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Old 01-12-2013, 09:28 AM   #61
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The thread title says "Attack my high-yield investing". Well, the OP got his wish.

The majority of posters here falls into 2 groups: people who buy broad market indices and do not believe in stock picking, and people who trust the managers of Wellesley and Wellington to do the picking for them. Only a minority including myself does true active investing, meaning choosing stocks or ETFs and doing our own AA rebalancing.

However, perhaps 99% believe in diversification, because we cannot be sure that we are always right, and simply hope that we are right more often than wrong.

There are indeed people who like a concentration in a type of asset, or a sector. For example, there was Mark Twain who said "Put all your eggs in one basket -- and watch that basket!". Well, Mark Twain had to file for bankruptcy.

But then, there was Warren Buffet who said “Wide diversification is only required when investors do not understand what they are doing.” However, we should note that Warren said wide diversification. He indeed shuns tech stocks and other new-economy equities. So, his holdings look nothing like the S&P500. Yet, he still does well.

So, I dunno. Even as an active investor, I still diversify quite a bit. I only have the audacity to increase holdings of certain sectors that I felt were the current underdogs and might have a chance to outperform in the next few years. Even when I was proven correct eventually, the timing of the execution was not easy. Yes, I would make money, but do I beat the indexers? It ain't easy.

All this is to say, I wish the OP good luck. The higher your concentration in a sector of the market, the higher your chance of outperforming (how does one outperform the market if he indexes?), but also at a higher risk of losing big. But if you are convinced that you are right, you can simply carry on your virtuous way. There's no need to ask to be attacked.

PS. Note that Wellesley's equities tend to be the dividend-paying boring types of company. They do not own the go-go tech stocks, and have only a small segment of the whole market. Yet, their performance has been pretty darn good and keep up with the S&P500 in the long run. Go figure!
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Old 01-12-2013, 10:36 AM   #62
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Alex,

1. Have you compared your returns to any sort of index?

For example (with a 12/31/12 yield 4.11%):

Morningstar U.S. | Morningstar Indexes

Quote:
The Morningstar Dividend Yield Focus Index is a portfolio of high quality and high yield US stocks screened for consistent records of dividend payments and the ability to sustain them in the future. The index consists of 75 stocks that are weighted in proportion to the total pool of dividends available to investors.

Total returns:
Trailing %
1 Month
-1.123
Month
-2.64
YTD
10.15
1 Year
10.15
3 Year Annualized 14.99
5 Year Annualized 7.99
2. Managing the credit risks associated with a high-yield stock is a common concern in the posts. What quality tests do you apply in selecting individual stocks? In assessing and managing that risk across the portfolio?

Your OP cites what I consider a price-based or technical indicator as the first filter for your stock selections, i.e. yield exceeds x%. Your description of any "quality" screens are missing, however.

I will illustrate what I am getting at.

Construction of the index above is described in an interview here.
Morningstar

The index manager cites three fundamental analysis techniques he uses in selecting the constituent stocks:

Quote:
The strategy itself is based on two pillars: business quality and financial health. In the Dividend Yield Focus Index, business quality is indicated by our economic moat ratings, and financial health is measured by distance-to-default...a company needs to earn good marks on these two tests plus a third (our analysts’ uncertainty ratings, which can capture risks not explicitly included in the first two).
Clearly a fundamentals-based approach applied as a second (and third and fourth) screen after dividend yield.
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Old 01-12-2013, 10:42 AM   #63
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Alex,
Your strategy is high risk, and that fits your investing style. There are two items that stick out quite a bit.
1) You started this strategy in 2009.
2) You are the sole executor of the strategy.

1) There is advantage in the upside from the Great Recession. But it is a cycle, and there is more to come. See https://www.fidelity.com.hk/investor...ent-clock.page
2) The greatest risk IMO is your self. Something could happen to you, and you become unable to continue to carry out this strategy.
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Old 01-12-2013, 10:52 AM   #64
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Here's another way to compare the quality of a basket of dividend-paying stocks. This time, dividend quality is the first filter, followed by yield.

At this web page, 200 dividend-paying stocks belonging to the Dividend Achievers, Dividend Aristocrats and U.S. Dividend Champions are listed. These stocks are sorted by dividend yield from highest to lowest.

Nine have yields greater than 8%. Another four have a yield between 6 and 8%.

Stocks With Rising Dividends: All Dividend Achievers, Dividend Aristocrats and U.S. Dividend Champions (Sorted by Dividend Yield)

A stock-picking technique like this might be called "Dogs of the Dividend Payers", after Dogs of the Dow.
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Old 01-12-2013, 01:57 PM   #65
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Originally Posted by vxp036000 View Post
Hopefully I can make it clear that I make nowhere near 5 % / month nor do I expect that kind of return. That sounds like a recipe for disaster. I average a little better than 10% in a year. Trying to improve on that would require more risk than I'm willing to take.
Why go through "all that work"?

