Tag Archives: opinion

The Cheapest Domestic Dividend ETFs

Summary I found five domestic dividend ETFs with expense ratios below .15%. The yields on three are fairly compelling. The sector allocations show strong allocations for several to consumer staples. Even though VIG has a low dividend yield, the fund offers great sector exposures. The high expense ratio goes to HDV, but it is only .14% and the sector allocations are great for investors that believe big oil will recover. There are a few big dividend ETFs for exposure to companies offering respectable dividend yields. In this article I want to compare a few of them. Let’s meet the 5 of the big dividend ETFs: Ticker Name Index SCHD Schwab U.S. Dividend Equity ETF Dow Jones U.S. Dividend 100™ Index VYM Vanguard High Dividend Yield ETF FTSE High Dividend Yield Index VIG Vanguard Dividend Appreciation ETF NASDAQ US Dividend Achievers Select Index DGRO iShares Core Dividend Growth ETF Morningstar® U.S. Dividend Growth Index HDV iShares Core High Dividend ETF Morningstar® Dividend Yield Focus Index Dividend Yields Since these are dividend ETFs, the first thing investors are going to be looking at is the dividend yield. The dividend ETF space is a great option for investors looking for higher yields on their portfolio but without a large enough portfolios to justify picking 30 to 50 individual dividend champions. The yields for these five range from 2.25% to 3.75% First Impressions Investors right away may notice that the Vanguard Dividend Appreciation ETF and the iShares Core Dividend Growth ETF don’t have a very high yield compared with the other dividend ETFs. It may be rational for investors looking at these funds to ask whether they should really be considered high dividend yield ETFs, but both of the portfolios are focused on companies that they expect to grow dividends significantly. Expense Ratios These funds were all selected for having extremely low expense ratios. The ratios range from .07% to .14%. While the Schwab U.S. Dividend Equity ETF technically only has 70% of the expense ratio of Vanguard’s options, the difference of .03% is not material. Even doubling from SCHD to HDV is still only increasing the ratio .14%. For the frugal investor, any of these options would be a reasonable choice so long as they are happy with the rest of the characteristics of the portfolio. Free Trading If investors are being careful with their cash and keeping an eye on factors like the expense ratio, then they may find free trading to also be very appealing. For the investor that is regularly investing more than $10,000 the commissions would cease to be a material factor, but for the investor that wants to be able to make several small purchases to keep building up their position each month for years the impact of commissions will add up. (click to enlarge) My Thoughts I would find any of these ETFs attractive. Personally I’m holding the Schwab U.S. Dividend Equity ETF and the decision was certainly influenced by free trading since I like to be able to add to my positions whenever there is a dip in prices. I expect to average purchasing ETFs one to three times per month. That is not three times for the same ETF, but I may be adding to positions in several sectors which would cause the commissions to start adding up. The other factor influencing me was the fact that SCHD is holding about 22% of the portfolio in the consumer staples sector. I don’t want to focus my investment efforts on market timing, so when prices feel high I look for more defensive allocations such as the consumer staples sector. This is the top allocation for VYM as well, though it is only around 14% to 15% of the portfolio. DGRO is also overweight on consumer staples at 17.65%, but industrials are the top allocation with 19.15% of the portfolio. VIG deserves a great deal of respect for the investor wanting more consumer staples in their portfolio. The fund has 26.43% of the portfolio in the sector. Even though the yield is lower on VIG, this is a solid portfolio. The biggest thing for investors here to consider is that the fund has only 2.31% to utilities, 1.26% to energy, and .10% to telecommunications. If an investor in VIG wants some Verizon (NYSE: VZ ) or AT&T (NYSE: T ), they’ll need to buy those shares individually. My favorite allocations arguably come from HDV though. The fund has a 20% allocation to both consumer staples and energy. For investors that don’t want to hold the oil giants, this would be a terrible choice. For investors that are happy to hold some of the oil champions, this is a great portfolio. The ETF offers a very strong yield and the exposure to oil helps an investor if oil prices go back up. If oil stays cheap, it will be a favorable development for the rest of the economy since it will drive down transportation costs and lead to many consumers having more cash in their pockets. For investors that want the oil exposure but don’t want to buy to buy into HDV because they have free trading on the others or because they are concerned about the slight difference in the expense ratio, they could buy their ETF of choice and simply buy some shares in Exxon Mobil (NYSE: XOM ) to get their oil exposure. What do You Think? Which dividend ETF makes the most sense for you? Do you want to overweight consumer staples for more safety in a downturn or would you rather have more upside in a prolonged bull market? Do you want to own the oil companies, or do you foresee gas as being in a long term downtrend that makes the business model much weaker?

