THE ART OF SHARE COLLECTING There is conclusive evidence that buying dips in certain circumstances can represent long-term value opportunities. The relationship between price and dividend yield is undeniably correlated (see below) and it s this correlation that allows the longer-term timing of investments to jump off the page at you. This phenomenon exists for a reason, not only in share prices, but also in almost every asset class, including property. All asset gains are comprised of two components; yield and growth. This is not chicken and egg math; yield definitely comes first. If we can find value in yield and remain patient, because growth is almost sure to follow. Growth will continue until the yield alerts us that asset prices are over-blown and we can implement an exit plan. This is usually the time when the emotional types jump onto the bandwagon, usually because they ve heard how well others have done and don t want to miss the party. How can we forget Packer s most famous words, You only get one Alan Bond in your life! It s also at this time that high growth can be seen, but in periods of such high growth there is the element of increasing risk. Several famous fund managers and market timers use yield extensively in their analysis. In the US the top-performing newsletter for the last 15 years (as measured by Hulberts yes, a newsletter that tracks newsletters!) uses historical yield on individual stocks as buy and sell points. Geraldine Weiss wrote a book on the topic, The Dividend Connection that is well worth the read and her website www.iqtrends.com is worth a look to get a free copy of her newsletter. My personal super fund is a collector of shares. The use of dividend compounding over the longer-term, say 15 to 20-years cannot be dismissed. The process that I follow is quite straightforward. I do a basic search using the following criteria:? PE < 18? 10-yr average total shareholder return > 15%? Return on equity > 15%? Dividend yield > 4%? Franking = 100%
This refines the ASX universe to stocks that offer relative value now but also have an extremely good long-term track record of performance for shareholders. I then take a glance at the charts to decide whether the stock is worth accumulating now or not. When I say, accumulate, I mean exactly that. If the stock sits around the current levels or lower for the next 6-months, I will be a buyer whenever I make a salary sacrifice or contribution into my SMSF. If prices move too high then I ll simply move onto another stock on my radar screen. I therefore go through stages of buying or standing aside. Over the last 6-months for example I have been accumulating PMN. Now the prices have moved up quite a lot I m looking elsewhere. If PMN comes back, I ll start buying again. Once the holding balances with all the other holdings, I review the complete portfolio and will most likely move on to the next stock. Another example was DVN which I accumulated sub-$0.75. That has shot higher over the last few months, so it s onto the next one, which is? SUN. I do not get concerned if the stock falls. That simply allows a better buying opportunity. The goal is not capital appreciation; it s dividend growth and reinvestment. Because my goal is the dividend stream I will only exit a stock if the dividend gets cut or if the stock appears to be going under. This strategy is not designed to beat the index year in and year out. It s designed to build a supportive income for the future. INVESTMENT TIMING FACTS vs. MYTH Dividends John Bogle. Vanguard. Proved from 1935 to 1992 that when dividend yield was under 3.5%, the odds of having a total annual return of over 10% during the next decade were 1 in 16, 6.25%. When the dividend yield was over 4.6%, the odds of getting a 10% total annual return rose to 19 in 27, 70%. Michael Keppler. Journal Of Portfolio Management. A 1991 study of the relationship of dividend yields and stock market performance of
17 separate countries. Every 3 months from 1969 to 1989, he sorted the stocks in the local markets into four quartiles, according to how high dividend yield the stocks were offering. He then looked at the performance of these stocks over the following quarter. He discovered that the quartile with the highest yielding stocks rose at an annual rate of 18% on average, while the quartile containing the lowest yielding stocks rose at only 6%. Mario Levis. Journal Of Banking and Finance. In 1989 Levis ranked all the companies in the London Stock Exchange from 1955 to 1988 into deciles according to their dividend yields. The decile with the highest dividend yields returned 19.3% the following year whilst the lowest decile returned 13.8%. This may not sound like much, but it s a 71% out performance. Arnot & Asness. Financial Analysts Journal. Between 1871 and 2001, corporate profits grew fastest in the decade following the highest dividend yield payouts, and were the lowest in the years following the lowest dividend yields. Price / Earnings Ratio James O Shaughnessy. Between 1951 to 1994, buying the 50 stocks in the S&P 500 with the lowest price/earnings ratios at the beginning of each year beat the market as a whole 88% of the time. The compound annual return was 13.5% vs. 11.4%, an 18% out performance. Sanjoy Basu. Journal of Finance. In 1997 he ranked NYSE stocks during the period 1957 to 1971 into five groups of lowest to highest dividend price/earnings ratios. During the year that followed, the group with highest price/earnings ratio had an annual return of 9.3%, whilst the group with the lowest price/earnings ratio returned 16.3%, an out performance of 57%. Roger Ibbotson. Arranged the stocks of the NYSE, from 1967 to 1984, into deciles according to their price/earnings ratios. He found that those with the highest price/earnings ratios had an annual compound return of 5.6% over the 18 year period, while those with the lowest price/earnings ratios returned 14.6% annually, an out performance of 152%.
Dimson, Marsh and Staunton. After surveying the international evidence of investing in low price earnings stocks of England, Germany, France, Switzerland and Japan showed an out performance of 0.26% per month. Price Action DeBondt and Thaler. Journal of Finance. They looked at the best and worst performing stocks over the previous 5-years between 1932 to 1977, and compared the subsequent performance of these stocks to that of the NYSE as a whole. The best performing stocks of the previous 5-years had an annual under performance of 6% to the NYSE as a whole in the following year while the stocks that were the worst performers in the previous 5-years out performed the NYSE as a whole by 18%. Porteba and Summers. Examined returns from 17 stock markets around the world from 1926 to 1985 and found that, over the longterm, high returns are followed by low returns, and low returns are followed by high returns. Their recommendation: Buy stocks that have recently suffered significant price declines. Power, Lonie and Lonie. Studied stocks in the UK and derived the same conclusion. The 30 stocks with the worst performance from 1973 to 1982 went on to out perform the 30 stocks with the best performance, as well as the market as a whole, from 1983 to 1987. Stein and DeMuth. Their study looked at buying stocks below their 15-year moving average compared to buying stocks above their long-term average. They tested buying the stocks, from 1902 forward, that finished at the end of each year below and above their 15-years moving average and exiting after various times; 5-years, 10-years, 15-years and 20-years. This data was then adjusted for dividends and inflation. After 5-years the buyer below the average out performed by 80%, after 10-years the out performance was 66%, after 15-years the out performance was 204% and after 20- years, the out performance was 113%. They then took this one step further and measured the distance of the stock price from its 15- year moving average. They divided this distance into quartiles and
held for 20-years. The total return, adjusted for dividends and inflation, showed that buying just below the 15-year moving average, being the highest quartile, showed a total return of 150%, in the next lower quartile, 220%, the third quartile 490% and buying when the price was furthest away from the average showed a return of 560%. The conclusion was that the further the stock was below its 15-year moving average, the better the return was over the next 20-years. This document may contain advice that has been prepared by Reef Capital Coaching ABN 24 092 309 978 ( RCC ) and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. Past performance is not a reliable indication of future performance. This material has been prepared based on information believed to be accurate at the time of publication. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information.