Chowder Rule

[hendi_alex]

You should do whatever makes you comfortable. But you are reporting something that you call Yield on Investment, and to do so you are dividing inflation devalued dividends by investment dollars that are no longer worth what they used to be. For me the result is a confusing mess. On the other hand if a person determines yield from dividends divided by the current value of capital, there is no such confusion. There is nothing misleading about such data.

Why discuss yield at all? All that really seems to matter to you is cash flow generated from dividends and perhaps how that cash flow has changed over time.

[cannew]

Sounds like we are saying the same thing. To me it's the income (cash flow) my portfolio generates. Others will have other calculations they feel important, I prefer to stick to this one.

[hendi_alex]

For now I only have one objective, but it is really just a matter of luck whether it is achieved or not. My target for our modest portfolio is to gain at least $25K in cash flow this year. Added to our fresh funding, that should exceed the $31K that we pulled from the IRA this January. As far as hopes go, I hope to actually recoup the full $31K. But there is nothing predictable about the cash flow that will be generated. It won't be a matter of sit back and enjoy the dividend flow, because I'm trying to squeeze over 10% from the under $300K portfolio. I'll be surprised if we don't generate at least $22K, but however we fare, dividends will only contribute about $11K to the effort.

[rnsmth]

(03-11-2014, 05:35 PM)hendi_alex Wrote: You should do whatever makes you comfortable. But you are reporting something that you call Yield on Investment, and to do so you are dividing inflation devalued dividends by investment dollars that are no longer worth what they used to be. For me the result is a confusing mess. On the other hand if a person determines yield from dividends divided by the current value of capital, there is no such confusion. There is nothing misleading about such data.

Why discuss yield at all? All that really seems to matter to you is cash flow generated from dividends and perhaps how that cash flow has changed over time.

What do you mean by the current value of capital? Are you referring to the share price?

Would you use the TTM dividend payments or anticipated dividend payments in the next 12 months

[hendi_alex]

Forward dividend rate, divided by market value of equities. IMO a person has many things that can be done with a portfolio. It can be liquidated and spent. It can be invested in different equities. It can be invested in fixed income. Return on originally invested capital, which may generate an interesting number, has no relevance to making comparisons that lead to investment among alternatives in the current market.

I don't believe in being all out or all in wrt most investment classes. For me, most weighting classes are represented by a range. Taking tech for example, if the general market for tech looks very positive, then the class weighting in our portfolio may be 20% or a little higher. If the climate looks lousy, then the tech exposure may only be 10% but probably wouldn't drop below that weighting no matter how gloomy things get. Or take DG stock weighting. In a huge downdraft, I may increase the weighting to as much as 50% of the portfolio, but at times like the present where there are few obvious bargains, the weighting may be as low as 10%. I also consider cash to represent an investment class. For us, the cash weighting usually moves between near zero weighting, to as high as 30% weighting. That depends upon lots of factors, but I view cash as both a short term safety class and also view it as an opportunity class. Cash tries to wait patiently on the sidelines, until some obvious bargain arises. Then the cash is usually deployed in an incremental way.

Our regular TDA account is structured as a pure dividend play. There is no cash allocation there, except as new deposits accumulate and wait on the right opportunity for deployment. In fact, too many opportunities materialized recently, and margin use has crept to its upper level. No new purchases will be made in that account until new cash and dividends pay the margin back down to a much lower level. Five percent current yield is the threshold yield for new purchases. Because of low current yields, the account holds no blue chip large cap DG stocks, though the class is represented in our more active IRA account.

Tickers:

CSG - Property REIT
MCY - insurance company
O - property REIT
OB - insurance company
ORI - insurance company
PBA - energy transportation pipeline
POT - fertilizer
SDRL - oil service ocean, long term platform lease
SNH - medical property REIT
SSL - utility/chemical
TGP - LNG carrier with long term contract

Current market yield equals 5.94%.

[Kerim]

Thanks very much for all of the thoughtful replies. The Chowder rule seems to be popular indeed, even if most are careful to indicate that it is only one of many metrics to consider. I guess I'll just have to remain content with not "getting it."

I still understand that yield and dividend growth are related in important ways, but I just can't see the logic of adding the numbers together -- even as just one step in a screening process.

Let's say company A has a yield of 4 percent and dividend growth of 7 percent, and company B has a yield of 2 percent and dividend growth of 15 percent. Those are very different profiles, and we all would dive deeper to understand the specifics of each company. But at a fundamental level, you are comparing a company with a higher initial yield and slower (but still healthy) dividend growth with a lower yielding company that has higher dividend growth. And there are lots of reasons a person might choose one over the other.

So what actionable information is added by saying that company A has a Chowder number of 11 and company B has a Chowder number of 17? We all weight the importance of yield and growth differently, and indeed might weight them differently be sector or individual company. Is company B worth more attention than company A (17 is a lot higher than 11, after all)? It depends on what you need and want in your portfolio. And given that yields are likely to be lower than dividend growth percentages, the Chowder approach would seem to weight growth much higher than initial yield. I'm just not seeing the value of this metric.

Thanks again for trying to help me understand this one.