U.S. Geothermal – Still No Short-Term Catalysts On The Horizon

Summary US Geothermal continues providing decent financial results. This year the company demonstrates some progress in taking two geothermal projects, WGP Geysers and El Ceibillo, closer to their production phase. However, in my opinion, setting COD (“Commercial Operation Date”) at 2Q 2018 (El Ceibillo) and 3Q 2017 (WGP Geysers) is going to be a challenge for the company. I believe that currently US Geothermal’s shares are overvalued against its peers. On November 23, 2015 US Geothermal Inc (NYSEMKT: HTM ) published its 3Q 2015 results. Below I am commenting on these results. I am also covering the last developments at the two most advanced geothermal projects. Year to date financial results The table below summarizes year to date financial results: Source: Simple Digressions and the company’s reports As the table shows, the results reported by the company in the first nine months of 2015 were comparable to those reported last year. However, a 17.5% increase in book value is worth commenting. To remind my readers, I consider book value as one of the best performance measures of any company. Simply put, if a company is able to increase its book value in the long-term, it means that it has built its value. Let me show how HTM was building its value: Source: Simple Digressions and the company’s reports Note: to calculate HTM book value I have excluded two issues, which distort it in the long-term: Accumulated other comprehensive income (AOCI) – it is part of the equity section of the balance sheet, representing accumulated unrealized gains and unrealized losses, such as cash hedges or currency translation adjustments. Every year or quarter this item fluctuates, very often quite much. What is more, AOCI depends on exchange rates, interest rates and other issues, which the company does not control. Therefore I have eliminated AOCI from my calculations of book value. Non-controlling interest – because non-controlling interest represents the stakes other entities hold in the company’s consolidated assets I have excluded this issue from my calculations. Because non-controlling interest is excluded from my calculations, the final figure demonstrates book value attributable to the company’s shareholders. As the chart shows, HTM increased its book value attributable to its shareholders from $0.66 per share at the end of 2012 to $0.80 per share at the end of September 2015 (an increase of 21.2%). In my opinion, it is a big plus – US Geothermal, increasing its book value in the long-term, behaves like a classic utility company. Operating results The table below presents basic operating results: Source: Simple Digressions and the company’s reports As the table shows, year to date US Geothermal reported slightly lower electricity generation and slightly higher operating expenses than in the same period in 2014. After taking a closer look at each operating facility I came to the conclusion that the main factor, standing behind higher operating expenses, was the Raft River’s performance. Raft River, located in Idaho, is the smallest HTM’s power plant, in terms of generation capacity (9.4 MW). Since the beginning this facility has been lagging behind other two plants. However, this year this underperformance is particularly striking: (click to enlarge) Source: Simple Digressions and the company’s reports As the chart shows, this year each megawatt hour, generated by Raft River, delivered only $4.94 in operating income (I call it “Netback”). Other plants, San Emidio and Neal Hot Springs, delivered $61.19 and $75.66, respectively. In its 3Q 2015 report the company explained that there were two reasons standing behind this underperformance: 371 lost hours during two unplanned outages (according to my calculations, these outages were responsible for the lost revenue of $196 thousand) Higher operating costs due to turbine repairs and wage increases – year to date these additional costs were $361.5 thousand (turbine) and $142.3 thousand (wages). I think that technical problems, experienced at geothermal facilities, happen sometimes. However, granting wage increases to the crew when the facility is in trouble is not, in my opinion, the best practice. Projects under development US Geothermal has four projects classified as “Projects under development”: El Ceibillo Phase I, San Emidio Phase II, WGP Geysers and Crescent Valley Phase I. Of these four projects, in 2015 the company was developing mainly two of them: WGP Geysers and El Ceibillo. Below I am commenting on these developments. WGP Geysers In April 2014 the company acquired the so-called “Geysers project”. To remind my