Dividend Yield - An investment factor?

Reading: White paper from Tweedy, Browne (verbosely) titled "The High Dividend Yield Return Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with Attractive Returns Over Long Measurement Periods."

tl;dr; summary: High dividend yield stocks as a whole outperform low dividend yield stocks.

However, unless you can buy high dividend yield stocks with transaction costs less than the outperform returns, this whole analysis is moot for the individual investor. Focusing on a smaller basket of stocks like the "Dogs of the Dow" is better. The "Dogs of the Dow" strategy is well known, and as a result, it did not surprise me that its 10 year return was lower than the Dow itself.

My portfolio has some stocks that pay dividends, mainly as a mechanism to generate income for future stock purchases. In other words, this portion of my portfolio is used for capital reallocation. The fact that, as the report suggests, high dividend stocks are less volatile in terms of the standard deviation of returns is not that important - my time horizon is long term and I still believe in value investing, so I still need to believe a dividend-paying stock is sufficiently undervalued.

Lists like S&P 500 Dividend Aristocrats and International Dividend Achievers™ Index are good starting points to peruse. My strategy is to pre-populate limit buy orders of selected companies with pre-computed valuations (that have a margin of safety). This runs the risk of buying a company that has truly deteriorated fundamentals, but with Mr Market antics like the occasional dips and flash crash, coupled with regular reevaluations to keep the buy order list up-to-date, I have managed to snag high quality dividend paying stocks like ADP, MMM, JNJ, PG and XOM at very good price points. Most recently, if you follow my covestor account, you might even noticed me purchasing GSK - the salient points for GSK is a high barrier of entry due to regulatory laws and it is one of the few companies capable of being in this field due to its economics of scale. The downsides of a volatile restructuring by its CEO and recent legal woes, but even so, as everything in life, these will pass.

Why Shipping Matters

I continue to believe that shipping (and in general the transportation) sector is still undervalued. Due to the exponential growth in imports by major and upcoming powers in the global stage, it is inevitable that demand will outstrip the supply of bulk carriers.

And do not get me started on the energy sector.

Note that the following graphs are in log scale.

United States Import History

China Import History

India Import History

My Current Financial Status - Feb 10

This month I finally got Ohio's 529 plan for my son; We chose a out-of-state 529 plan because the California 529 plan offers no state tax exemption, and it was a toss-up between Utah and Ohio 529 plans. I ended up with Ohio as I preferred to use Vanguard's age-based options rather than Utah's custom age-based options. Furthermore, the fee differences between the two were minor. I imagine I will be equally happy if I had gone with the Utah 529 plan.

This month included adding to my position in UFP Technologies (UFPT), a packaging company specializing in fabricating specialty foams, plastics, and natural fiber materials. Their products are used in automotive, commercial and consumer markets. UFPT announced on Wednesday continued positive non-GAAP earnings of $0.45 per share, for an estimated earnings of $0.94 per year for 2009. This is annualized 3-year growth rate of 86%. UFPT has low debt (quick ratio of 1.04 and current ratio of 3.13); a good thing in this financial climate. Price/Free Cash Flow for Trailing Twelve Months is 8.7 (versus around 20 for S&P in general). UFPT has been undervalued for quite a while - I had been picking up shares from $4.39 to $7.71. Since the earnings announcement on Wednesday, UFPT has risen to $10. 

I have also continued to purchase shares of companies I find fairly-priced but with good growth prospects or undervalued during market downturns, like PBR, PFE and KFT.

Disclaimer: I am not a financial advisor. In fact, I am not trained in finance at all. Investing in any financial products can be highly risky and use of the information provided by here is at your sole risk.

My Current Financial Status - Jan 10

The fall in securities negated the increase in income, so it is another flat month. I did manage to sneak in a few stock purchases, but as a co-worker likes to say, "I'm waiting for financial armageddon again to start buying".

I am doing some financial planning - on top of my usual "fun" stock investments, I believe this year I will be getting a new fund in my Roth IRA: Vanguard International Value (VTRIX), and will be contributing to a 529 plan for the little one.

My Current Financial Status - Dec 09

Happy new year!

A quick update on my financial status - looks like a stagnating month. Mainly due to a lower income due to going on paternity leave and getting slightly less pay, holiday expenditure (new camera, household items, etc) and my financial portfolio staying neutral.

