# What is so wrong about chasing yield?



## Max (Apr 4, 2009)

I have heard that chasing yield is bad, but I would like to understand more fully what are the arguments.

A lot of the most highly recommended dividend stocks yield only 3-4%. I see some of these US shipping companies yielding 15-20%, and GE, BMO and others have all touched double digit yields. They look pretty tempting, but after hearing the don't chase yield comments, I hesitate and am compelled to think it through, but I cannot see the weakness.

Why should we not pursue companies like these assuming they pass a fundamental analysis of their financial health, they are paying out less than they earn, and they are not funding dividends with debt or common stock issuance?

Is it because dividend investors do not like to time the market and would rather make smaller regular purchases than large lump sum investments that they avoid high yielding stocks with high volatility? Is it because the high yield almost always signifies problems with the stock (its yield must be high for a reason?).

Could someone please let me know the common dangers of yield chasing?


----------



## mfd (Apr 3, 2009)

Nothing is wrong with high yield really. You've touched on one concern though. Payout ratio. A high yield could mean a company is paying out a large portion of their earnings in dividends which doesn't leave them with much money to grow or they may even be going into reserves to pay the dividends. This will eventually lead to a dividend cut. 

A second concern is inflation and dividend growth. A high yield today may not be a high yield in 20 years. They may pay out 15% now but if they never raise their dividend in 20 years it could be a yield of 1%. On the flip side a company that is currently paying out 1% today could be paying out a bundle in the future if they grow their dividend aggressively. This is why its important to look at both yield and growth. 

Those are generally the two main issues. I'm not a heavy dividend investor right now so there might be a few more reasons that others can fill in.


----------



## Financial Highway (Apr 3, 2009)

Yea you are right partially that stocks that have a high yield are SEEN to be in danger of cutting dividends, but not in all cases. Income trusts and REITS have high yields because they are required to distribute most of profits to shareholders, but just be aware with income trusts not all of it is dividends. It can be interest as well as return of capital ROC. 

The higher yield you have the higher PERCEIVED risk you take to dividends being cut. 

Shipping companies are very similar to income trusts, but VERY volatile it should only be very small part of your portfolio.

The danger is that if dividends are cut you will 
1. lose/reduce your income
2. have a stock drop (15-30% maybe)

And if you are depending on the dividends as income support it will have a major impact on you e.g. Derek Foster.

What is more important when looking at dividends is looking at the PAYOUT RATIO. If the company is paying out 30% of their earnings there is enough room for profits to drop and maintain dividends. But if payout ratio is 80% if earnings drop chances of a cut are much higher. 

Like i said yield is just perceived danger, it doesnt always mean it will happen. For example Canadian Banks have high yields, I don't think the banks will cut their dividends anytime soon, unless we have a major economical disaster at which point I think we'll have other things to worry about than bank dividend cuts.

here is my look at Are Canadian Bank Dividends Safe?

I think if you are buy-and-hold investor and going for long term do your DD and you can find GREAT dividend paying stocks with good yields.

Canadian Capitalist post on Dangerous of Chasing High Yield


----------



## Max (Apr 4, 2009)

Great, great advice. Thanks guys!


----------



## moneygardener (Apr 3, 2009)

Great answers here and I agree with most of the comments. 

Another problem with chasing yield is overconcentration on one feature of a stock (company). If by 'chasing yield' the investor is drawn to stocks with high yields and pays little mind to other factors such as competitive advantage, balance sheet, earnings growth history and potential, return on equity, profit margin growth, need for product/service in the future, brands, etc. then it is a mistake just based on that. 

If your stock screen is as simple as:
-Stocks yielding +7%

you have a problem.


----------



## MoreMiles (Apr 20, 2011)

Yellow Pages was listed as a TSX 60. It was yielding 10% and lots of people were chasing it. What's wrong? Well... You know the ending.


----------



## james4beach (Nov 15, 2012)

The problem with chasing yield is that it often ends up with you losing capital. When all is said and done your total return is back to market average (best case scenario) or, more likely, far worse than market average. I'll bet that a lot of people chasing dividend yields today will find that, in 10 years, they would have been much better off in XIU or ZCN.

At a more fundamental level, and this answer encompasses stocks, bonds & everything --

The problem with yield chasing behaviour is that *the investor is stubbornly refusing to accept the reality of the market*. Interest rates are all relative. The market currently tells us, via bonds, that the 5 year benchmark is 1.8% and the 10 year is 2.5%. These are the benchmarks.

So when an investor says "I want higher than the 3% dividend yield I'm getting on the TSX" they're really stubbornly refusing to accept the market reality. Currently, 3% is more or less the long term yield you can expect. But many investors seem to approach the market from the viewpoint that I need a predetermined X% (for my retirement planning) and therefore I'm going to make it happen.

And I think that's the wrong way to invest. The market doesn't owe you 5% returns. The bond market says that the no risk long term rate is 2.5%. I think as an investor you have to take that reality and work with it. Or at least you have to realize that any time you find more than 3% yield, there are some risks involved. But I routinely see people demanding more than benchmark rates, without realizing what kinds of risks they're taking on.

