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+-- Forum: Dividend Growth Investing (http://DividendGrowthForum.com/forumdisplay.php?fid=15)
+--- Forum: Dividend Growth Investing (http://DividendGrowthForum.com/forumdisplay.php?fid=33)
+--- Thread: Chowder Rule (/showthread.php?tid=437)
RE: Chowder Rule - rnsmth - 06-23-2014
I read the article and comment stream yesterday and, frankly, did not find it very helpful. The assumptions break down in the real world, IMO.
Here is how I look at it with my portfolio, but first a couple of thoughts about my particular circumstances, because without that context a lot of what gets written about dividend growth strategies do not make as much sense as they do with it.
My wife and I are both retired during the past year or so. Kathy stopped working as a graphic designer at the age of 58 because she has a genetic, degenerative eye disorder and, being legally blind, was having increasing difficulty doing her job. She gets a small pension from the state of Missouri and a smaller one from Oregon, having worked in public higher education. She applied for and received SS disabilty. I retired at the age of 62, also from public higher education. I receive a small pension from Oregon, an early retirement stipend from my college that will continue until I am 65 and I took SS at the age of 62. The sources of income meet our monthly living expenses. Now that we are getting settled in Merida, Yucatan, Mexico we think we are going to be able to put some of this income into savings, although we are planning a trip to Europe next year - there are places Kathy wants to see while she still has some eyesight left.
We also have a couple of smallish IRAs, totaling about $165,000. Those are 90% invested in 34 or so dividend growth names. If anyone wants to see what they are, look up rnsmth's profile on SA. Our current yield is 3.9% - or an average of about $470 a month in dividends. We are reinvesting all dividends back into the companies that paid them.
At the start of 2013 I estimated the amount of dividends I would receive based on the forward dividend rate for my companies - the rate that Yahoo uses. I did not estimate the increased number of shares I would have cause that would have just been too much work for my little brain.
I repeated the exercise this weekend. I added an underweight position in APU since then, but given the 7% + current yield, the income it provides is not underweight. Today's estimate includes all the dividend increases announced since January and it also included the increased share counts resulting from reinvesting all the dividends back into the companies that paid them. These results, looking at income over the next 12 months - excluding the effect of future dividend increase announcements and increased share counts from divvy reinvestment - is 12% higher than January's estimate. I am pleased.
To me this is the key number - the growth in dividends that comes from 1) companies increasing their dividends and 2) increased shares from dividend reinvestment. I have higher yield / lower divvy growth companies, moderate yield / higher divvy growth companies and higher yield / higher divvy growth companies. I will not hold a company that does not increase its dividends.
My early retirement stipend will end in two and a half years. Our dividend income will more than cover that, if we need it. Our plan is to keep reinvesting dividends for as long as possible, and we think we will be able to get to RMD age doing that, or another 8 years for me and another 11 years for Kathy.
RE: Chowder Rule - EricL - 06-23-2014
(06-22-2014, 11:42 PM)earthtodan Wrote: I created a spreadsheet that can model principal and income growth based on the assumptions you enter about DGR and capital appreciation, and is flexible enough to model a high growth stock that slows down over time, year by year. There are actually two calculators in the spreadsheet so you can compare two scenarios side by side. I posted it in the resources forum.
http://dividendgrowthforum.com/showthread.php?tid=600
Thanks Dan!
Always enjoy new toys to play with!
RE: Chowder Rule - EricL - 07-01-2014
Here is yet another article discussing the Chowder Rule on Seeking Alpha.
There is some really good discussion in the comments section if you have the time to read through it.
RE: Chowder Rule - Dividend Watcher - 07-01-2014
I've been thinking about the HYLG category after reading those threads. Although I'm not willing to give up my low yielding CCC stocks, I'm not averse to dabbling in the field. I'm looking forward to reading OK Red's journey into that rabbit hole. Hendi_Alex has given some good information but there's always more to gain.
RE: Chowder Rule - Ok Red - 07-01-2014
I've already started dabbling. The advantage of having a lot of cash on the sidelines is that I can establish small positions and watch, listen and learn for a while. More on this later.
I do think that it might be good to have a part of the forum dedicated to LYHG stocks, and a section to HYLG. The approaches are SO vastly different that it would save folks a lot of time when looking for investment ideas.
RE: Chowder Rule - ronn38 - 07-02-2014
Ditto to the above!