readers, this project is located in the Californian broader Geysers geothermal field, the largest producing geothermal field in the world. In June 2015 the company completed a flow test program of the three production wells. These tests confirmed that wells were operational but to achieve a planned long-term capacity of 28.8 MW, two or three additional production wells should be reopened (the company does not need to drill new wells). In other words – before any geothermal company takes a decision on eventual production, flow tests have to be performed to establish resource viability. US Geothermal completed such tests and announced that two or three additional production wells were needed. In my opinion, it is an important message. It seems that the company is approaching a production decision on WGP Geysers – if such is the case it could be a game changer. However I have some doubts. The company estimates that production at Geysers should start in the third quarter of 2017. In my opinion, it will be a challenge to meet this timeline because HTM must, for example, open two or three production wells, connect its property to the grid, sign a power purchase agreement, find financing for its project etc. All these issues need time so the two-year time frame, in my opinion, seems to be very optimistic. El Ceibillo, Guatemala US Geothermal used to postpone a commercial operation date (COD) of El Ceibillo many times. Fortunately, since the fourth quarter of 2014 the company has been confident that this facility should start its operations in the second quarter of 2018. On October 13, 2015 HTM was granted the concession agreement for the El Ceibillo development. To remind my readers, the previous concession expired this year so now the company is once again formally allowed to continue development. Currently the company is in the middle of it. In 2014 it completed a nine hole temperature gradient drilling program (an initial part of any development). This year HTM is performing flow tests – one well (EC-2A) confirmed that there is a commercial resource at El Ceibillo but at least two additional wells are needed to extend the resource area (drilling at the first well, EC-3, started on October 29 ). Summarizing, the company is at its intermediate stage of development at El Ceibillo. In my opinion, setting 2Q 2018 as a COD is going to be, similarly to WGP Geysers, a challenge. Equipment purchase On November 9 the company announced it acquired equipment for the construction of three binary geothermal power plants. This equipment was acquired at a significant discount to its cost. According to the company: “We paid $1.5 million, which is approximately 5% of the equipment’s original cost, a saving of roughly $28 million. This equipment gives us the ability to expand our megawatt output at our existing portfolio of advanced stage development projects at significantly lower cost, and in much shorter construction timeframes” The equipment is supposed to be applied to the Crescent Valley and San Emidio Phase II projects. The initial market reaction was very positive – on November 9, the company’s shares closed 8.9% higher than on the previous day. Well, in my opinion, the equipment acquisition is surely a positive thing in the long-term – the company should save a lot of money and time at the construction of Crescent Valley and San Emidio II. The management did a very good job, indeed. However, in the short-term this message means nothing – the company has just bought some equipment, which will be stored as inventory, waiting a few years to be applied. Additionally, this equipment will be accounted for as inventory and disclosed at cost ($1.5 million). However, the most paradoxical thing is the fact that when both projects start their operations, the company will be allowed to recognize depreciation charges attributable to only $1.5 million. Putting it differently, an excellent managerial success, due to accounting and fiscal rules, will be converted into lower depreciation charges and higher taxes in the future. Valuation To demonstrate US Geothermal’s market valuation I have calculated the Enterprise Value / EBITDA multiples for a few geothermal energy stocks. The chart below, depicting these ratios, was taken from my article on another geothermal company, Polaris Infrastructure. As the chart shows, currently the company’s shares are trading at a multiple of 12.3, which means that they relatively overvalued against its peers: Summary US Geothermal continues to provide descent financial results. However, due to large non-controlling interest component, HTM shares are relatively overvalued against its peers. In this article I have covered two projects, which are approaching production phase – WGP Geysers and El Ceibillo. Year to date some progress towards putting these projects closer to production has been evident. However, in my opinion, to meet time frames set by the company is going to be a challenge. Therefore I am sustaining my previous thesis on US Geothermal – there are still no short-term catalysts to lift the company’s shares. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