This is why I accept the 3% GIC yield and am happy with it. And why I buy the government bonds at 2.5% and am happy with those too. I acknowledge these are the current interest rates in our market, and I don't fight it.


----------



## Rusty O'Toole (Feb 1, 2012)

Others have pointed out the danger of chasing yield i.e. many stocks and bonds have a great yield right before they go bankrupt. They could have been paying dividends out of capital, or even borrowing money to keep up the dividend.

On the other hand there are times when the whole market is selling at a discount or even a certain sector. There was a lot of doubt about the banking sector in 2008 - 2009 and this brought down the price of Canadian bank stocks even though they were in little or no danger.

Buying good stocks when they are on the bargain counter is an excellent way to "chase yield" as long as you investigate and make sure you are not buying into a dying concern.

Incidentally there are times when it pays to buy the securities of a bankrupt company. For example the Penn Central Railroad went bankrupt in 1970 or thereabouts. It was the biggest bankruptcy in American history up to that time. But I heard of one investor who made a killing in Penn Central bonds.

It was like this. There was a certain issue of bonds that had a high coupon, 12% I think. They were issued when the railroad was in trouble and their credit rating not the best. But, the bonds were secured by a mortgage on the rolling stock, held by another railroad.

One investor bought these bonds at 60 or 70 cents on the dollar during the bankruptcy. He knew he was going to get every penny of interest and capital because he checked into the bonds, checked into the railroad that held the morgage, and checked with the trustee in bankruptcy.

It took a year or 2 to work everything out but he got interest of 18% or 20% on his money plus a capital gain of half or 2/3 when they cashed out the bonds.

This was written up in one of Adam Smith's books, I think it was in Supermoney. He went on to ask this investor what stocks he liked and he recoiled in horror. "I never buy stocks" he said. "They go UP and DOWN all the time".

So, he was making 20% or more per year on his money and he never touched stocks because they were too risky.


----------



## james4beach (Nov 15, 2012)

Buffett has been buying distressed debt for years. It's totally a valid thing to do (buying bonds or preferreds with high yields) but there are huge risks involved and you have to be an expert in those areas to really understand what's going on.

It's retail investors I'm concerned about. They wander across the web and end up buying some like XTR for its "high yield", an ETF that's loaded up on junk bonds!


----------



## james4beach (Nov 15, 2012)

Those institutional investors who buy distressed bonds and other high yield things, also often face total losses on some of their purchases. But they have enough capital in the game to come out ahead after the big winners (the recoveries) balance out the losers. Again I don't think a typical retail investor can expect to replicate the performance seen by professional distressed debt investors.


----------



## MrMatt (Dec 21, 2011)

Max said:


> Could someone please let me know the common dangers of yield chasing?


The danger is you might not get it. The published yield is trailing yield.

What if a company "yielding" 10% runs out of money and declares bankruptcy?

For a company paying out $10/share/yr, the "secure" one will have a high price (low yield), the "risky" one will have a low price (high yield).
Just think about that.

Most likely if you're getting a high yield, the underlying company is riskier than others, you're taking on more risk for that potential return.

Another thing is some resource trusts simply run out, what would you pay for an oil well that is almost dry vs one that is fresh and "full".


----------



## Synergy (Mar 18, 2013)

"High Yield" and "Yield Chasing" is pretty subjective - what are we talking about - 2-3%, 3-4%, 5-6%, 7-8%, 10+%? Would you call an investor who screens for stocks in the 2-3% yield range "a yield chaser"? I view a yield chaser as someone seeking yield (usually in the 6+% range) with little to no regard to the companies fundamentals. Additionally, just because a company has a higher yield doesn't necessarily make it a riskier investment - small cap growth stocks paying no dividend are often riskier than a large cap stock paying a reasonable yield of say 3-5%.


----------



## gibor365 (Apr 1, 2011)

Synergy said:


> just because a company has a higher yield doesn't necessarily make it a riskier investment - small cap growth stocks paying no dividend are often riskier than a large cap stock paying a reasonable yield of say 3-5%.


Exactly! Take for example MO , they have 5.3% yield and raising dividends for 45 years (since I was 2 years old ) .... I doubt that their dividend is riskier than of some 1-2% yielding small cap. Yea, I bought MO about 2 years ago mostly because of the yield and because I like their product and now my YOC is 7.4%


----------



## andrewf (Mar 1, 2010)

It's almost as if the dividend yield is not very useful in providing information about a company, and you should evaluate them on factors other than yield.


----------



## gibor365 (Apr 1, 2011)

andrewf said:


> It's almost as if the dividend yield is not very useful in providing information about a company, and you should evaluate them on factors other than yield.


Yield just one of the many factors


----------



## MrMatt (Dec 21, 2011)

andrewf said:


> It's almost as if the dividend yield is not very useful in providing information about a company, and you should evaluate them on factors other than yield.


No one number is going to give you a complete understanding of a company.