New year resolution: Find passive income sources that can support my monthly expenses within 5 years

Repeat after me - Don't Worry

Why Investors Need to See the Light and Slow Down by Jason Zweig

In his classic book "The Intelligent Investor," the great money manager Benjamin Graham wrote that "the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances." If you can't exercise that kind of emotional control, then by Graham's definition you aren't an investor at all.

Is the market overvalued? Is this a "real" rally? Do not concern yourself with such worries - find a good business, determine that it is fair-priced (or at a bargain!), and then buy it. Rinse and repeat.

My investing style

Lately I have been more critical of my posts, abandoning at least three over the past few weeks. The posts were all from the personal finance theme whereby I lay out my investments (deemed too private), my goals (deemed too ambitious and probably highly unattainable) and my returns on investments so far (deemed too private).

I had "abandoned" my kaChing! account a while back due to several problems I encountered with the site, but reflecting more I guess it's the most public forum for which I can openly discuss my investment philosophy (investing $10M and $XXXK are two totally different modes of thinking and operations).

How would I invest $10M?

I make long term investments as if we were buying shares to become a partner in the business. Looking for a mix of both good growth and value companies. During the "great recession of 2008", it seems that stocks were so oversold that large cap stocks that would have been sold at a premium in normal times became affordable and safe. In other words, lots of potential for profit, but manageable safety margin (when taking a 10 year and beyond horizon).

We do not particularly look for either value or growth as both are valid investments - a great price for a good company or a good price for a great company, but we give preference to the latter.

It is my opinion that predicting the market short-term *might* be possible, but it is too time-consuming and error-prone for me to consider trying. I do, however, believe that long-term trends can be gleaned from understanding macro-economics, human psychology and politics. If I can't understand a business, it is not worth the risk. If the situation warrants time to analyze, and the opportunity passes, so be it. I would rather have a margin of safety.

Knowledge about finance and accounting can only get you so far in investing - you actually need to know the company. i.e. spend time talking to the management, the employees and the customers. You also need to somehow learn about the company beyond the company reports to see if the company is sound and to really know if a company has the right stuff. Recall Enron, WorldCom, Long-Term Capital, and how "amazing" their books were before they collapsed. I buy into companies under these conditions:
1. Fundamentals are good. I favor a holistic view, but will typically screen based on Price/Book, Price/Sale, Free Cash Flow and Return on Equity.
Action: None, but is a necessary condition for further investigation.
2. I know the industry and the company. Probably due to having experience using their products or knowing someone in the company.
Action: Invest in the company.
3. Long-term prospects for a sector is sound and it is reasonable to buy a basket of stocks of the sector.
Action: Invest in the sector. Note that while such "diversification" is frowned upon by Warren Buffet, but it mitigates the need to determine which company is good or not to invest in. The rationale is to invest in high potential sectors to seek gains, and to diversify within the sector to gain safety. This might not result in the maximum profit, but it reduces volatility.

To summarize, my main investment style is long-only, and to average down as the stock price drops as long as the company valuation looks good. I sell under two conditions:
1. When the macro or micro economics have changed and the company or sector no longer looks attractive.
2. Or, when there are better investment opportunities elsewhere, and there is no other asserts available to sell to finance that better investment.

Money blogs

Personal finance blogs that I find interesting

1. The Digeratli Life
2. My Dollar Plan
3. My Money Blog
4. Early Retirement Extreme
   

A few thoughts here and there

I think that:
1. After seeing the disintegration of Wall Street, I am less inclined to consider pursuing a MBA.

2. After being disabused about how flawed financial modeling and short-term trading can be, I believe that a logical person can read the macro-economic signs and deduce a trend that can result in a successful long-term investment plan. You too can be Warren Buffett.

3. The latest bull run is a technical rally, and we will see a bearish market soon. Perhaps even matching the March lows.

4. In light of the presumed bearish market, I am waiting (and evaluating if it's worthwhile) to contributing more to my Roth IRA before April 15, the last day to contribute for tax year 2008.

5. A 529 plan seems like a good plan, except that we might not be staying in US until DJ enters university.

Cake Financial

Even with a brokerage account (especially a low-cost one like Zecco), I have found that stock and financial analysis and reporting to be dismal at best.

Just like how mint.com has made financial planning easy and streamlined, Cake Financial does the same for portfolio analysis. You enter your brokerage account info (WARNING: Only for people who believe in the security of 128 bit cipher keys), and Cake Financial downloads your positions and transactions, and compares your performance with a benchmark group that have a similar profile as you. I have tried Covestor, but have found it less intuitive and user-friendly. (Think big pretty icons, clean design and nice charts)