Download Dividend Portfolio Strategy

"Compound interest is the
eighth wonder of the world.
He who understands it, earns it
... he who doesn't ... pays it."
Albert Einstein
Albert Einstein when asked what he considered to be the most
powerful force in the universe answered: “Compound interest!
What you have become is the price you paid to get what you
used to want.”
Mignon McLaughlin, American Journalist
Interest Rates Really Are Interesting
"Yeah, interest. It's an amazing thing.
You make money without doing
anything..."
"Y'know, I have friends who try to base
their whole life on that principle."
"Really? Who?"
"Nobody you know...“
Jerry and George - Seinfeld TV Show
Compound Dividends!
“Compound Dividends are like compound interest on
steroids, figuratively speaking”
“Good dividend stocks’ yield, tends to stay within a given
range, so if dividends are increasing each year, the only way
to keep a consistent yield is for the price of the stock to go
up.”
Source: Dividendvalue.com
Dividend Paying
Non-Dividend Paying
Stocks Total Return Stocks Total Return
1928 to 2009 *
1928 to 2009 **
10.8% - 11.7%
8.28%
* Represents 5th and 4th quintiles respectively
**Compound Annual Return
Source: Grant’s Interest Rate Observer (October 2010)
Assuming Buy & Hold over the entire period:
If your family had bought $100 worth
of quintile-four dividend stocks in
1928, you would have had a portfolio
value worth
$713,370 in 2009.
If your family, on the other hand, had
bought non-dividend paying stocks in
1928, you would have had a portfolio
value worth
$58,127 in 2009.
Source: Grant’s Interest Rate Observer (October 2010)
1.Dividends may appeal to investors who desire stable cash flow but do not
want to incur the transaction costs from periodically selling shares of
stocks.
2.Behavioral finance argues that investors with limited self-control can meet
current consumption needs with high-dividend stocks while adhering to
the policy of never dipping into principal.
3. Managers, acting on behalf of the stockholders, can pay dividends in order
to keep cash from bondholders.
4.The board of directors, acting on behalf of the stockholders, can use
dividends in order to reduce cash available to spendthrift managers.
6.Dividends have long been a signal to investors. A constant dividend assures
investors the company is doing well, and views future potential to be
equally as sound.
7.The dividend approach gives a greater opportunity to beat inflation, over
time, than a bond-only portfolio.
Ross,Westerfield,Jaffe (2008) Corporate Finance
 Favorable tax treatment recently has hedged
dividend returns.
 For most of the last 80 years, dividends have
been taxed at the individual marginal income tax
rate. *
 *Tax facts 2009 Addition
Source: Grant’s Interest Rate Observer (October 2010)
 Dividend paying stocks will often help an individual
hold onto a stock that he/she may come to believe
they over paid for when originally bought.
EXAMPLE:
March 1999 – Bought Abbott Labs at $46.59
March 2009 – The shares were quoted at $46.89
A 30-cent gain in share price
The above happened during a period when Abbott raised sales and
earnings by 135%. This halved the PE ratio from 28 to 14.
Nearly everything that could go wrong did go wrong during this period.
Source: Grant’s Interest Rate Observer (October 2010)
DON’T FORGET THE DIVIDENDS!
Abbott continued to pay Dividends…
In 1999, the dividend was 66 cents a share
In 2009, the dividend had gone to $1.48 a share
If you had reinvested the dividend, you would have earned 25.7% over
the 10-year period.
The S&P500 had no gain over this time period.
On November 1st, 2010, Abbott stock was worth $50.60 a share
Source: Grant’s Interest Rate Observer (October 2010)
"Investing in dividend stocks is one of the top strategies to survive market instability"
Lawrence Carrel, journalist of The Wall Street Journal
 In July 2004, Microsoft had a cash hoard of nearly $60 billion. It used cash
to:
 Increase the annual dividend $.32 per share
 Repurchase about $30 billion of the company’s stock over the next 4 years
 Make a special dividend payment of $3 per share to shareholders
With 10 billion shares outstanding – the special dividend payment totaled
$32.6 billion – the largest corporate cash disbursement in history!
The total dividends paid by all the companies in the S&P500 for the year
totaled $213.6 billion – Special dividend represented about 15% of all
dividends paid by 500 of the largest companies of the year!
When the dividend was sent to investors in December, personal income in
the United States rose 3.7%. Without dividend, personal income only
rose .3%.
This special dividend payment accounted for over 3% of all
personal income in the U.S. for the month of December,
2004!
