Sunday, December 30

Week 391 - Members of “The 2 and 8 Club” in the FTSE Russell 1000 Index

THIS IS THE LAST WEEKLY ISSUE. FUTURE ISSUES WILL APPEAR MONTHLY.

Situation:The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.

Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”

Execution: see Table

Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.

In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.   

Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).

NOTE: This week’s Table will be updated at the end of each quarter.

Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.

Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Sunday, December 23

Week 390 - REITs That Qualify For "The 2 and 8 Club"

Situation: Membership in “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which consists of the ~400 companies in the FTSE Russell 1000 Index that reliably pay an above-market dividend. Real Estate Investment Trusts (REITs) are excluded from the FTSE High Dividend Yield Index because their dividend payouts are variable, being fixed by law at 95% of gross income. But those payouts are usually higher than the yield on an S&P 500 ETF (e.g. SPY), which is ~2%. We are curious as to whether any REITs meet the 5 basic requirements for membership in “The 2 and 8 Club”, and find that there are 4 (see Table). However, REITs are typically “small cap stocks.” Only one of the four in our Table is a large enough company to be included in the FTSE Russell 1000 Index (Simon Property Group; SPG).

Mission: Populate our Standard Spreadsheet for REITs. Select only those that meet the 5 basic requirements for membership in “The 2 and 8 Club”:
   1) above-market dividend yield;
   2) 5-Yr dividend growth of at least 8.0%/yr;
   3) a 16+ year trading record that is analyzed weekly for quantitative metrics by the BMW Method;
   4) an S&P Bond Rating of BBB+ or higher;
   5) an S&P Stock Rating of B+/M or higher.
Add a column for FFO (Funds From Operations; see Column P in the Table), which is a ratio that the REIT Industry substitutes for P/E

Execution: see Table.

Bottom Line: Pricing for REITs is negatively correlated with rising interest rates but not as much as you might suspect. This is likely because the dividend yield for most REITs remains above the interest rate on a 10-Yr US Treasury Note. Pricing is more sensitive to the likelihood that the REIT will have enough FCF (Free Cash Flow) to fund dividend payouts (see Column R in the Table). Overall, it is hard to argue against the idea that high-quality REITs are a good “bond substitute.” 

Risk Rating: 4 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-average into SPG and own shares of KIM.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com