[rnsmth]

(03-14-2014, 09:38 AM)Kerim Wrote: Thanks very much for all of the thoughtful replies. The Chowder rule seems to be popular indeed, even if most are careful to indicate that it is only one of many metrics to consider. I guess I'll just have to remain content with not "getting it."

I still understand that yield and dividend growth are related in important ways, but I just can't see the logic of adding the numbers together -- even as just one step in a screening process.

Let's say company A has a yield of 4 percent and dividend growth of 7 percent, and company B has a yield of 2 percent and dividend growth of 15 percent. Those are very different profiles, and we all would dive deeper to understand the specifics of each company. But at a fundamental level, you are comparing a company with a higher initial yield and slower (but still healthy) dividend growth with a lower yielding company that has higher dividend growth. And there are lots of reasons a person might choose one over the other.

So what actionable information is added by saying that company A has a Chowder number of 11 and company B has a Chowder number of 17? We all weight the importance of yield and growth differently, and indeed might weight them differently be sector or individual company. Is company B worth more attention than company A (17 is a lot higher than 11, after all)? It depends on what you need and want in your portfolio. And given that yields are likely to be lower than dividend growth percentages, the Chowder approach would seem to weight growth much higher than initial yield. I'm just not seeing the value of this metric.

Thanks again for trying to help me understand this one.

I think it can help in Portfolio Construction.

I have often written that a DG portfolio is like a symphony. Individual companies are the musicians. There is room in my portfolio for initial yields as low as 2.75% with higher dividend growth rates (at purchase), for stocks with initial yields double that with lower growth rates, and for companies with higher initial yields and higher DGR. I have all three.

There is not room for companies with lower yield at purchase and lower recent divvy growth rates, like WMT, for example. There is not room for companies with high initial yields and low divvy growth rates, like T, ED, or HE, for example.

It is a balancing act and as the artistic director of my dividend growth compounding machine symphony the Chowder guideline helps me keep a sweet sounding, balanced group.

It has helped me make choices between two companies, but usually things like initial yield, valuation, earnings growth, payout ratio, financial,strength and other metrics play a more important role there.

[Kerim]

Sorry, but I just can’t seem to let this Chowder thing drop. I am tempted to just shut my trap because it seems to be very popular among plenty of people that I respect. But in the hope that perhaps you all can help me understand what I am missing, I’ll press on.

I was thinking about it in the car today, and this analogy struck me: Say you’re shopping for a car, and among many other criteria, both mileage and horsepower matter to you. Among the choices available to you are cars with great mileage and low horsepower, high horsepower and crummy mileage, and some that present a reasonable balance of the two. Is there any universe in which you would add the horsepower to the mileage in order to compare cars? What would that number even mean?

I understand that yield and dividend growth rate are somewhat related, but perhaps only marginally more so that mileage and horsepower. They measure different things and the sum of the two values is, in my mind, nearly meaningless. They are both important, and both must be weighed, and indeed they must be weighed in light of each other. And further it may be completely true that the lower one value is, the higher you’d demand of the other. But still, the sum is a meaningless number. The sum itself measures nothing.

(03-14-2014, 04:11 PM)rnsmth Wrote: I think it can help in Portfolio Construction.

I have often written that a DG portfolio is like a symphony. Individual companies are the musicians. There is room in my portfolio for initial yields as low as 2.75% with higher dividend growth rates (at purchase), for stocks with initial yields double that with lower growth rates, and for companies with higher initial yields and higher DGR. I have all three.

It is a balancing act and as the artistic director of my dividend growth compounding machine symphony the Chowder guideline helps me keep a sweet sounding, balanced group.

I agree completely that a good portfolio should include companies with a variety of different yield profiles. But if anything, the Chowder number is at odds with that goal. If I want some high yielders (that may have low dividend growth) as well as some fast dividend growers (that may have lower initial yields), then I need to look at those metrics separately to construct my portfolio. The Chowder number gives you no actionable information in constructing your portfolio.

Is it really just me?

Thanks in advance!

[earthtodan]

Reminds me of the road sign outside of New Cuyama.

[Concasto]

Adding dividend growth rate with dividend rate will give you the total return if you assume a constant yield. A constant yield of 3% on stocks like JNJ, KO, CLX isn't out of the question, but the comparison really only applied to matured companies. A stock with a yield of 1%, growing at 20% a year, shouldn't be compared to a KO that pays 3% and grows 6% a year.

[Kerim]

(05-06-2014, 07:49 PM)earthtodan Wrote: Reminds me of the road sign outside of New Cuyama.

Beautiful. The perfect illustration for the Chowder rule!

[earthtodan]

While I was taken by the horsepower vs. mileage analogy and I couldn't resist posting that picture, I actually agree with Concasto that long term DGR CAGR is a good proxy for price appreciation for a mature company. They can and will vary for a while but if you model them out several decades, if they're much different the yield will get really big or really small. Therefore yield plus DGR CAGR is a good way to project total return. I'm writing up a portfolio business plan, and this idea is part of it.

Of course some companies will break the rule for a while, like QCOM giving us 20% raises on 15% earnings growth, but they are intentionally raising the payout ratio.