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Value and Dividend Producing Stocks and Securities
Old 08-11-2011, 07:45 AM   #1
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Value and Dividend Producing Stocks and Securities

With the Fed making their intentions clear and their goal keeping rates low and know that sometime in the future, rates will rise....


What is the P/E and P/B level of Large Cap Domestic Value stocks that throw off dividends where they begin to look like a decent alternative to bonds?


For example: VG high Yield Dividend Fund is a Large cap fund that has about a 3.1% yield. It holds many many large companies that are household names. It's P/E just dropped from about 14.6 to 12.6 (roughly calculated by substitution of the price) and the P/B form 2.4 to about 2.0.


Is there a point where it makes sense to take some of the fixed investment and put it in a fund like that? If so, what is the P/E and P/B level that you would need to see?

What are the other issues to consider economically or legislative (i.e., taxes) that one might consider?
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Old 08-11-2011, 09:17 AM   #2
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The loss of diversity - you are exchanging bonds for stocks. The role of bonds is not so much about their yield (which currently sucks) but about the stability they provide a portfolio.

DD
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Old 08-11-2011, 09:41 AM   #3
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The fund you mentioned is yielding 3.1% Well, you can get over 2% by purchasing the S&P 500 index fund. And you also get a lot more diversity. Of course, you give up 1/3 of the dividends you would have received in the other fund.

I would not trade a bond fund for a stock dividend fund unless I was rebalancing. Even then, keep diversity in mind.
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Old 08-11-2011, 10:54 AM   #4
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The loss of diversity - you are exchanging bonds for stocks. The role of bonds is not so much about their yield (which currently sucks) but about the stability they provide a portfolio.

DD
Look at the last 60 years bond prices, not just the last thirty. How stable is that?

Today's bonds are in acompletely articficail market. To buy them, (longer duration) you have to decide that the Fed can always control bond prices as they have done recently. IMO, not a bet to make.

Ha
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Old 08-11-2011, 11:04 AM   #5
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The fund you mentioned is yielding 3.1% Well, you can get over 2% by purchasing the S&P 500 index fund. And you also get a lot more diversity. Of course, you give up 1/3 of the dividends you would have received in the other fund.

I would not trade a bond fund for a stock dividend fund unless I was rebalancing. Even then, keep diversity in mind.

That was just an example of a low cost fund.

However, that fund contains almost 500 companies in it across industries... it is an index... but with a value tilt.

Take a look at the holdings.
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Old 08-11-2011, 11:05 AM   #6
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I still remember Louis Rukeyser's interview with John Templeton. When asked how to generate income dollars, he replied "Invest in stocks and sell the growth" Maybe not his exact words, but close to it.

The old guy knew quite a bit. He also had the courage of his convictions. As I recall, in the depths of the Depression he bought 100 shares of every stock he could find under $1. Many went bust and he lost his $100 (or less). But, those that recovered, made him a fortune.

Am, I suggestion a 100% stock portfolio? No way! Templeton may have had the courage to bet the farm, but I do not.
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Old 08-11-2011, 11:06 AM   #7
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@chinaco
Thanks. I will look at the fund.
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Old 08-11-2011, 11:16 AM   #8
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The loss of diversity - you are exchanging bonds for stocks. The role of bonds is not so much about their yield (which currently sucks) but about the stability they provide a portfolio.

DD
Yes, I agree with diversification... as a general principal.

Another advantage is that bond owners are usually ahead of stock owners.... if there is a default or bankruptcy.

But still... if the culling process for value stocks in the portfolio is one that only includes companies that are real value stocks, they should be fairly strong companies and just experiencing more near term price degradation (not ones that are about to go bankrupt or are experiencing major problems). I would be more concerned that if earnings were to suffer that there would be a temporary dividend cut.


But what would it take for you to feel like the risk was bearable? P/E of 1 or 10?

IOW - the opposite of irrational exuberance.... an irrational stampede for the exits!
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Old 08-11-2011, 11:31 AM   #9
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Look at the last 60 years bond prices, not just the last thirty. How stable is that?