----------



## Charlie (May 20, 2011)

Interestingly, if OP had 'chased yield' with BMO or GE in April 2009 as he'd contemplated, he'd be up 250% in share price and a big up in dividends to boot . Better lucky then good, I suppose...


----------



## HaroldCrump (Jun 10, 2009)

IMHO, we should differentiate between _chasing yield _and focusing on _dividend growth_.
Companies that are able to grow their dividends consistently year after year turn out to be great investments more often than not.

A few names come to mind such as IBM, Coca Cola, the 5 Canadian banks, telcos like BCE, utilities like Trans Canada, and a few others.

Such investments are often characterized by a high YOC.
I know, I know, YOC is supposed to be meaningless, however, there is often a highly compelling success story behind a high YOC that cannot be ignored.
It indicates a combination of good market timing as well as a good fundamental analysis success story.

Just as we should not make a fetish out of yield, similarly, we should not summarily dismiss and pooh-pooh the ability of a company to pay healthy and growing dividends over time.


----------



## Synergy (Mar 18, 2013)

HaroldCrump said:


> Just as we should not make a fetish out of yield, similarly, we should not summarily dismiss and pooh-pooh the ability of a company to pay healthy and growing dividends over time.


1+ Well said


----------



## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> It's retail investors I'm concerned about. They wander across the web and end up buying some like XTR for its "high yield", an ETF that's loaded up on junk bonds!


We don't own any XTR but are interested to know how one determines that it is "loaded up on junk bonds"? If we look up the current fund holdings at ishares, they indicate having 17.6% in the iShares US high yield bond index - is that the "loaded up" part? But as an index, isn't the risk in turn spread so that having a single or several bond issues go bad would be a mere blip? It looks like the largest single holding within that bond index fund is 0.58% in someone called Sprint Corp. And back in XTR, it looks as if the largest position in what they call the 'aggregate underlying holdings' is 2.5% in Fortis, 1.95% in RioCan, etc.

We can see that the fund's recent performance has been poor, -0.61% ytd, 0.95 over 1 yr, but assume that might be because the bonds, prefs and reits it holds took a kicking this year? Are we missing something?


----------



## liquidfinance (Jan 28, 2011)

OnlyMyOpinion said:


> We don't own any XTR but are interested to know how one determines that it is "loaded up on junk bonds"? If we look up the current fund holdings at ishares, they indicate having 17.6% in the iShares US high yield bond index - is that the "loaded up" part? But as an index, isn't the risk in turn spread so that having a single or several bond issues go bad would be a mere blip? It looks like the largest single holding within that bond index fund is 0.58% in someone called Sprint Corp. And back in XTR, it looks as if the largest position in what they call the 'aggregate underlying holdings' is 2.5% in Fortis, 1.95% in RioCan, etc.
> 
> We can see that the fund's recent performance has been poor, -0.61% ytd, 0.95 over 1 yr, but assume that might be because the bonds, prefs and reits it holds took a kicking this year? Are we missing something?



Another problem with XTR is the fact that the fund yield is higher than the combined yield of the underlying holdings.
Back in February I was talking to James4 about this fund and at the time it was worked out the actual yield was around 3.7% based on the underlying holdings.


----------



## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> We don't own any XTR but are interested to know how one determines that it is "loaded up on junk bonds"? If we look up the current fund holdings at ishares, they indicate having 17.6% in the iShares US high yield bond index - is that the "loaded up" part?


Well they have 20% in XHB which though not strictly 'junk' bonds are lower grade Canadian bonds. Nothing in A ratings, only BBB and lower grade (BBB is the edge of investment grade). And then the 18% you saw in XHY, straight junk bonds.

I view that as 38% of XTR in lower quality corporate bonds and borderline junk. And the composition of XTR changes a lot (it's totally at the whims of their manager).. at one point in the past I remember seeing closer to 50% of it in XHB + XHY.

I feel that's a pretty huge exposure to poor quality bonds. And you could buy this today and find in a couple years that the junk bond allocations have increased. They don't have to stick to a certain weighting, it's entirely up to them.

There are seniors buying this thing because it's a "monthly income fund". I don't feel that the typical retiree should have 38% exposure to borderline junk bonds (way too much risk exposure). Compare it to a monthly income fund that I somewhat approve of ... CIBC Monthly Income ... that mutual fund only has 10% of total assets at the 'BBB' level and nothing below. In comparison, XTR has 38% at the BBB (and plenty below) level !

My point with XTR though is that if someone naively approaches this and just gets tempted by the yield alone, they run the danger of getting into a fund that's very heavy in low grade/junk corporate bonds and they may not realize the risks they take on with that. XTR has the additional problem that liquidfinance mentions, that they use a heavy dose of return-of-capital to give the appearance of a higher yield. So an investor who just chases yield probably wouldn't realize that XTR will fail to have capital growth since they are being paid back their own capital.