RE: Chowder Rule - Be Here Now - 07-03-2014
(07-01-2014, 11:55 PM)Ok Red Wrote: I do think that it might be good to have a part of the forum dedicated to LYHG stocks, and a section to HYLG. The approaches are SO vastly different that it would save folks a lot of time when looking for investment ideas.
Considering some of the negative feedback I have had on HYLG stocks, I think this is a very good idea.
RE: Chowder Rule - ronn38 - 07-03-2014
Honestly, I hadn't given much thought to HYLG stocks. But as I begin to recognize my retirement window has closed in on me much fast than I anticipated, this has more interest to me. For example, NLY or ACRP weren’t even on my radar—yet seeing them in some of your portfolio’s makes me reconsider.
Could those of you with interest, give us some links to HYLG materials; i.e. articles, sample portfolio's, etc. It much nicer to have someone tell you the best sources to examine, rather than sorting them yourself at the novice level.
Good start to a new section, huh ;-)
Thanks,
Ronn
RE: Chowder Rule - Be Here Now - 07-03-2014
(07-03-2014, 11:54 AM)ronn38 Wrote: Could those of you with interest, give us some links to HYLG materials; i.e. articles, sample portfolio's, etc. It much nicer to have someone tell you the best sources to examine, rather than sorting them yourself at the novice level.
Good start to a new section, huh ;-)
Thanks,
Ronn
I have identified and invested in several categories of HYLG stocks. I can help with links to SA articles about them. I can also give you some words of guidance based on my experience.
HY stocks are not buy-and-forget. They are buy-and-frequently-monitor. You will not find any consumer staples or utilities here.
HY stocks require as much if not more due diligence than MY or LY stocks. If you enjoy learning about a subject in depth, this could be the place for you. My personal experience is that diving into these stocks has been a good intellectual replacement for what I did before I retired, which was software engineering. Use it or lose it, and I use it every day.
HY stocks require a tolerance for much greater standard deviation than you will see with MY or LY stocks. If you see large changes in price as opportunities, this is a place for you. If large price changes give you that queasy feeling, stay away.
When you own a HY stock, you need to have different expectations for growth than you would for a MY or LY stock. Some of these are best thought of as variable dividend payers. If you invest in these, you must be prepared to tolerate an occasional decrease in the dividend. This is especially true for mortgage REITs, BDCs, and leveraged ETNs. I expect the occasional decrease, so I set yield and yield growth goals for my entire portfolio, with enough reliable dividend growth in MY that I can reasonably expect that my yield will grow in total even when, for example, AGNC reduces its dividend.
Except for the ETNs, you can get SEC filings for all of these, and I recommend 10-Ks and 10-Qs as required reading.
Following are starred (*) HY categories that I am familiar with.
* 2x leveraged ETNs with monthly reset from UBS
If the thought of leverage or ETNs does not put you off, I suggest you start with the UBS web site: http://etracs.ubs.com/product/list
Select the 'leverage' strategy, you will get a list of all their leveraged ETNs. Download the product supplement of whichever product catches your interest, and become familiar with 'automatic acceleration', which I consider to be the only real risk with these products. UBS does have default risk, but its Morningstar credit rating is A, and if UBS defaults, we will all have much larger problems.
Seeking Alpha authors Lance Brofman and Left Banker have written a number of excellent articles. SA blogger Darren McCammon has created a portfolio with several of these ETNs and writes extensively about them. I did a back-of-the-envelope study of the various risks of these ETNs and published my study as a comment to one of Darren's blogs.
This is Darren's HY blog: http://seekingalpha.com/instablog/379412-darren-mccammon/2860573-a-high-yield-portfolio-using-ubs-2x-etns
These are my risk analyses (I have done 2): http://seekingalpha.com/instablog/379412-darren-mccammon/2860573-a-high-yield-portfolio-using-ubs-2x-etns#comment-33291633
http://seekingalpha.com/article/2237513-projected-june-dividend-for-cefl-will-bring-yield-to-18_1-percent#comment-34705863
My personal favorite is MLPL, which tracks the Alerian MLP infrastructure index, i.e. midstream. I think it has the best combination of yield and growth, and the underlying businesses are here to stay and grow.
I also own BDCL and MORL. I would like to own CEFL and DVHL, but my broker, Wells Fargo, will not allow its customers to own them. I think the only reason they are not allowed is their short history. There is nothing inherently more risky about these than BDCL or MLPL.
You may have read that leveraged ETNs are designed to lose value in the long run. This is true for those that reset daily. The UBS ETNs reset monthly. I have studied their price histories compared to the indexes they track, and I have not found any price decay due to reset. The only decay I have seen has been entirely due to the management fees, just like any ETF or mutual fund.