Today's bonds are in acompletely articficail market. To buy them, (longer duration) you have to decide that the Fed can always control bond prices as they have done recently. IMO, not a bet to make.

Ha
My point was in terms of the portfolio as a whole, not bonds in isolation.

DD
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Old 08-11-2011, 11:32 AM   #10
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@chinaco
Thanks. I will look at the fund.

That's fine... but it was an example, not a recommendation!

I used an an example in hopes of making my question a little more clear about the meaning... at least that was my intention.

For that matter the thread is one big question, not a recommendation.

Just looking for thoughts about the situation we seem to be facing with fixed securities.
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Old 08-11-2011, 12:00 PM   #11
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Some ports are geared toward total return, others may be geared toward divs/income so that you do not touch principal. I see nothing wrong with having a value tilt in equities in either case, using a fund like you proposed, especially in a tax sheltered account.

Also, I didn't interpret your question to mean you wanted to exchange a bond fund for this, as it certainly could be coming from cash or done to rebalance the overall port if too heavy in bonds.

That said, I have no idea how anything will play out in terms of tax law changes.
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Old 08-11-2011, 12:22 PM   #12
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My point was in terms of the portfolio as a whole, not bonds in isolation.

DD
I understand, and I know that this is the conventional thought, but I do not buy it. Why add a low return, high risk asset to a portfolio, in hopes of some sort of magical benefit? The benefit IMO has been an artifact of a 30 year bond bull market. I was also alive and sentient during the preceding, very long lasting bond bear market and heard many old men describing their insufferable losses to the relentless bond bear.

Also, there is no theoretical or historical basis for the idea that bonds go up when stocks go down. Just another artifact. Theoretically the risk free interest rate forms the base discount rate, and all financial asset valuations are tied to this rate.

I do feel that their are good resons to hold CDs, even when rates are low- mainly, that one does not like stock values. An investor can't have everything. By holding long bonds he risks losses to rising interest rates, but gains during falling rate periods. (Such as the last few days and the so-called flight to quality. A bizarre idea, when the US debt to GDP ratio has just passed 100%.) It's not that long rates cannot get lower, we have seen that they can. But it certainly makes no sense, and sometime people will wake up to the risk that is lying there waiting to ambush them and the rush for the exits will be on.

I am not talking about credit concerns with USA bonds, but (currently quiescent) inflation concerns.

Ha
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Old 08-11-2011, 01:56 PM   #13
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I understand, and I know that this is the conventional thought, but I do not buy it. Why add a low return, high risk asset to a portfolio, in hopes of some sort of magical benefit? The benefit IMO has been an artifact of a 30 year bond bull market. I was also alive and sentient during the preceding, very long lasting bond bear market and heard many old men describing their insufferable losses to the relentless bond bear.

Also, there is no theoretical or historical basis for the idea that bonds go up when stocks go down. Just another artifact. Theoretically the risk free interest rate forms the base discount rate, and all financial asset valuations are tied to this rate.

I do feel that their are good resons to hold CDs, even when rates are low- mainly, that one does not like stock values. An investor can't have everything. By holding long bonds he risks losses to rising interest rates, but gains during falling rate periods. (Such as the last few days and the so-called flight to quality. A bizarre idea, when the US debt to GDP ratio has just passed 10%.) It's not that long rates cannot get lower, we have seen that they can. But it certainly makes no sense, and sometime people will wake up to the risk that is lying there waiting to ambush them and the rush for the exits will be on.

I am not talking about credit concerns with USA bonds, but (currently quiescent) inflation concerns.

Ha
I understand where you are coming from, but like you said you can't have everything all the time. I don't hold much in long bonds (just what is in some TBM). The bulk of my fixed income is in T-bills, Intermediate Term Treasuries and TIPS - so I have some exposure to inflation risk but not to the level of Long Term Treasuries. The flight to safety has worked well in my favour in 2009 and again now and have to hope that over the next ~40 years they are negatively correlated to equities (for whatever reason) often enough to make it worth holding onto them.