So there is a tangible example of what an investor can end up if they chase yield (without lots of caution)

- way more junky paper than a monthly income fund should have... about quadruple in XTR case
- no capital appreciation, since there's return of capital happening


----------



## andrewf (Mar 1, 2010)

The whole idea of a monthly income fund makes my blood boil. It's a marketing gimmick to steer retirees into inappropriate risk allocations and high fees without disclosing risk.


----------



## Toronto.gal (Jan 8, 2010)

Lol, attack on yield, and why a 2009 thread was revived as though there weren't any current threads about that? :biggrin:


----------



## My Own Advisor (Sep 24, 2012)

andrewf said:


> the whole idea of a monthly income fund makes my blood boil. It's a marketing gimmick to steer retirees into inappropriate risk allocations and high fees without disclosing risk.


bam!


----------



## Squash500 (May 16, 2009)

andrewf said:


> The whole idea of a monthly income fund makes my blood boil. It's a marketing gimmick to steer retirees into inappropriate risk allocations and high fees without disclosing risk.


 What's wrong with a monthly income fund? I own the XTR because I need the monthly income to live on. The XTR has been on a roll lately. It's gone from a 52 week low of 11.63 to 12.06. I'm also getting a .06 per unit of monthly income as well.

I think the MER of the XTR is totally reasonable for what you get. I'm well aware of the risks of the XTR. Also I don't find an MER of .55% to be a high fee....especially considering the fact that I'm a DIY investor.

Also I'm not paying one of those rip off high priced financial advisors--LOL.


----------



## Squash500 (May 16, 2009)

OnlyMyOpinion said:


> We don't own any XTR but are interested to know how one determines that it is "loaded up on junk bonds"? If we look up the current fund holdings at ishares, they indicate having 17.6% in the iShares US high yield bond index - is that the "loaded up" part? But as an index, isn't the risk in turn spread so that having a single or several bond issues go bad would be a mere blip? It looks like the largest single holding within that bond index fund is 0.58% in someone called Sprint Corp. And back in XTR, it looks as if the largest position in what they call the 'aggregate underlying holdings' is 2.5% in Fortis, 1.95% in RioCan, etc.
> 
> We can see that the fund's recent performance has been poor, -0.61% ytd, 0.95 over 1 yr, but assume that might be because the bonds, prefs and reits it holds took a kicking this year? Are we missing something?


 I don't think your missing anything. The XTR is having a bad year...because bonds, prefs, utilities and reits are tanking. However thank goodness that all of these above mentioned securities are making a bit of a comeback lately.


----------



## james4beach (Nov 15, 2012)

andrewf said:


> It's a marketing gimmick to steer retirees into inappropriate risk allocations and high fees without disclosing risk.


YES - this pretty much sums up my thoughts too.



Squash500 said:


> What's wrong with a monthly income fund? I own the XTR because I need the monthly income to live on. The XTR has been on a roll lately. It's gone from a 52 week low of 11.63 to 12.06. I'm also getting a .06 per unit of monthly income as well.
> 
> I think the MER of the XTR is totally reasonable for what you get. I'm well aware of the risks of the XTR. Also I don't find an MER of .55% to be a high fee....especially considering the fact that I'm a DIY investor.


XTR is not all bad -- the MER is 0.57% by the way -- but I don't like the way iShares markets it, puts a misleading yield on their web site, and how it's got a much higher risk profile than other common monthly income funds. I think many investors (and I worry about retirees) don't understand XTR's risk profile. But it's totally fine to invest in this if you're fully aware of the risks you're taking on.

And I'd sum up those risks, briefly as

- It contains about 4x the amount of junky paper as more conservative monthly income funds... high credit risk
- It pays return of capital, which eats away at capital, meaning price appreciation long term is unlikely
- It contains many risky securities which are highly volatile
- It has 83% equity (equivalent) exposure since low grade bonds have very high correlation with stocks
it's basically an 83/17 fund and this explains its strong rebound in 2009
- The manager has discretion to change weightings at any time. Unlike a 50/50 balanced fund, you could suddenly find you're holding MUCH riskier investments one day

The monthly distribution is not a guarantee. They are paying out more than their portfolio earns, by paying you back with some of your own capital. If you're OK with all those factors, it's not the most terrible investment on earth


----------



## Sampson (Apr 3, 2009)

Toronto.gal said:


> Lol, attack on yield, and why a 2009 thread was revived as though there weren't any current threads about that? :biggrin:


my thoughts exactly. but what has changed, might as well, parse all threads together, but that might mean there are only 3-4 threads on our forum.

Despite what you think of andrewf's position, he is a trooper and the only one of us that can maintain the discussion. most of us just stop trying... then come back for a bit.... then stop...


----------



## Toronto.gal (Jan 8, 2010)

Andrew did not enter my mind in the least, so it was no criticism; it just so happened that I posted after him.

I simply posted after I noticed that the thread, dead since 2009-04-05, had been revived for no apparent reason, that was it; it had not been directed at anyone per se.


----------



## dubmac (Jan 9, 2011)

james4beach said:


> I'll bet that a lot of people chasing dividend yields today will find that, in 10 years, they would have been much better off in XIU or ZCN.