For 2012 the Vanguard Total International Stock Index Admiral shares returned 18.21% and
Vanguard Total Stock Index Admiral Shares returned 16.38%.


No research, analysis, decisions, et al just buy it. As it's been said if this works for you fine but it's a lot of work, taxes if in a taxable account, trading costs.
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Old 01-12-2013, 02:10 PM   #66
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Short answer: because I enoy it and, for me, it is actually less risky. Case in point; when the market plummited after the recent election, I had already sold off my shares for a substantial profit. I jumped back in the day after New Years and won another substantial profit. In the meantime, most of my passive investing peers were moaning and groaning about their massive losses during the downturn. I lost nothing.

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Why go through "all that work"?

For 2012 the Vanguard Total International Stock Index Admiral shares returned 18.21% and
Vanguard Total Stock Index Admiral Shares returned 16.38%.


No research, analysis, decisions, et al just buy it. As it's been said if this works for you fine but it's a lot of work, taxes if in a taxable account, trading costs.
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Old 01-12-2013, 02:13 PM   #67
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Originally Posted by veremchuka View Post
For 2012 the Vanguard Total International Stock Index Admiral shares returned 18.21%...
For the record, VTIAX went down 15% in 2011.

Just playin' devil advocate...
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Old 01-12-2013, 02:14 PM   #68
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I should add that the trading costs are neglegible compared to profit when you're working with $250k + of capital.
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Old 01-12-2013, 02:26 PM   #69
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For the record, VTIAX went down 15% in 2011.

Just playin' devil advocate...

Huh?

From the Vanguard website:



Total International Stock Index Admiral Shares VTIAX International 0.18% — 2.32% 18.21% — — 3.85%
(11/29/2010)

Average Annual Returns as of 12/31/2012 the red is 1 year

never mind i see this is since 2010 not for the 2012 year!
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Old 01-12-2013, 02:41 PM   #70
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16.19% according to google finance. Ouch! I think I'll stick with my stocks.

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For the record, VTIAX went down 15% in 2011.

Just playin' devil advocate...
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Old 01-12-2013, 02:44 PM   #71
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And the Dow was up 5.5 % that year.

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16.19% according to google finance. Ouch! I think I'll stick with my stocks.
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Old 01-12-2013, 02:49 PM   #72
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Here's yet another way to look at risk, specifically the sequence of returns risk to principal for a basket of dividend-paying stocks over the past few years.

Pasted below is a 6-year "stock return map" for VYM, the Vanguard High Dividend Yield Index Fund, which employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index.

Notably, this covers a period of declining interest rates, which all things being equal is favorable for dividend stock values.

Tool available for inputting any stock here:
Stock Return Map Maker - See Patterns of Winners and Losers
An old thread that shows historic real and nominal returns for the S&P 500 here:
New chart shows real return ....


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Old 01-12-2013, 05:40 PM   #73
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response #5 to comments on my high-yield investing


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Alex,

... 2. Managing the credit risks associated with a high-yield stock is a common concern in the posts. What quality tests do you apply in selecting individual stocks? In assessing and managing that risk across the portfolio?

Your OP cites what I consider a price-based or technical indicator as the first filter for your stock selections, i.e. yield exceeds x%. Your description of any "quality" screens are missing, however.

Thanks so much for asking, Harry. (I've just been waiting for someone to ask. )

Once a week, I run a dividend-yield screen to see where I might place unallocated cash that's come into my portfolio from dividends and stock sales during the week. I screen for a dividend yield of 8% or better, and then sort the companies out from highest to lowest yield. Then I vet them one at a time (starting with the highest, of course) as follows below until I've allocated all available portfolio cash except for a 5% reserve.

My primary financial vetting of potential additions to my stock portfolio include:
-- current liquid assets must exceed current liabilities
-- total assets minus goodwill must exceed long term liabilities
-- operating cash flow must exceed paid-out dividends
-- net income must exceed interest payments

In my calculations, I also factor out any unrealized gains on hedges and other derivatives.

I review these parameters for the 4 quarters prior to my possible purchase.

I strongly opt for companies with 1.5x or better ratios for any or all of the above criteria. I'll put up to 6% of my portfolio in such a company. If a company's ratios are not that strong (but still at least 1.0x), I will limit my exposure to 3% - 4.5% of my portfolio, "depending."

If I am considering a high-yield bond instead of a stock, I will also review the Moody's report on the company and the bond issue and do a qualitative assessment of positive and negative points in the report. Positives have to exceed negatives. The bond has to be rated at least B3. And its current yield must be 10% or better. If the bond passes, I will put 3% of my portfolio into it. Otherwise, bupkus.

Secondary financial criteria I look at include cash per share, book value per share and net profit margin. Acceptable numbers vary by industry.

