06-26-2015, 05:22 PM
When you go to a medical doctor, you don't want an explanation of how the human circulatory system works, you just want your medicine and be on your way. Firstly, you wouldn't understand the doctor's explanation of the human circulatory system. Secondly, you wouldn't know how to apply the knowledge, even if you understood it.
But regardless, I'll start with the philosophical points of leveraged and hedged dividend growth. If there's any interest, I'll respond, but I doubt anybody gives a shit. Remember, these are not just ideas that stand alone... These ideas all have empirical evidence supporting them. I advise being careful about the ideas people talk about on this forum... They make sense, but have horrible empirical results. Yet these amateurs spout their bullshit as the Gospel truth, despite having done zero experimentation and having zero evidence.
The 7 point philosophy below can be easily understood by anybody.
1) Fundamental Dividend Growth Ability: Dynamic financial statement analysis and environmental scan, which determines a company’s fundamental dividend growth ability relative to benchmarks. Benchmarks lead to more reasonable criteria, which adjust in different economic climates.
Relative analysis works. Borrowing from another point, a 2% dividend yield may seem reasonable now. Over the course of 10 years, market rates might significantly increase, and 2% would not sufficiently discriminate between investment choices. Bench-marking dividend yield to the yield-to-maturity on the 10-Year T-Note or the average dividend yield on the S&P 500 would lead to more realistic expectations of current yield. Many factors effect dividend growth ability, the following are only a few:
A) Adequate and successful capital expenditures add significant value in the form of both total return and dividend income. Capex is a priority ahead of creditor obligations and dividend payments. In order to generate a return in a business, capex is a normal requirement. A company can increase short-term dividends by neglecting investment back into the company; however future dividends could be in jeopardy due to a depreciated business. It is difficult to analyze the adequacy and success of capital expenditures as an outsider. Current measures of capex on the statement of cash flows should be considered. In investing, and especially in capex, there is a certain amount of trust in management to make the right capex decisions. This trust in management can be earned based on historical financial results.
B) Legally speaking, creditors are in line before equity owners, so that can affect the use of capital for dividends. However, under certain circumstances, a wealth transfer from creditors to equity owners will prudently enhance dividend growth ability.
C) The high earnings qualities of certain companies add significant value in the form of both total return and dividend income. Financial shenanigans can artificially inflate earnings and deceive an investor into thinking there’s room for dividend growth. Skilled accounting can greatly reduce the risk of falling for shenanigans by performing an earnings quality analysis.
There are many land-mines in determining dividend growth ability and no quick and dirty method that can be used with fiduciary responsibility intact. For example, the financial statements could look great, but in the management discussion there may be a disclosure stating something such as, “all patents are expiring in one year,” or “66% of customers’ contracts expire and won’t be renewed.” Clearly, you cannot blankly make rules and rankings. One must have a refined business intuition and spend time in deep due-diligence to prudently make investment decisions.
2) Optimum Risk-to-Reward Profile: Highly synergistic effect on security selection, which compares a company’s risk-to-reward profile relative to the overall market and the effect on an overall portfolio. There are many ways to optimize portfolio performance, and although they make good sense, many techniques provide little to no empirical results. The key difference is the quality of the estimates of risk and reward, and the execution. There’s many ridiculous ways to estimate future rewards and just as many ridiculous ways to estimate risk. My measures of risk and reward accomplish great empirical results in the form of total return and dividend income.
3) Ability to Meet Creditors’ Obligations: Quality credit may allow economically beneficial transactions for equity owners in the form of borrowing capacity, less restrictive covenants, and low interest rates. A company with poor credit could not transfer wealth from creditors to equity owners in a prudent manner. Many poor credit companies have creditor covenants on their financials which limit a company’s ability to make lucrative dividend policy for equity owners. Lastly, solid credit may extend a life-line to companies in periods of great systemic risk.
4) Current Yield at Time of Purchase Greater Than the 10-Year T-Note Yield to Maturity: Although I do not seek high yields, the yield on the 10-Yr is a good benchmark for determining a reasonable yield. High yielders relative to the 10-Yr tend to be weeded out in the financial statement analysis.
5) No Dividend Decreases Within the Past One Year: Although historical dividend policy is not necessarily a good predictor of future dividend policy, I want management to show me they’re on board with the idea of at least maintaining dividends.
6) Using Leverage Can Be a Calculated Risk: The securities selected according to the philosophy above tend to be lesser-risked securities. A margin loan is a great tool to push investments into a more optimum point on the return-risk profile. I stress test the optimal amount of margin across several financial crises to determine the “point of no margin call” on a Reg T margin account.
7) Hedging is Necessary in a Boom and Bust Market: Markets have become more secure through regulation and more transparent through increased accounting quality. However, there are still enough booms and busts to make hedging a value added transaction. No hedge can realistically mitigate losses 100% of the time. In one day in 1987, the market sold-off 20%. In one week in 2008, the market sold-off 20%. It is virtually impossible to enter a hedge in time to fight those quick sell-offs. However, a successful hedge will allow a dividend growth investor to increase leverage and hold dividend payers, rather than sell them off to meet a margin call.