I'm not so sure that this statement is true.

Let's go back to, say, late 2006, and compare XIU (from your statement above, XIU yield is 2.87%) and compare it to CDZ (a dividend etf with a yield of 3.3%. Most inidividuals who enjoy taking yield would invest in CDZ as a reasonable dividend earning ETF.

Plot these two over the past 7.5 yrs. XIU returns 13.8% and CDZ returns 18.6%. This does not include monies earned from the yield of either fund - this focuseson the growth of each over the past 7.5 years.


----------



## Squash500 (May 16, 2009)

james4beach said:


> YES - this pretty much sums up my thoughts too.
> 
> 
> 
> ...


James....excellent response as usual. Everything your saying about the XTR is true. However at least the XTR is transparent. Last month the manager of the XTR...got rid of the XLB, XCB and XPF and replaced it with CBO and CPD. Unlike the CIBC monthly income where you have no clue what's in the fund day to day....at least with the XTR it's very transparent.

If I didn't need the monthly income then I wouldn't have bought the XTR. However I have a big position in XTR in my non-registered account. The longest GIC that I'll buy in my non-registered account is one of a 1 year duration...which only pays 1.8%. I'm not an individual stock picker...so I'm willing to take my chances on owning XTR, CPD and XDV in my non-registered account.

If worse comes to worse....I can always sell these ETFS....and get my money out in three days if need be.


----------



## james4beach (Nov 15, 2012)

Squash500 said:


> James....excellent response as usual. Everything your saying about the XTR is true. However at least the XTR is transparent. Last month the manager of the XTR...got rid of the XLB, XCB and XPF and replaced it with CBO and CPD. Unlike the CIBC monthly income where you have no clue what's in the fund day to day....at least with the XTR it's very transparent.


Agreed and that's a huge advantage of ETFs. No question there. I love the transparency too.

For a savvy investor (as you are), who understands what XTR holds and how they use some return of capital to enhance the distribution, there really isn't a problem. Just remember though the price could really plummet if the stock market weakens. With an 'effective' 83% exposure to equity-like-things, the response of this to a market downturn will be much more severe than a 50/50 fund (like CIBC's)


----------



## Sampson (Apr 3, 2009)

@MGal,

I only referred to andrewf because he is THE champion. I saw the thread revived, and given all the discussion of late about the topic, don't even want to wade in anymore.

That's why he's our champion.


----------



## Squash500 (May 16, 2009)

james4beach said:


> Agreed and that's a huge advantage of ETFs. No question there. I love the transparency too.
> 
> For a savvy investor (as you are), who understands what XTR holds and how they use some return of capital to enhance the distribution, there really isn't a problem. Just remember though the price could really plummet if the stock market weakens. With an 'effective' 83% exposure to equity-like-things, the response of this to a market downturn will be much more severe than a 50/50 fund (like CIBC's)


 James again your 100% correct. The price of the XTR already fell drastically from a 52 week high of 12.70 all the way down to a 52 week low of 11.63 (in June 2013) in the span of a couple of months. At least I knew why the price drop was happening as all the ETFS in the XTR fell drastically all at once....for example....XUT, XRE and the different bond ETFS etc.


----------



## gibor365 (Apr 1, 2011)

dubmac said:


> I'm not so sure that this statement is true.
> 
> Let's go back to, say, late 2006, and compare XIU (from your statement above, XIU yield is 2.87%) and compare it to CDZ (a dividend etf with a yield of 3.3%. Most inidividuals who enjoy taking yield would invest in CDZ as a reasonable dividend earning ETF.
> 
> Plot these two over the past 7.5 yrs. XIU returns 13.8% and CDZ returns 18.6%. This does not include monies earned from the yield of either fund - this focuseson the growth of each over the past 7.5 years.


You comparing ETF vs ETF that is not fair 
For modest portfolio of 300K , if you bought XIU 10 years ago , you would pay for 10years in MER $5,100! (assuming MER 10 years ago was the same 0.17%). So MER would be $510 per year that cost in my discount brokerage about 73 transactions, so I could've buy all holdings of XIU the same time , 1 time and it would be cheaper than 1 year MER for XIU


----------



## james4beach (Nov 15, 2012)

dubmac said:


> Plot these two over the past 7.5 yrs.


I agree that dividend stocks have outperformed the broad market *recently*, but I will assert that this is a recent phenomenon under extraordinary circumstances, and should not be an expectation for long-term investment.

Here's what I think is going on. There has been an intense yield chasing environment sparked by QE and Fed manipulation, basically when fixed income yields came down really low... bond yields plummeted *starting in 2011* (as did rates on GICs etc). This has been an extraordinary environment and never before seen in history. One of the results is that people piled into dividend investments.

Plot the relative performance of CDZ versus XIU. stockcharts includes dividends so this is a valid comparison of total return. I'm plotting XDV.TO:XIU.TO below because it's basically the same picture and provides a bit longer data, 2006 to present.