If the company has passed that vetting, I will do an in-depth review of how its business operates and how management has presented its future expectations and plans in its most recent quarterly conference call. I will also review news headlines on and from the company for the previous 3 months to make sure there isn't some snake lurking in the grass behind the numbers.

I will repeat and update this review on a quarterly basis for each company in my portfolio. (News headlines I check daily because snakes can bite you before you know it if you're not alert.)

In general terms, that's it. There's a lot of other parameters that matter from industry to industry, but it's probably too much detail. Stuff like are a shipping company's vessels on long-term charter or offered on the spot market... is the prepayment rate on a REIT's mortgages under control... what is an energy exploration company's production ratio of oil to gas... yaddy, yaddy, yaddy. (It all matters because 2 companies in the same industry with a presently similar dividend yield can prove to be very different in how sustainable that dividend yield may be.)

Once I decide a company is "good to go", then I analyze the stock price chart to determine the buy price at which the risk/reward ratio of buying the stock is acceptable to me. But that's a whole other post.

So, how does my "quality screening" sound?

Cheers!

Alex in Virginia
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Old 01-12-2013, 06:06 PM   #74
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It sounds rather simplistic and clueless. Good thing you have been doing this in a rising market.
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Old 01-12-2013, 06:34 PM   #75
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To someone that doesn't understand the market, active investment through a "dogs of the DOW" approach or directly trading stocks is doomed to failure. But don't generalize it to folks that actually put the effort into coming up with a profitable strategy. I know, impossible... Just keep thinking that; it makes it easier for the rest of us :-)

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It sounds rather simplistic and clueless. Good thing you have been doing this in a rising market.
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Old 01-12-2013, 06:39 PM   #76
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To someone that doesn't understand the market, active investment through a "dogs of the DOW" approach or directly trading stocks is doomed to failure. But don't generalize it to folks that actually put the effort into coming up with a profitable strategy. I know, impossible... Just keep thinking that; it makes it easier for the rest of us :-)
I will point out a giant hole in your junk bond review, as an example. You don't read the prospectus and indenture when you buy junk? If not, expect to get badly burned from time to time.

I am also curious how you buy and sell junk bonds. Trade execution for retail lots is atrocious compared to equities, with bid/ask spreads commonly 3 points or worse. I am also curious how all of this will work out in one of the many periods where the junk market hiccups and there is pretty much zero liquidity for such bonds.
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Old 01-12-2013, 06:47 PM   #77
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I don't use margin :-) But in all seriousness, I purposely separate my trading money from safer / stable money. So when things go south, and they have, I'll still have options. Will my strategy remain profitable long term? That remains to be seen, but it has served me well so far (knock on wood).

You never addressed the issue of inflation.... again, your portfolio is producing INCOME... not cap gains.... and it seems that you are spending all the income....

So, over time your spending ability will go down EVEN IF YOU DO NOT LOSE PRINCIPAL..... However, I have doubt that over time you will not lose principal.... there are always firms that go out of business or some other thing happens to make your investment go bad.... look at Citi, AIG, GM, Chrysler (just naming some who are still in business, many more who did not make it).... and these were not junk (hi yield is another term for junk, so do not try and tell me you are not investing in junk)....

Like many here have posted, your strategy works until it does not... and likely it will implode quickly rather than over time.... and as I said in my first post, you might not live long enough to have it implode... so you are the winner...
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Old 01-12-2013, 06:47 PM   #78
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This is the most entertaining thread I can recall since MMND.
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Old 01-12-2013, 07:00 PM   #79
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No I'm not spending all the income I make from trading. My trading portfolio grows roughly 6% / year after living expenses.

And yes, sometimes I do lose principal. That is why I have considerable capital elsewhere. No, I do not invest in junk. High yield != junk. Citi, AIG, GM, Chrysler, etc. I would not have touched with a 20 foot pole and yes I considered them to be junk for multiple reasons. I only invest in companies with a proven track record, among many other criteria. People are telling me to buy AAPL, DFS, FB, etc. Do you consider these high quality as well? My criteria disqualify all of these companies as poor choices.

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You never addressed the issue of inflation.... again, your portfolio is producing INCOME... not cap gains.... and it seems that you are spending all the income....

So, over time your spending ability will go down EVEN IF YOU DO NOT LOSE PRINCIPAL..... However, I have doubt that over time you will not lose principal.... there are always firms that go out of business or some other thing happens to make your investment go bad.... look at Citi, AIG, GM, Chrysler (just naming some who are still in business, many more who did not make it).... and these were not junk (hi yield is another term for junk, so do not try and tell me you are not investing in junk)....

Like many here have posted, your strategy works until it does not... and likely it will implode quickly rather than over time.... and as I said in my first post, you might not live long enough to have it implode... so you are the winner...
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Old 01-12-2013, 07:04 PM   #80
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Isn't ignorance a bliss?

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This is the most entertaining thread I can recall since MMND.
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