Tag Archives: crisis

An Opportunity During Cloudy Days

Summary The volatility in the markets continues . With anxiety arrives opportunities. Here is one ETF with relatively low volatility and high dividend yield. The stock markets continue to move aggressively up and down. The uncertainty regarding the FED’s action next week drives the investors to levels of high anxiety where every small publication or clue regarding the coming interest rate hike leads to high volatility. History showed us that volatility phases are not short by nature and the best example to use is the 2011 summer selloff that took place due to the European debt concerns, and moreover, due to the U.S. credit rating downgrade. The length of high volatility phase back than was about three months, from early August till mid October. As the markets continue to be highly volatile opportunities for the long term, patient, investor are piling up. The first group of candidates to explore are the group of Aristocrats. Dividend Aristocrats are companies that have increased their dividend payouts to shareholders every year for the last 25 years. Among the more familiar names in this group are The Coca-Cola Company (NYSE: KO ), Chevron (NYSE: CVX ), AT&T (NYSE: T ) and Johnson & Johnson (NYSE: JNJ ). Overall there are about fifty members in this prestigious list of dividend stocks that are included in the Dividend Aristocrats index. Since pursuing fifty stocks in not really achievable the next best thing is to pursue an holding in an ETF that follows this index. SPDR Dividend ETF (NYSEARCA: SDY ) is a passive ETF that seeks to replicate S&P High Yield Dividend Aristocrats Index. I have written about SDY back in April when concerns regarding a correction that was coming about arose. Based on etfdb.com SDY has total of 101 holdings. That means that beyond tracking the Dividend Aristocrats Index the ETF is following the “Index of Champions” which, based on David Fish’s latest article , includes 106 companies. In order to assess the attractiveness of SPY compared to other ETFs I used the list of my best Big Cap ETFs that were published back in July : Vanguard Value ETF (NYSEARCA: VTV ), Vanguard Russell 1000 Value ETF (NASDAQ: VONV ), Vanguard S&P 500 Value ETF (NYSEARCA: VOOV ) and SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). The behavior back in 2011: (click to enlarge) When looking at the graph which compares the performance of the five ETFs, going from January to October 2011, we can see that SDY delivered the best return compared to all benchmarks. During that time period between January to October it delivered a positive 1.8% while the other ETF delivered negative returns up to -3.9% . When zooming in to the crisis period, between June to October 2011 it was again SDY that delivered the best performance, dropping by only 2.2% while the other benchmark ETFs went down by up to 7.8% . When comparing the volatility of these ETFs using a Coefficient of Variation metric (Standard deviation divided by Average price) SDY also comes out with the lowest volatility score. Back to 2015: (click to enlarge) When comparing the same list of ETFs during a similar timeframe in 2015, going from January to September, SDY is still one of the better ETF performers delivering a -8.8% which is only second to SPY which delivered -6.3% during that timeframe. When zooming in to the crisis period, June to September 2015, SDY delivered the best return at -8.9% while the other ETFs delivered lower performance all the way down to -10.7% . While delivering the highest performance DY also demonstrated the lowest volatility during that timeframe of high volatility. Based on Morningstar.com SDY’s current dividend yield is at 2.46%. In 2014 the ETF delivered more that $3 to its shareholders and therefore I believe that the dividend return at these levels is higher that 3%. Conclusions: With high volatility arrive opportunities. SDY is an ETF that follows one of the most prestigious indexes. With lower volatility compared to its benchmarks I find it very attractive and waiting for it at $65. Happy investing Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