To me that chart illustrates what's going on. Dividend stocks had been about the same, a little worse, than the broad TSX. Then in 2011 yield chasing went crazy with fixed income yields plummeted. Since then, dividend stocks have done great.

When people observe amazing outperformance in dividend stocks I think very much relies on on the post-2011 period. I don't think you can generalize it for long term investment.

To me, dividend stocks smell like a mania, a fad, and a bubble fed by the Federal Reserve. I would much rather bet on the long term performance of XIU / ZCN and this also protects you from the very real possibility that dividend stocks are in a bubble mode and could come down when things normalize.


----------



## andrewf (Mar 1, 2010)

Hey, I'm a champion now!

Maybe I'm just more stubborn than average and thus willing to have the same argument multiple times. I can hope that eventually it will sink in.


----------



## andrewf (Mar 1, 2010)

james4beach said:


> To me, dividend stocks smell like a mania, a fad, and a bubble fed by the Federal Reserve. I would much rather bet on the long term performance of XIU / ZCN and this also protects you from the very real possibility that dividend stocks are in a bubble mode and could come down when things normalize.


Interesting, Meb Faber had a post a few days on this topic.

http://www.mebanefaber.com/2013/10/21/the-dividend-challenge/

Looks like dividend paying stocks are indeed in a bit of a bubble and liable to revert to the mean.










It's funny how many people drive with their eye on the rear view mirror.


----------



## james4beach (Nov 15, 2012)

Wow look how colourful our thread has become.

Between the TSX chart and the American one, I think this makes a very strong case that dividend stocks are unusually inflated right now. My chart shows that "safe dividend stocks" have only outperformed in the last 2 years, not persistently over time


----------



## Sampson (Apr 3, 2009)

andrewf said:


> Hey, I'm a champion now!
> 
> Maybe I'm just more stubborn than average and thus willing to have the same argument multiple times. I can hope that eventually it will sink in.


a champion of a bunch of people too lazy to continue a fight is a champion none the less.


----------



## doctrine (Sep 30, 2011)

> Looks like dividend paying stocks are indeed in a bit of a bubble and liable to revert to the mean.


You mean dividend paying stocks from "higher than the mean P/E in traditionally defensive sectors such as telecom, utilities and consumer staples", of course, and not just all evil-capital-destroying-dividend paying companies. 

I do agree with that. I don't hold any utilities or big brand consumer staples or pipeline companies because of the above average P/E. I do continue to hold some telecom because they have much lower P/Es (13-15), which is lower than the TSX average. 

But lumping defensive sectors in with dividend paying companies is a bit of a stretch. There are plenty of dividend paying companies in every single sector including cyclicals.


----------



## andrewf (Mar 1, 2010)

That chart didn't select for high P/E, it selects for high yield, and compares relative P/E.

I didn't say dividend paying companies are evil. I'm preaching caution when chasing yield. Picking companies because they yield a lot or you need x% yield for income is pretty much always a bad idea, but even more so when those stocks have recently outperformed due to the probability of mean reversion.

By all means, buy good companies at reasonable valuations that happen to pay dividends (or not). Don't pick stocks based on yield.


----------



## GoldStone (Mar 6, 2011)

Here's another picture from Mebane Faber's blog. High yielding dividend stocks are worth 44% of the S&P 500 market cap. Long term average: 34.7%. Is this a new normal or a bubble? You decide.










Source:
http://www.mebanefaber.com/2013/10/10/the-biggest-problem-with-buy-and-hold/


----------



## dubmac (Jan 9, 2011)

james4beach said:


> I I would much rather bet on the long term performance of XIU / ZCN and this also protects you from the very real possibility that dividend stocks are in a bubble mode and could come down when things normalize.


How much overlap is there between XIU and XDV (or CDZ)? 

It is difficult for me to imagine that a index fund like XIU would perform significantly better than CDZ when the two funds probably share many of the same holdings. I checked the holdings of XIU - something like 25% of the ETF is RY, TD, BNS, SU and CN. Are these not all dividend stocks? When banks drop, XIU drops - so would CDZ, XDV.


----------



## doctrine (Sep 30, 2011)

CDZ actually has very little exposure to the big banks. They have other problems, such as they overweight high dividend stocks on their "list". They also tend to hold companies that actually haven't raised their dividends for 5 years in a row. They make "exceptions' and there is very little transparency around this. AGF, which hasn't raised their dividend since 2011, is the #1 holding. Atlantic Power was a #2 holding and only had a 3 year dividend history before they cut it by 70%. Reitman's is now creeping up on the list due to the distress in their business. 

But on big banks, they have a 2.2% weighting to BNS, and a 1.98% weight to TD, and that's it. XIC has a 22% weight to the big 6 and XIU has a 30% weighting, so they will perform differently with respect to the big banks.