Ross,Westerfield,Jaffe (2008) Corporate Finance
Goal:
 To concentrate on higher current dividend yields
that have also a history of annual dividend
increases in order to increase portfolio
performance while reducing risk
Reason:
 Tangible confirmation of management’s
confidence in future earnings growth
 Generation of higher levels of income over a
long period of time if reinvesting dividends
Objective:
To apply quantitative criteria to the wide universe
of dividend stocks in order to narrow it down to
few companies. This will allow us to concentrate
on a more promising group of dividend stocks,
our high probability dividend stocks!
Stock
Universe
Popular
List
Current
List
Master List
(250 stocks)
Scoring
Process
Top 25 Dividend
Stocks
Screen
Based List
Screening Process
STOCK UNIVERSE
Screen Based List
DRPs
High
Yield
Dividend
Growth
Dividend
Yield
High Div &
Growth
Master List
Scoring Process
TOP
25 DIVIDEND STOCKS
Dividend
Yield &
Profitability
 DRPs High Yield Screen: DRPs companies with high relative
yields, reasonable dividend payout ratios and high growth
 Dividend Growth: Looking for stable companies that are in the
maturity stage of their life cycle, above-average dividend growth
rates.
 Dividend Yield: Screen that looks for undervalued stocks using the
dividend-yield approach (companies with secure dividends –
example: specifying a maximum level of dividend payout ratio of less
than 50%)
 High Div&Growth: Screen that focuses on high-quality growth
stocks that have higher dividends and lower price volatility
 Dividend Yield & Profitability: Screen that looks for companies
with increasing profitability and reasonable dividend yield
 Current List: List that comes from our experienced advisors.














Provides DRP plan
Yield >= 3
Dividend 12m >= Dividend Y1
Dividend Y1> Dividend Y2
Dividend Y2>Dividend Y3
Dividend Y3 > Dividend Y4
Dividend Y4>Dividend Y5
Dividend Y5>Dividend Y6
Dividend Y6>Dividend Y7
Dividend Gr. 5Y> Industry Div-Gr. 5Y
Yield > Yield-Avg. 5 Y
Payout ratio 12 <= 60%
EPS-Gr. 5 Yr >= Industry EPS-Gr.5Y
ADR/ADS Stock is false
FIELD
Provides DRP Plan
Yield
Dividend 12M
Dividend Y1
Dividend Y2
Dividend Y3
Dividend Y4
Dividend Y5
Dividend Y6
Dividend-Growth 5yr
Yield
Payout ratio 12m
EPS-Growth 5yr
ADR/ADS Stock
OPERATOR
is True
>=
>=
>
>
>
>
>
>
>
>
<=
<=
is False
COMPARE TO:
3
Dividend Y1
Dividend Y2
Dividend Y3
Dividend Y4
Dividend Y5
Dividend Y6
Dividend Y7
Industry Dividend-Growth 5yr
Yield-Average 5 years
60
Industry EPS-Growth 5yr
STOCKS
1089
1678
9238
1638
1315
1126
1616
1817
1795
1232
939
3818
4421
9528
17 companies passed the screen!
3rd QUARTER, 2012
SYMBOL
SECTOR
COMPANY NAME
1 ABT
Health Care
Abbot Laboratories
2 AROW
Financial
Arrow Financial Corporation
3 AUBN
Financial
Auburn National Bancorporation
4 CVX
Energy
Chevron Corporation
5 DRI
Services
Darden Restaurants, Inc.
6 GIS
Consumer Non-Cyclical
General Mills, Inc.
7 INTC
Technology
Intel Corporation
8 MCD
Services
Mcdonald’s Corporation
9 MDP
Services
Meredith Corporation
Current
List
Stock
Universe
Screen
Based
Master List
Top 250
Dividend Stocks
Master List
Top 250 Dividend
Stocks
Scoring Process
Criteria for scoring:
- Consistent Growth
- Increasing Profitability
- Good Financial Health
- High Dividend Yield
TOP
25 DIVIDEND STOCKS
As of:
RANK #
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
8/1/2012
TICKER COMPANY
LINE
AVA
UNS
NLY
MCD
MSFT
HTS
CLF
ARCC
INTC
LMT
SCCO
CTL
ETN
COP
RAI
JNJ
OLN
ABT
T
AFL
CVX
SYY
KMB
CLX
Linn Energy, LLC
Avista Corp
UNS Energy Corp
Annaly Capital Management, Inc
McDonald's Corporation
Microsoft Corporation
Hatteras Financial Corp.
Cliffs Natural Resources Inc
Ares Capital Corporation
Intel Corporation
Lockheed Martin Corporation
Southern Copper Corp
CenturyLink, Inc.