DD
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Old 08-11-2011, 02:25 PM   #14
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I understand where you are coming from, but like you said you can't have everything all the time. I don't hold much in long bonds (just what is in some TBM). The bulk of my fixed income is in T-bills, Intermediate Term Treasuries and TIPS - so I have some exposure to inflation risk but not to the level of Long Term Treasuries. The flight to safety has worked well in my favour in 2009 and again now and have to hope that over the next ~40 years they are negatively correlated to equities (for whatever reason) often enough to make it worth holding onto them.

DD
Yes, this is completely different. TIPS and relatively short duration treasury securities have no to little inflation risk. You "pay" for this by giving up the supposed negative correlation to stocks. (A negative correlation that I have argued will not reliably be found anyway.) You also trade nominal income stability for capital stability, which to me seems like a good trade under current conditions.

So what you have is a portfolio with very low risk, albeit low prospective return. This sounds like a reasonable trade to me, as you have repeatedly explained that you do not want to experience stock market volatility.

(A correction to my post that you quoted- I had meant to write Federal debt is now at 100% of GDP, rather than the 10% that I wrote. Were it only 10% our problems would be over.

Ha
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Old 08-11-2011, 02:38 PM   #15
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I understand, and I know that this is the conventional thought, but I do not buy it. ...
Ha
Well stated.

I am not sure too many people really understand.

I was not expecting the bond market to be manipulated for that long. I was hopeful that a recovery would be more evident by now.

So now I am trying to figure out a plan B.

My fixed allocation right now is almost purely a preservation of capital mechanism (and only then if it can keep up with inflation).

I expect a positive real return from fixed... but the real return on fixed is looking a lot like <= 0.

So I am beginning to ask myself how much capital do I really need preserve at 0% or slightly -% return for the next several years? Especially when I consider that I could be facing potential loses in the value of the fixed securities if rates go up... which is inevitable at some point.

As you stated... given the current circumstances... which rules, are in effect, rendered somewhat in effective (or less effective)?
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Old 08-11-2011, 02:43 PM   #16
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Is it OK to say wheeeeee? Someone had to say it. Might as well come from an boozer. Of course there are 16 minutes left in trading so it could be a premature wheeeee.
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Old 08-11-2011, 02:59 PM   #17
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Is it OK to say wheeeeee? Someone had to say it. Might as well come from an boozer. Of course there are 16 minutes left in trading so it could be a premature wheeeee.
I guess those high-frequency trading computers had another good day.


Maybe they are getting things just right to harvest their short positions (they setup today) at tomorrow's open (joking... i hope).
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Old 08-11-2011, 03:14 PM   #18
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I suppose the Fed plans to continue to use the "no inflation" excuse for several more years now.

The CPI-U including food and energy is pretty high. I haven't seen any signs of it abating!


http://www.bls.gov/news.release/pdf/cpi.pdf
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Old 08-11-2011, 03:46 PM   #19
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I suppose the Fed plans to continue to use the "no inflation" excuse for several more years now.

The CPI-U including food and energy is pretty high. I haven't seen any signs of it abating!


http://www.bls.gov/news.release/pdf/cpi.pdf
Gas is down about 15c a gallon in the last couple of weeks here. The garden helps, although with our cool weather this year we are again going to miss out on most of our fruit and tomatoes are looking like a bust . We are going to get some cucumbers though.

DD
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Old 08-11-2011, 03:51 PM   #20
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So what you have is a portfolio with very low risk, albeit low prospective return. This sounds like a reasonable trade to me, as you have repeatedly explained that you do not want to experience stock market volatility.

Ha
You must have confused me for someone else. The bonds make up ~ 25% of my AA currently. The rest is a slice and dice diversified portfolio of low cost index funds including domestic and foreign equally weighted, with a value and small cap tilt and REIT's. I know, Bogle would not approve. What can I say. Once I had the spreadsheet built it was easy to add new asset classes...

DD
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