----------



## dubmac (Jan 9, 2011)

doctrine said:


> But on big banks, they have a 2.2% weighting to BNS, and a 1.98% weight to TD, and that's it. XIC has a 22% weight to the big 6 and XIU has a 30% weighting, so they will perform differently with respect to the big banks.


thanks doc.
I did not check CDZ's top holdings & surprised me somewhat. 
Didn't know that AGF and Reitman's were top holdings - both yields are off the chart!
I got CDZ from the couch potato portfolio website - so thought it was a good choice. - I'll be looking to this more carefully - perhaps another ETF would be a better choice looking forward.


----------



## My Own Advisor (Sep 24, 2012)

Try ZDV vs. CDZ. More balanced, lower MER and still a solid yield. A good ETF for TFSA or even non-registered. 

CDZ is a decent ETF is you want to find individual dividend stocks to own but I would avoid most if not all high-yielding stocks like AGF and Reitman's. AGF is a time-bomb.


----------



## james4beach (Nov 15, 2012)

dubmac said:


> How much overlap is there between XIU and XDV (or CDZ)?
> 
> It is difficult for me to imagine that a index fund like XIU would perform significantly better than CDZ when the two funds probably share many of the same holdings.


I think there's lots of overlap... they both hold large cap Canadian companies. You don't have to guess at the performance, look at the chart I posted in msg #37. Though that chart was XDV, you get more or less the same picture when you plug in CDZ instead... similar overall result, which is that CDZ performed about the same as XIU until 2011, then started outperforming in the last 2 years.

But the MER on CDZ is 0.48% more than XIU. My logic on "dividend stocks" goes like this. Since I don't see any reason to expect difference in long term total performance, I don't see any reason to pay the extra MER versus plain old XIU/ZCN. If I did really want to buy dividend stocks, I would do so at a time they are depressed versus the broad index. Right now the opposite is true... dividend stocks have outperformed in the last 2 years.


----------



## MoreMiles (Apr 20, 2011)

james4beach said:


> Wow look how colourful our thread has become.
> 
> Between the TSX chart and the American one, I think this makes a very strong case that dividend stocks are unusually inflated right now. My chart shows that "safe dividend stocks" have only outperformed in the last 2 years, not persistently over time


It may continue to be inflated as more baby boomers retire... They want their " retirement income" so guess what? They are not going to get it from GIC. So everyone ends up buying a dividend stock, pushing the price even higher.


----------



## liquidfinance (Jan 28, 2011)

I really do not like CDZ. 

For me it's XDV / ZDV


----------



## james4beach (Nov 15, 2012)

There is literature out there to support that very carefully chosen dividend stocks can outperform the broad market but they have to be low payout ratios (under 50%), higher yield, with history of dividend increases. This is a very delicate selection criteria and dividend stocks with other characteristics (e.g. high payout ratios, or low yields) are historically shown to underperform the broad index.

None of the dividend ETFs satisfy me though.
- ZDV looked promising until I saw how high its payout ratios were and this is not expected to give outperformance
- CDZ has an unacceptably high MER at 0.66%
- XDV is way overweight financials, plus it has lots of low yield stocks, a group expected to underperform historically

So I'm not attracted to any of the dividend ETFs. When I look at those candidates I say, why bother? Go with XIU or ZCN. There is no solid reason to expect any of the above ETFs to outperform the broad index. When you look at research on dividend stocks, there are many dividend stocks that under-perform the broad market. You can't just arbitrarily pick them... the process is very sensitive to specific parameters.

Yes you may be able to pick great individual dividend stocks, but personally I don't have the time to regularly review financial statements for a handful of companies every 6 months. Do you have that kind of time?


----------



## Toronto.gal (Jan 8, 2010)

*J4B:* you do seem to have time to do a lot of research [some of it informative I might add], but what do you get out of it? And why bother when you know exactly what you want, and more importantly, what you DO NOT want? Is that time well-spent?

There is no need to review all financial statements regularly. I pay little attention to stocks that I want to hold for 20+ years, unless there is reason to.


----------



## My Own Advisor (Sep 24, 2012)

I'm with you T.gal. I don't spend much, if any time, reviewing annual reports. 

For the CDN market you don't need to research dividend stocks that intently, I think they are pretty easy to find. 

If you're a long-term holder like T.gal, for 20 years, stocks can be like a good indexed product. Buy it, rebalance, maybe a couple times of year (if at all for a stock) and simply watch the dividends come in. 

Should I be doing tons of work I don't know about?


----------



## andrewf (Mar 1, 2010)

MoreMiles said:


> It may continue to be inflated as more baby boomers retire... They want their " retirement income" so guess what? They are not going to get it from GIC. So everyone ends up buying a dividend stock, pushing the price even higher.


This is counting on the 'greater fool', though. If you think you can get out before the bubble pops, all the power to you, but a lot of people necessarily won't be able to avoid the bubble popping.


----------



## james4beach (Nov 15, 2012)

> J4B: you do seem to have time to do a lot of research [some of it informative I might add], but what do you get out of it?


What I get out of it is better decision making, or at least I hope so. Reading a lot of background material seems to help me avoid bad investments, such as financial stocks pre 2008 (which I never touched).

It's my belief that if you hold stocks directly, you should be reviewing the annual financial statements. I look at the annual financials for the ETFs I hold too.