Investing In The Investors

Summary This far into a bull market, U.S. investors traditionally have to make do with paltry yields in the 1-2% range. Unless they’re looking at a REIT or the commodities & energy sector, where an enormous question mark hangs over the medium-term outlook for oil and metals. However, there is another sector that is offering some eye-popping yields: the private equity industry. By Steven Carroll The private equity industry, where stalwarts such as The Blackstone Group LP (NYSE: BX ) offer an F12M dividend yield of 8.6% and KKR & Co. LP (NYSE: KKR ) an equally appealing 8.8%. So what’s going on? Source: Thomson Reuters Eikon The story unfolds Clearly the market’s growth expectations look undemanding (KKR -7.9% 5-year EPS CAGR, BX -8.3%), yet the StarMine Smart Estimate is forecast to rise gradually over the next three years in both cases. Why the disconnect? One suggestion is that markets see a large rise in volatility and assume exits from previous investments will be delayed. Another is that funding terms may be less favorable to the companies and/or that achieved prices on exit will be lower as investor appetites wane in line with falling stock market values. Certainly, it seems unlikely there’ll be a large amount of activity this quarter, but the share price is implying years of such volatility, or that the high of the cycle has come and gone (certainly possible, but a somewhat pessimistic base case). Source: Thomson Reuters Eikon Blackstone’s chapter When Blackstone first listed, there were many commentators that called the top of the market, and sure enough the $35 share price plummeted in line with the rest of the market, bottoming in mid-2008 at a stomach-churning $5. Since then, the share price has reached new highs, with the company’s all-time (and 52-week) high being $44.43. The stock has since fallen back just over 25% in the last 3 months, so it’s fair to say this isn’t a low beta stock. Quant indicators certainly appear in your favour – with a smorgasbord of high scores from StarMine’s various factor models. Source: Thomson Reuters Eikon Testing the wind The “alts,” or alternative asset managers, are often viewed as a levered play on capital markets. BX, KKR and their peers require stable markets in order to fund their acquisitions and ultimately be able to unload them back into the marketplace. The performance of BX seems to validate that, with eye popping outperformance (210% over five years) and, as mentioned, massive declines during the crisis period. So really this is a binary choice – for those who believe the markets are going through a normal period of bull market angst (three months ago it was Greece, today, China) this seems like an interesting stock with a huge carry. For those who believe this is the start of the great unwind, with the Chinese economy creating an inverted version of the super cycle – obviously BX and KKR still could have a lot of air to be removed from the tires. If you think commodities, oil and emerging markets are all going to plummet (from here) in the face of falling growth expectations in the world’s second largest economy – the sidelines might be a safe place. For the bull – with an 8.6% yield and a deeply pessimistic valuation – even just a stablilization of markets at current levels would probably be enough to earn some reasonable capital gains. The perma bears will no doubt have an alternative view but it seems an interesting opportunity. For the nervous retail investor – perhaps just sit on that fence for a while and add BX and KKR to the watch list. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

After The Fall: The Dividend Aristocrats Detailed

Summary Loss averse investors with long-run horizons should not be heading to the sidelines, but rather looking to buy quality businesses on weakness. An index tracking the Dividend Aristocrats has outperformed the S&P 500, producing higher average returns with lower variability of returns over the trailing quarter-century. This article details the components of this index, with current valuation and year-to-date performance, to highlight companies that may outpeform through the next bout of volatility. In yesterday’s article entitled ” Stocks Will Go Higher “, I showed readers that over ten year periods, stocks almost invariably produce positive returns, and suggested the readers plan to buy high quality businesses on weakness and be prepared to hold these investments for long time periods. If history is a guide, such a strategy is very likely to come out a winner. (click to enlarge) Sources: Standard and Poor’s; Robert Shiller (Blue Line is price returns and pink line includes dividends) That article was spurred by a recent quote by famed investor and CEO of Berkshire Hathaway ( BRK.A , BRK.B ), Warren Buffett, who stated in an August 10th interview on CNBC that ” Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years for now .” In this same interview, Buffett went further stating that “my game is to own decent businesses and decent prices and you are going to make a lot of money over time.” A strategy populated by good businesses that have generated market beating returns over times is the Dividend Aristocrats. The Dividend Aristocrats are S&P 500 (NYSEARCA: SPY ) constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years. To be included in this index, these companies, at a minimum, have paid increasing dividends through the Eurozone Sovereign Crisis, the Global Financial Crisis, the Tech Bubble, and the early 1990s recession. These are the types of businesses that would be likely to produce market-beating risk-adjusted returns through the next downturn as well. Heeding Buffett’s advice, perhaps buying these businesses on weakness will spur market beating returns prospectively. Demonstrating this success, below is the cumulative total return of the S&P 500 Dividend Aristocrats Index, which is replicated by the ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ). (click to enlarge) Source: Standard and Poor’s; Bloomberg The Dividend Aristocrats have produced higher average annual returns, outperforming the S&P 500 by 2.5% per year. This approach has also produced returns with roughly three-quarters of the risk of the market, as measured by the standard deviation of annual returns. This long-run outperformance saw this strategy included in my “5 Ways to Beat the Market .” Given the weak domestic equity market performance in August, I wanted to detail the Dividend Aristocrat components for Seeking Alpha readers with current P/E ratio and year-to-date performance. (click to enlarge) For the broad “Investing for Income” community on Seeking Alpha, I have also sorted the list of Dividend Aristocrat constituents descending by dividend yield. (click to enlarge) If you are a long-term investor, looking to buy solid businesses on weakness, perhaps this list of companies who can weather another bout of market-related volatility. If readers find this helpful, I will also put together a list of the constituents of the Low Volatility Index, another factor tilt towards high quality businesses that has generated long-run alpha. 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. Disclosure: I am/we are long NOBL, SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.