* Mortgage REITs
These REITs borrow at low short term rates and lend at higher long term rates, and use leverage. SA author Scott Kennedy is a CPA who does gold-standard analysis of AGNC. He also follows PSEC, a BDC.
* Business Development Companies (BDCs)
These are mostly lenders to private equity, with a small minority of their portfolios being equity, but this varies. SA author BDC Buzz provides excellent analysis for the larger BDCs, as does Scott Kennedy for PSEC.
Wells Fargo produces extensive in-depth analysis. I consider them to be the best. You may need to be a Wells Fargo brokerage customer to get their reports. I am. If you cannot get the WF research, BDC Buzz and Scott Kennedy provide between them enough for in depth due diligence, IMO.
* Upstream MLPs.
These MLPs get hydrocarbons out of the ground. They do not engage in exploration, only production, so they do not have the risk profiles of wildcatters, for instance. They are exposed to commodity price fluctuations and thus they hedge a large part of their output. Hedging limits their downside exposure, but also their upside. There are many to choose from. Those I am most familiar with are BBEP, LINE/LNCO, QRE, and VNR. You can find articles on all of these on SA. Wells Fargo produces extensive in-depth analysis.
> Midstream MLPs
These MLPs transport the hydrocarbons from the wellhead to the refiner. The business model is primarily that of a toll road. They have long term contracts with take-or-pay provisions that generate very predictable revenues. Most of these yield less than 8%, but depending on the markets, a few may from time to time rise into the HY category.
There are many of these as well. Most familiar to me are EPB, EPD, ETP, ETE, KMI, KMP/KMR, MMP, PAA. Once again, Seeking Alpha and Wells Fargo are my sources of information.
MLPL is the ETN that tracks 2x the performance of this group. I started investing in individual midstream MLPs in 2011. If I had understood MLPL as well then as I do now, I would have bought a lot less of the individual MLPs and would have substituted MLPL.
RE: Chowder Rule - Ok Red - 07-03-2014
Thanks for the primer, Be Here Now! That is excellent!
In my transition from LYHG to HYLG I had stumbled upon Upstream and Midstream MLPs along with BDCs. Don't know a thing about the ETNs but now I have homework. mREITs still scare me.
The big challenge is in the portfolio construct. Obviously, this is a pretty limited group of securities, and so it would be nice to figure out a way to smooth out the returns. For instance, I have been restructuring my port and am a bit heavy in REITs and BDCs right now. Today was a pretty solid day for all the 'normal' indices, but my port was in the red because REITs were punished for some reason.
I don't have a solution, but I'm thinking that for now - in my transitory phase, with 5-10 years to retirement - that I will keep some high quality LYHG equities while I increase my HYLG positions. And if I pick right, some of those LYHG positions will get me my desired 10% YOC over that time period, so I can simply keep them in the port!
It will be interesting for sure....
And here is an interesting SA article on just this subject....
http://seekingalpha.com/article/2298795-just-how-risky-is-high-yield-dividend-investing
Hmmmm....
RE: Chowder Rule - rnsmth - 07-04-2014
I'd be interested in knowing how ya'll define HYLG.
There are also some HYHG stocks available, like OHI, for example, unless you consider 5.5% to be lower than high yield.
RE: Chowder Rule - earthtodan - 07-04-2014
I've tried this kind of two-way categorization and it doesn't work very well, there are too many exceptions. For example, there are a lot of companies that are neither high growth nor high yield, but are low risk, which you buy for "blue chip" value. There are also stocks that can be considered "high yield, high growth, high risk" such as SDRL, or OHI as rnsmth pointed out. IMHO, the individual stock forum is better not broken up into categories. It's easier and more fun the way it is.
That said, my portfolio is actually broken down into four categories:
High Yield (> 5%) - Any high yielding stock regardless of projected growth
Balanced (2% - 5%) - Most blue chip dividend growth stocks should fall into this profile.
Growth (0%-2%) - This can include new dividend growers, maturing companies with accelerated dividend growth and payout ratios, and non-dividend paying companies with a track record of strong earnings growth.
Speculative (0%) - Companies with a good story but negative, non-existent or unreliable earnings to date
Okay, 3 categories if we're strictly talking about dividend growth. It works well enough that I'm sticking with it, and gives me a way to think about how I'm managing risk and income. Currently I'm invested about equally in the first 3 categories, plus a sliver of the fourth. However, there are still situations where the categorization feels forced.