Conditions with companies can change very rapidly and I just don't see how you can buy a stock based on the vague things you know about it, and then blindly hold it for 20 years. CEOs change, boards change, even sometimes the nature of the business changes (for instance GE went from becoming an industrial giant to basically a financial company by '08).

Toronto.gal and My Own Advisor, am I misunderstanding what you're saying, or are you just assuming that the companies you bought will still be successful businesses in 20 years and will not have gone bankrupt?


----------



## Toronto.gal (Jan 8, 2010)

james4beach said:


> 1. Reading a lot of background material seems to help me *avoid bad investments...*
> 2. I just don't see how you can buy a stock based on the vague things you know about it, and then blindly hold it for 20 years.


*1.* Agree that it's a must before buying investments. 

*2.* Nobody said anything about buying/holding 'blindly', but no need to review every 6 months IMHO. By paying little attention, I mean that I don't need to review every company/every quarter, but once/yr., if that! I don't think there is any need to mention what companies require minimal attention, ie: duopolies, but that's not to say that I won't look at them until 2033.


----------



## underemployedactor (Oct 22, 2011)

Toronto.gal said:


> *J4B:* I pay little attention to stocks that I want to hold for 20+ years, unless there is reason to.


I agree with J4b here. This seems a rather reckless statement from Tgal who seems like such a diligent researcher and thoughtful poster. This seems rather shockingly "couch potato-y" to me I dare say. Have you gone over to the enemy T-gal? 
I get her point though. J$b you always seem to be going on on a single theme; buy GICs and stay away from common stock. I have no argument with that strategy if it works for you, but why bother researching stocks if you have no intention of buying them?
Not trying to start anything here, but just curious.


----------



## james4beach (Nov 15, 2012)

underemployedactor said:


> J$b you always seem to be going on on a single theme; buy GICs and stay away from common stock. I have no argument with that strategy if it works for you, but why bother researching stocks if you have no intention of buying them?


Who said I had no intention of buying stocks? I have no interest in buying stocks at the current time.

I do hold stocks, and will be buying more eventually. I bought my first stocks around 2006 (still hold them) and am accumulating holdings over time. It's a marathon, not a sprint.

Many of you guys seem in such a hurry to buy stocks. "omg, I have some extra cash available, what stocks should I buy before my cash becomes worthless due to inflation!"


----------



## Toronto.gal (Jan 8, 2010)

underemployedactor said:


> 1. This seems rather shockingly "couch potato-y" to me I dare say. *Have you gone over to the enemy T-gal?*
> 2. buy GICs and stay away from common stock....why bother researching stocks if you have no intention of buying them?


*1.* No, always had a strong CP side, but did you have to blow my cover? Muchas gracias, NOT. :tongue-new:
*2. *That had been my precise point.


----------



## james4beach (Nov 15, 2012)

By the way, I've mentioned this before, but I also provide background research for others (and am paid to do so). Although I personally am not buying stocks right now, I provide answers to others who ask me questions like: I absolutely insist on buying stocks, what should I get?


----------



## underemployedactor (Oct 22, 2011)

Ah, I see J4B. Didn't mean to pry, just curious.
You should have hooked your clients up with my LYD I was pumping four days ago. You would have had a %50 gain! Sorry, had to crow again over this yet again. ig:
And you Tgal, a closet CPer? A Benedict Arnold in our midst?
Must I course the mad valleys of swing trading, shorting and option trading alone....?


----------



## james4beach (Nov 15, 2012)

I work for very conservative clients (lol - does it show?) and do not recommend individual stocks, because I don't want to put my neck out on the line. Sometimes they ask me to look into a particular company, and the farthest I will go is review the financial statements and share what I find, like risk factors, unusual things in the the report, trends in earnings/etc.

So I'll totally admit that I have a bias against individual stock picking.

In the stock world, I'm mostly looking at ETFs. This is what leads me to say things like, I don't see any strong reason to believe that XDV/CDZ will outperform long term so you might as well go with the benchmark XIU/ZCN


----------



## underemployedactor (Oct 22, 2011)

Is this just your professional bias, or also your personal one?
Oh dear, I have a feeling I'm guilty of completely derailing this thread which you very cleverly got back on track with your final paragraph.
Gracefully done sir.


----------



## gibor365 (Apr 1, 2011)

james4beach said:


> So I'll totally admit that I have a bias against individual stock picking.
> 
> In the stock world, I'm mostly looking at ETFs.


Don't see any advantage of holding ZEB over holding all 6 bank stocks.


----------



## My Own Advisor (Sep 24, 2012)

@J4B,

Totally with you, conditions with companies can change and sometimes rapidly, but I don't see the need to dump a dividend paying stock that has paid dividends for decades after one or two bad quarters. Yes, CEOs change, boards change, even sometimes the nature of the business changes but those things take time to manifest and for the most part, are already built into the price of the stock at any given point.

If you're an indexer, you already know (or strongly believe) markets are efficient


----------

