermonkey.com/hedge-fund/education-center/how-to-beat-the-market-by-20-percentage-points/1

A janitor secretly amassed an $8 million fortune and left most of it to his library and hospital

Brattleboro Reformer | AP Photo

In this December 2011 photo, Connie Howe pours coffee for Ronald Read, left, and Dave Smith during the Charlie Slate Memorial Christmas breakfast at the American Legion in Brattleboro, Vt.

You don't need to earn a massive paycheck to become a millionaire. As one-time Vermont-based janitor and gas station attendant Ronald Read demonstrated, you can reach the seven-figure mark on a modest salary. Unbeknownst to everyone around him until he died at age 92 in June 2014, Read had quietly amassed an $8 million fortune, thanks to smart spending and investing habits. Even Read's family was "tremendously surprised" upon finding out about his hidden wealth. "He was a hard worker, but I don't think anybody had an idea that he was a multimillionaire," Read's stepson Phillip Brown told the Brattleboro Reformer in 2015. Read came from humble beginnings. He was the first in his family to graduate from high school and served in North Africa, Italy and the Pacific theater during World War II, according to Reuters. After the war, he came home to work at a gas station and as a janitor at JCPenney, and married a woman who had two children. Read maintained a frugal lifestyle, never spending money unless he had to. Friends remember him driving a second-hand Toyota Yaris, using safety pins to hold his coat together and cutting his own firewood well into his 90s. "I'm sure if he earned $50 in a week, he probably invested $40 of it,"said friend and neighbor Mark Richards



He was also a good stock picker and had the control to hold onto stocks for the long haul, a strategy billionaire investor Warren Buffett recommends. "Mr. Read owned at least 95 stocks at the time of his death, many of which he had held for years, if not decades," The Wall Street Journal reported in 2015. "Among his longtime holdings were blue-chip stalwarts such as Procter & Gamble, J.P. Morgan Chase, General Electric and Dow Chemical. When he died, he also had large stakes in J.M. Smucker, CVS Health and Johnson & Johnson," the publication reported. The library invested the bulk of the money. That way, "it will continue to pay dividends and support us down the road," LaTronica said. The donation also allowed the library to extend its hours and do some much-needed renovations to the 50-year-old building. Read bequeathed $4.8 million to Brattleboro

 Memorial Hospital, where he was a regular — not for treatment, but for breakfast. "He always had a cup of coffee and an English muffin with peanut butter," Ellen Smith said of her friend's morning ritual at the hospital cafe. "That was it. And he always sat at the exact same stool at the counter." The hospital plans to use the money to support infrastructure improvements and general modernization projects. "There are multiple areas in the hospital that need to be updated, and so this money will certainly allow us to do that," Gina Pattison, director of development and marketing at the hospital, told CNBC. "We are just incredibly fortunate and grateful."

By Kathleen Elkins

Source : http://www.cnbc.com/2016/08/29/janitor-secretly-amassed-an-8-million-fortune.html

George Soros Made Billions Using This Simple Strategy -- You Can Use It, Too

Remember when America feared that its once-mighty economy was getting "hollowed out" and its workers were becoming indentured servants of Japan, Inc.?

What a difference 25 years of economic stagnation make. Japan's economy has contracted so often during the last few years alone, it's hard to keep track of its seesawing fortunes. Signs are now emerging that the country's gross domestic product may have declined again in the third quarter, dragged down by the flagging economy of China.
What's worse is that three years after Prime Minister Shinzo Abe won office with the goal of ending the slump with aggressive monetary stimulus, the country still remains mired in stagnation.
(It's not just Japan that's ailing. Check out this list of critically weakened stocks that are on the verge of collapse. If you own them, you need to sell them now.)
Most analysts are betting that when the Bank of Japan meets this week, it will launch yet another round of easing. By betting against the yen now, you can position yourself to make money off Japan's latest gamble to jump-start its moribund economy.
It's exactly how hedge fund billionaire George Soros made $4 billion in 2013. Combining political with investment acumen, he accurately predicted the downward direction of the yen. Here's why this tactic will be effective again.
For starters, another infusion of inflationary policies from the Bank of Japan will likely strengthen the country's stock market. After three years of infrastructure projects and easy lending, Japan has few economic or fiscal tools left to wield. Moreover, the country's graying population makes it exceedingly difficult to achieve higher labor productivity.
That gives Japanese policymakers little choice but to expand the scope of the country's already ambitious quantitative easing program. A falling yen makes the products of major Japanese exporters such as Honda Motor, Sony andHitachi cheaper overseas, which in turn boosts the "wealth effect" at home.
These forces all set the stage for a declining Japanese yen against a basket of currencies, especially as the Federal Reserve gets ready to end seven years of near-zero interest rates by tightening the monetary spigot.