DWX: High Yield International Allocations With Falling Share Prices

Summary The dividend of 5.69% looks incredible until investors take a look at the total return. The individual holdings have fairly high weights which suggest higher volatility. The sector allocations for utilities look great, but the lack of other defensive sectors is fairly strange. Looking at historical performance confirms the higher volatility of the fund and a negative total return over a long time period. The SPDR S&P International Dividend ETF (NYSEARCA: DWX ) is a weird fund that doesn’t quite seem to go together for me. I’ve seen quite a few good dividend ETFs lately and started to wonder if my standards were simply slipping. It seems I was just due for finding one that didn’t work for me. Expenses The expense ratio is a .45%. This is quite a bit too high for my tastes. Dividend Yield The dividend yield is currently running 5.69% according to Yahoo Finance. This is just a beastly dividend yield and looks very attractive, though investors should expect weak trailing returns for most international ETFs. Over the last several years the domestic market has substantially outperformed the international markets. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: The first thing to notice about the international allocations here is that the weightings are fairly heavy near the top of the chart. Around 25 to 30% of the portfolio is allocated to the top 10 holdings. This isn’t what I would consider extreme, but it is a little heavy for investors hoping for substantial international diversification to lower their risk since international stocks can be especially volatile. Sectors It’s fairly normal to see the financial sector receive a heavy allocation in dividend ETFs and I’ve found international allocations are also prone to placing a higher weight on the financial sector. With both factors in place here, it is no surprise that the financial sector is receiving such a heavy weight. On the other hand the heavy allocation to utilities is what I would consider fairly attractive since utilities have a great position in negotiating on price. The sector is generally going to be less competitive and investors can expect the companies to be fairly stable in being able to generate some profits. It is interesting to see that the health care sector and the consumer staples sector, which are the other two defensive sectors, have received very low weights after the heavy weight given to utilities. That’s a little strange and dampens my excitement about the fund. Geography I put together the following chart to demonstrate the allocations by country: (click to enlarge) The majority of these allocations are to developed countries, but there is a mix of emerging markets being included. I don’t mind using a mix like this as part of an international allocation, but it is interesting to see Japan being entirely absent from the country allocations when they have a fairly heavy weighting in many international portfolios. Volatility I ran a regression on the returns for DWX compared to the S&P 500 going all the way back to February of 2008. The annualized volatility for DWX was materially higher at 27.8% compared to 22.3% for the S&P 500. On top of much higher values for annualized volatility, the total return was a negative 21.0% compared to the S&P 500 being up 82%. I expect international allocations to have suffered quite materially relative to domestic equity, but the this is a long period in for a total return of negative 21%. Conclusion The allocations looked a little interesting as we got into the sector allocations, but the weaker allocations to two of the three defensive sectors was enough to give me cause for concern. The country allocation seemed interesting, but I didn’t see any problems that couldn’t be rectified by combining the fund with other funds that put heavier allocations into the missing markets such as Japan. The real problem came when I decided to look at the returns since 2008 and saw that despite a strong yield the fund has been struggling on total returns. International funds have generally had a rough go since the last recession but that is remarkably weak over a prolonged period.