Situation: “The 2 and 8 Club” is based on mathematics. Specifically, William Bernstein has shown that two factors largely determine your returns from buying a dividend-paying stock. Those are: 1) Dividend Yield; 2) Dividend Growth Rate (see The Four Pillars of Investing by William Bernstein (McGraw Hill, New York, 2002, ISBN 0-07-138529-0). Add those numbers together and you arrive at a working estimate of your long-term total return. Given that you can invest in the Dow Jones Industrial Average (DIA) or the S&P 500 Index (SPY) with negligible transaction costs and expect a 7%/yr long-term total return, you’d have to shoot for 9%/yr if you were to become a stock-picker. Why? Because you’ll do a lot of research and become a trader, which means you’ll have to pay transaction costs and capital gains taxes. Accordingly, we look for stocks that have an above-market dividend yield (i.e., more than ~2%/yr) and a 5-yr dividend growth rate greater than ~8%/yr, hence our designation as “The 2 and 8 Club.”
Mission: “The 2 and 8 Club” has ~20 companies (see Week 348). Compare that to the 65-stock Dow Jones Composite Index selected by the Managing Editor of The Wall Street Journal. Apply our Standard Spreadsheet to companies that appear on both lists.
Execution: see Table showing metrics for all 9 such companies.
Administration: Our starting point is the US version of the FTSE High Dividend Yield Index, which is composed of the ~400 highest-yielding companies in the Russell 1000 Index. The Vanguard High Dividend Yield Fund ETF (VYM) clones that list and updates it monthly. After winnowing that list down to companies that have grown their dividend 8%/yr or faster, we eliminate any that do not have the 16 year trading record needed for quantitative analysis and S&P stock and bond ratings indicative of high quality (at least B+/M and BBB+, respectively). To further aid analysis, we only include companies that are on the latest annual Barron’s 500 List.
Bottom Line: Aside from NextEra Energy (NEE), these are risky stocks to own (see Column M in the Table). As a group, they’ll go up or down in price more than the market. Even if you own shares of all nine, you need to be watchful. You’ll need to learn how to spot trouble (or opportunity) well enough to sell (or buy) shares in a timely manner. But the rewards are substantial (see Columns C, F and K in the Table).
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 MSFT, NEE, MMM, JPM and IBM, and also own shares of CSCO, BA and CAT.
"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, April 8
Sunday, April 1
Week 352 - Gimme Shelter
Situation: You need to think about aligning your portfolio to “shelter in place.” A storm is coming. We just don’t know what will trigger the next market crash. A number of political, cultural, and economic factors are in play. But you do need to make lists:
1) Which stocks that you now dollar-average into are worth continuing to dollar-average into when a market crash happens on short notice?
2) Which stocks do you want to hold onto throughout a market crash, so that you can reinvest or spend the dividends?
3) Which stocks would you sell, so as to park that money in relatively safe assets like the Vanguard High Dividend Yield Fund (VYM) and the iShares 20+ Year Treasury Bond ETF (TLT).
Mission: Use our Standard Spreadsheet to analyze companies that appear to be able to weather a market crash. In other words, which have a) less risk of loss in a crash than the S&P 500 Index (see Column M in our spreadsheets), b) low Long-Term debt (Column P), and c) positive Tangible Book Value (Column R).
Execution: see Table.
Administration: All of the companies in this week’s Table have S&P bond ratings that are A- or higher, and S&P stock ratings that are B+/M or higher (see Columns T and U). And all have at least the 16 years of weekly price points needed for quantitative data per the BMW Method. Only 9 companies meet the criteria.
Bottom Line: Stocks crash from time to time; bonds don’t. Stock market corrections and crashes are difficult to predict, and recessions even more so. As Paul Samuelson said in 1966, “The stock market has forecast nine of the past 5 recessions.” Economies around the world are currently doing well: “Every major economy on earth is expanding at once”. This is a good time to remember that the biggest crash, which occurred on 10/19/87, did not precipitate a recession. But it did wipe out a lot of investors as $500 Billion of market value disappeared in a few hours without warning. Of course, the trick is to bulletproof part of your portfolio at all times.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion)
Full Disclosure: I dollar-average into NKE, WMT and NEE, and also own shares of TRV, KO, ATO and WEC.
"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
1) Which stocks that you now dollar-average into are worth continuing to dollar-average into when a market crash happens on short notice?
2) Which stocks do you want to hold onto throughout a market crash, so that you can reinvest or spend the dividends?
3) Which stocks would you sell, so as to park that money in relatively safe assets like the Vanguard High Dividend Yield Fund (VYM) and the iShares 20+ Year Treasury Bond ETF (TLT).
Mission: Use our Standard Spreadsheet to analyze companies that appear to be able to weather a market crash. In other words, which have a) less risk of loss in a crash than the S&P 500 Index (see Column M in our spreadsheets), b) low Long-Term debt (Column P), and c) positive Tangible Book Value (Column R).
Execution: see Table.
Administration: All of the companies in this week’s Table have S&P bond ratings that are A- or higher, and S&P stock ratings that are B+/M or higher (see Columns T and U). And all have at least the 16 years of weekly price points needed for quantitative data per the BMW Method. Only 9 companies meet the criteria.
Bottom Line: Stocks crash from time to time; bonds don’t. Stock market corrections and crashes are difficult to predict, and recessions even more so. As Paul Samuelson said in 1966, “The stock market has forecast nine of the past 5 recessions.” Economies around the world are currently doing well: “Every major economy on earth is expanding at once”. This is a good time to remember that the biggest crash, which occurred on 10/19/87, did not precipitate a recession. But it did wipe out a lot of investors as $500 Billion of market value disappeared in a few hours without warning. Of course, the trick is to bulletproof part of your portfolio at all times.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion)
Full Disclosure: I dollar-average into NKE, WMT and NEE, and also own shares of TRV, KO, ATO and WEC.
"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
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