Eaton Corporation
ConocoPhillips
Reynolds American, Inc.
Johnson & Johnson
Olin Corporation
Abbott Laboratories
AT&T Inc.
AFLAC Incorporated
Chevron Corporation
SYSCO Corporation
Kimberly Clark Corp
Clorox Company, The
Growth Score Yield Score Dividend Yield TOTAL SCORE
72.00
80.00
80.00
58.00
74.00
76.00
56.00
64.00
54.00
68.00
62.00
56.00
52.00
60.00
56.00
52.00
58.00
56.00
58.00
50.00
58.00
56.00
56.00
56.00
52.00
96.00
88.00
88.00
99.00
82.00
79.00
99.00
90.00
98.00
82.00
88.00
94.00
95.00
86.00
89.00
91.00
84.00
86.00
83.00
90.00
82.00
84.00
84.00
84.00
84.00
* Yield Score and Growth Score as of July 1, 2012 - from 3rd Quarter Screener
7.54
4.17
4.23
12.75
3.13
2.69
12.41
5.94
8.84
3.43
4.47
6.24
6.95
3.50
4.74
5.06
3.53
3.88
3.06
4.68
2.96
3.24
3.69
3.47
3.57
84.00
84.00
84.00
78.50
78.00
77.50
77.50
77.00
76.00
75.00
75.00
75.00
73.50
73.00
72.50
71.50
71.00
71.00
70.50
70.00
70.00
70.00
70.00
70.00
68.00
 A model that describes the relationship between risk and expected
return and that is used in the pricing of risky securities.
 General idea behind CAPM: investors need to be compensated in two
ways: time value of money and risk.
 The time value of money is represented by the risk-free (rf) rate in
the formula and compensates the investors for placing money in
any investment over a period of time.
 The risk is represented by beta and calculates the amount of
compensation the investor needs for taking on additional risk (risk
premium)
 The CAPM says that the expected return of a security or a portfolio
equals the rate on a risk-free security plus a risk premium.
Investopedia, January 2011
As of:
8/1/2012
RANK #
TICKER
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
LINE
AVA
UNS
NLY
MCD
MSFT
HTS
CLF
ARCC
INTC
LMT
SCCO
CTL
ETN
COP
RAI
JNJ
OLN
ABT
T
AFL
CVX
SYY
KMB
CLX
COMPANY
Linn Energy, LLC
Avista Corp
UNS Energy Corp
Annaly Capital Management, Inc
McDonald's Corporation
Microsoft Corporation
Hatteras Financial Corp.
Cliffs Natural Resources Inc
Ares Capital Corporation
Intel Corporation
Lockheed Martin Corporation
Southern Copper Corp
CenturyLink, Inc.
Eaton Corporation
ConocoPhillips
Reynolds American, Inc.
Johnson & Johnson
Olin Corporation
Abbott Laboratories
AT&T Inc.
AFLAC Incorporated
Chevron Corporation
SYSCO Corporation
Kimberly Clark Corp
Clorox Company, The
Growth Score Yield Score Dividend Yield
72.00
80.00
80.00
58.00
74.00
76.00
56.00
64.00
54.00
68.00
62.00
56.00
52.00
60.00
56.00
52.00
58.00
56.00
58.00
50.00
58.00
56.00
56.00
56.00
52.00
96.00
88.00
88.00
99.00
82.00
79.00
99.00
90.00
98.00
82.00
88.00
94.00
95.00
86.00
89.00
91.00
84.00
86.00
83.00
90.00
82.00
84.00
84.00
84.00
84.00
7.54
4.17
4.23
12.75
3.13
2.69
12.41
5.94
8.84
3.43
4.47
6.24
6.95
3.50
4.74
5.06
3.53
3.88
3.06
4.68
2.96
3.24
3.69
3.47
3.57
TOTAL
SCORE
84.00
84.00
84.00
78.50
78.00
77.50
77.50
77.00
76.00
75.00
75.00
75.00
73.50
73.00
72.50
71.50
71.00
71.00
70.50
70.00
70.00
70.00
70.00
70.00
68.00
Beta
0.74
0.70
0.64
0.28
0.42
1.01
0.27
2.40
1.77
1.10
0.93
1.60
0.69
1.51
1.12
0.55
0.54
1.22
0.31
0.56
1.83
0.78
0.71
0.31
0.37
Beta
Current
Portfolio
Yield:
August 1, 2012
Rf
Treasury Bill Rate - 4 weeks
8/3/2012
* Yield Score and Growth Score as of July 1, 2012 - from 3rd Quarter
Screener
5.127
0.89
Rf
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
Rf
0.02
Rm
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
0.6767
Rm
0.6767
CAPM of Portfolio
Current Portfolio Yield
Expected return of the Portfolio
CAPM
0.5059
0.4797
0.4403
0.2039
0.2958
0.6832
0.1973
1.5960
1.1823
0.7423
0.6307
1.0707
0.4731
1.0116
0.7555
0.3812
0.3746
0.8211
0.2236
0.3877
1.2217
0.5322
0.4862
0.2236
0.2630
CAPM
0.6073%Per Month
7.54%
5.13%
12.66%
Annualized
36 variables in the Scoring Process, including:
-Dividend Growth
-Free Cash Flow
-Return on Equity
-Sales Growth…
Dividend Scoring
Snapshot
 Based on Fundamental Data
 In-Depth Dividend Analysis:




Dividend Yield
Dividend Growth
Margin of Safety
Dividend Valuation
 Based on a combination of dividend strategies
 Provides Ex-Dividend date
 Yield Growth: Combination of dividend yield and




dividend growth rate analysis. High value on this category
indicates stocks with above average yield and long-term
growth.