But regardless, I'll start with the philosophical points of leveraged and hedged dividend growth. If there's any interest, I'll respond, but I doubt anybody gives a shit. Remember, these are not just ideas that stand alone... These ideas all have empirical evidence supporting them. I advise being careful about the ideas people talk about on this forum... They make sense, but have horrible empirical results. Yet these amateurs spout their bullshit as the Gospel truth, despite having done zero experimentation and having zero evidence.
The 7 point philosophy below can be easily understood by anybody.
1) Fundamental Dividend Growth Ability: Dynamic financial statement analysis and environmental scan, which determines a company’s fundamental dividend growth ability relative to benchmarks. Benchmarks lead to more reasonable criteria, which adjust in different economic climates.
Relative analysis works. Borrowing from another point, a 2% dividend yield may seem reasonable now. Over the course of 10 years, market rates might significantly increase, and 2% would not sufficiently discriminate between investment choices. Bench-marking dividend yield to the yield-to-maturity on the 10-Year T-Note or the average dividend yield on the S&P 500 would lead to more realistic expectations of current yield. Many factors effect dividend growth ability, the following are only a few:
A) Adequate and successful capital expenditures add significant value in the form of both total return and dividend income. Capex is a priority ahead of creditor obligations and dividend payments. In order to generate a return in a business, capex is a normal requirement. A company can increase short-term dividends by neglecting investment back into the company; however future dividends could be in jeopardy due to a depreciated business. It is difficult to analyze the adequacy and success of capital expenditures as an outsider. Current measures of capex on the statement of cash flows should be considered. In investing, and especially in capex, there is a certain amount of trust in management to make the right capex decisions. This trust in management can be earned based on historical financial results.
B) Legally speaking, creditors are in line before equity owners, so that can affect the use of capital for dividends. However, under certain circumstances, a wealth transfer from creditors to equity owners will prudently enhance dividend growth ability.
C) The high earnings qualities of certain companies add significant value in the form of both total return and dividend income. Financial shenanigans can artificially inflate earnings and deceive an investor into thinking there’s room for dividend growth. Skilled accounting can greatly reduce the risk of falling for shenanigans by performing an earnings quality analysis.
There are many land-mines in determining dividend growth ability and no quick and dirty method that can be used with fiduciary responsibility intact. For example, the financial statements could look great, but in the management discussion there may be a disclosure stating something such as, “all patents are expiring in one year,” or “66% of customers’ contracts expire and won’t be renewed.” Clearly, you cannot blankly make rules and rankings. One must have a refined business intuition and spend time in deep due-diligence to prudently make investment decisions.
2) Optimum Risk-to-Reward Profile: Highly synergistic effect on security selection, which compares a company’s risk-to-reward profile relative to the overall market and the effect on an overall portfolio. There are many ways to optimize portfolio performance, and although they make good sense, many techniques provide little to no empirical results. The key difference is the quality of the estimates of risk and reward, and the execution. There’s many ridiculous ways to estimate future rewards and just as many ridiculous ways to estimate risk. My measures of risk and reward accomplish great empirical results in the form of total return and dividend income.
3) Ability to Meet Creditors’ Obligations: Quality credit may allow economically beneficial transactions for equity owners in the form of borrowing capacity, less restrictive covenants, and low interest rates. A company with poor credit could not transfer wealth from creditors to equity owners in a prudent manner. Many poor credit companies have creditor covenants on their financials which limit a company’s ability to make lucrative dividend policy for equity owners. Lastly, solid credit may extend a life-line to companies in periods of great systemic risk.
4) Current Yield at Time of Purchase Greater Than the 10-Year T-Note Yield to Maturity: Although I do not seek high yields, the yield on the 10-Yr is a good benchmark for determining a reasonable yield. High yielders relative to the 10-Yr tend to be weeded out in the financial statement analysis.
5) No Dividend Decreases Within the Past One Year: Although historical dividend policy is not necessarily a good predictor of future dividend policy, I want management to show me they’re on board with the idea of at least maintaining dividends.
6) Using Leverage Can Be a Calculated Risk: The securities selected according to the philosophy above tend to be lesser-risked securities. A margin loan is a great tool to push investments into a more optimum point on the return-risk profile. I stress test the optimal amount of margin across several financial crises to determine the “point of no margin call” on a Reg T margin account.
7) Hedging is Necessary in a Boom and Bust Market: Markets have become more secure through regulation and more transparent through increased accounting quality. However, there are still enough booms and busts to make hedging a value added transaction. No hedge can realistically mitigate losses 100% of the time. In one day in 1987, the market sold-off 20%. In one week in 2008, the market sold-off 20%. It is virtually impossible to enter a hedge in time to fight those quick sell-offs. However, a successful hedge will allow a dividend growth investor to increase leverage and hold dividend payers, rather than sell them off to meet a margin call.