The dollar is strong not so much because the U.S. economy is growing like gangbusters (it isn't), but because Europe and Japan, which form the largest components of the Dollar Index, are intentionally devaluing their respective currencies.
There are many reasons for the fear and certainty that now grip global markets, but China is a key culprit. As the Middle Kingdom continues to grapple with slowing growth and a busted stock market bubble, the country's economic policymakers increasingly seem desperate.
Beijing's recent devaluation of the yuan reflected how the nation's leaders are running out of tools to keep the economy and stock market afloat. A "currency war" is now breaking out across Asia, as countries dependent on manufacturing exports compete to produce the cheapest goods. Growth in emerging markets overall is sputtering, which leaves the markets vulnerable to more shocks down the road.

According to Goldman Sachs Asset Management's chief of fixed income in the Asia-Pacific region, the yen could decline as much as 20% over the next two years as Japan seeks growth through inflation.
You can bet against the yen by shorting the Guggenheim CurrencyShares Japanese Yen Trust (FXY) , which tracks the price of the yen.

FXY data by YCharts
Or you can take a more aggressive approach through a leveraged inverse yen fund, the ProShares UltraShort Yen ETF (YCS) , which seeks returns that correspond to two times the inverse of the daily performance of the U.S. dollar price of the yen.

YCS data by YCharts
(The yen isn't the only investment that's about to plunge. Click here for a list of 29 popular stocks that are in such perilous shape, you must avoid them at all costs.)

By John Persinos

Source:http://www.thestreet.com/story/13338492/1/george-soros-used-this-strategy-to-make-billions-you-can-use-it-too.html?kval=dontmiss

Opinion: 10 momentum stocks for a late-stage bull market

CHAPEL HILL, N.C. (MarketWatch) — Don’t give up on momentum stocks just because you worry the bull market may be nearing its end.

That’s because, contrary to popular belief, such stocks do not tend to be among the biggest losers when the market heads south. In fact, during bear markets, high-momentum stocks tend to do markedly better than those at the opposite end of the spectrum.

Momentum is typically measured over the trailing 12 months. So the stocks with the highest momentum are those with the best returns over the previous year, while those with the worst returns have the lowest momentum. A substantial body of academic research has documented that high-momentum stocks, on average, have significantly outperformed the market over the past century, while stocks with the least favorable momentum have markedly lagged.

Despite that strong academic support, however, many erstwhile followers of momentum strategies get particularly nervous when bear-market anxiety heats up. They worry that stocks with the highest momentum when the market is rising will be among the biggest losers when the market falls.

Some resort to a surfing analogy to express their concern: While a surfer rides high so long as his wave continues, he crashes when that wave comes to an end.

Compelling as this surfing analogy may be, however, it is misleading, according to Tobias Moskowitz, a principal at hedge fund firm AQR and a finance professor at the University of Chicago.

He told me that “while high-momentum stocks can be expected to lose during a bear market, historically, at least, they have not suffered significantly more than the overall market, and often fare better. Regardless, such stocks on average have fared better during bear markets than stocks with the worst trailing 12-month returns — those with the lowest momentum.”

“In fact,” he continued, “the times when high-momentum stocks fare worse than low-momentum stocks have come at the beginning of a new bull market — not at a bull market’s end or the beginning of a new bear market. Furthermore, it’s not that high-momentum stocks suffer at such times; their poor relative performance is caused by the sometimes exceptional gains of low-momentum stocks.”

Consider the performance during the 2007-2009 bear market of a hypothetical momentum portfolio that shifted each month into the 10% of stocks with the best returns over the previous year. It lost 43.5% between October 2007 and March 2009, according to data compiled by University of Chicago professor Eugene Fama and Dartmouth professor Ken French. That’s essentially no different than the 44.8% loss for the market as a whole.

In contrast, the 10% of stocks with the lowest trailing 12-month returns proceeded to lose almost twice as much: 75.8%.

The bottom line? Like other stocks, high-momentum stocks will lose during a bear market. But there is no special reason to avoid them even if you think the bull market is getting long in the tooth.

With that thought in mind, below is a list of 10 high-momentum stocks that are also recommended by at least one of the Hulbert Financial Digest-monitored advisers who have beaten the market over the past 15 years.

• VASCO Data Security International VDSI, +3.66%  
• Skyworks Solutions SWKS, -1.05%  
• Skechers USA SKX, +14.54%  
• Electronic Arts EA, +0.13%  
• Hospira HSP, -0.16%  
• Avago Technologies AVGO, -2.99%  
• Cambrex CBM, +1.26%  
• Southwest Airlines LUV, +0.96%  
• Cirrus Logic CRUS, +1.15%  
• Hanesbrands HBI, +1.35%  

By Mark Hulbert

Source: http://www.marketwatch.com/story/10-momentum-stocks-for-a-late-stage-bull-market-2015-04-22