Dividend Analysis: In-depth analysis of dividend stocks
considering payout ratio, P/E ratio, earnings yield and
dividend yield.
Dividend Growth: Concentrates on sustainable growth
rate, the maximum growth rate that a firm can sustain without
having to increase financial leverage.
Strong Dividend Valuation: Focuses on strong
dividend stocks: a record of dividend increases over time.
Margin of Safety: Determines the margin of safety of the
stock based on dividend valuation approach.
STRATEGY 1: Combination of high yield stock with low dividend
growth. This strategy concentrates on INCOME – High risk and
short term benefits
STRATEGY 2: Combination of low yield with high dividend growth.
This strategy concentrates on GROWTH – Long term benefits due
to compounding nature of the growing dividend.
STRATEGY 3: Combination of low yield and low dividend growth
with high risk due to high divided payout ratio.
STRATEGY 4: Combination of high yield stock with high dividend
growth.
STRATEGY 5: Mature companies with low but stable dividend. The
strategy with the lowest risk and lowest income.
LJCM DIVIDEND STRATEGY
STRATEGY 1
STRATEGY 2
STRATEGY 3
STRATEGY 4
STRATEGY 5
24%
44%
28%
4%
DIVIDEND STRATEGIES:
STRATEGY 1
HIGH YIELD STOCK WITH LOW DIVIDEND GROWTH (INCOME STRATEGY)
STRATEGY 2
LOW YIELD STOCK WITH HIGH DIVIDEND GROWTH (GROWTH STRATEGY)
STRATEGY 3
LOW YIELD AND LOW DIVIDEND GROWTH WITH HIGH RISK
STRATEGY 4
HIGH YIELD STOCK WITH HIGH DIVIDEND GROWTH
STRATEGY 5
MATURE COMPANIES WITH LOW BUT STABLE DIVIDEND
 Investment term related to the payment of
dividend.
 Defined by the IRS as “the first date following
the declaration of a dividend on which the
buyer of a stock is not entitled to receive the
next dividend payment.“
 Theoretically, the closer to the ex-dividend
date, the higher the stock price. On the exdividend date the stock will drop the amount
by the dividend amount.
 Long-term Strategy.
 Looking for strong financial quality firms:
 Growth
 Profitability
 Financial Health
 Relative Strength
 Involves a cyclical rotation of the dividend
strategies
 Combinations of the dividend strategies will
reduce risk.
 Sell signals will be based on:
 Dividend picking process
 News on fundamentals
 Drastic drop of dividend
Lee Johnson Capital Management does not promise, guarantee or imply that you
will improve your operation, or increase your revenues. As with any business,
earnings potential and successful or unsuccessful use of LJCM products and
materials will widely vary among our customers depending on many factors,
including but not limited to, the customer’s finances, knowledge and skill set,
creativity, motivation, level of effort, individual expertise and as such we do not
guarantee your success or income level.
The information conveyed by LJCM, as well as the information otherwise conveyed
in these materials is intended to provide you with basic instruction regarding
your business or operation. LJCM does not guarantee any results or returns
based on the information you receive. Past performance or examples of
other’s performance is no indication or guarantee of your anticipated future
results, and individual results may vary.
We are not responsible for any success or failure of your business if you implement
the information you receive from us. We provide a tool that you can use to try
to improve the operations of your business. All information contained or
received through the use of our materials is provided “as is” without warranty
of any kind. We hereby disclaim all warranties with regard to the information
contained in our materials including without limitation all expenses, statutory
and implied warranties of merchantability and fitness for a particular purpose .