Some Active beats Indexing

[ERD50]

Anyone could see that in March of 2009 O Realty with a yield of 7 percent, Coca Cola with a yield of 4 percent, Altria with a yield of 6.5 percent, VFC with a yield of 3.5 percent, Home Depot at 4 percent Johnson and Johnson at 4 percent, Fed Realty at 3.5 percent all were great picks and all mentioned here.

DVY is not a “proxy” for blue chip dividend stocks, ...

The blue chip dividend fund is SDOG ...

OK, those stocks you mention did rebound well from the downturn. While I am not going to suggest any cherry-picking or hindsight used here (seriously, no sarcasm intended at all), I still ask how an investor that isn't interested in individual stocks can take advantage of any benefits in this area.

SDOG doesn't have a long enough track record to see how it did in the 2000 and 2008 dumps. And it just seems to me that, if that stock list you gave was so easy to see, why didn't many active funds jump on them, and show above average returns?

Is there some SDOG equivalent that has a longer track record?

-ERD50

 

[Running_Man]

OK, those stocks you mention did rebound well from the downturn. While I am not going to suggest any cherry-picking or hindsight used here (seriously, no sarcasm intended at all), I still ask how an investor that isn't interested in individual stocks can take advantage of any benefits in this area.

SDOG doesn't have a long enough track record to see how it did in the 2000 and 2008 dumps. And it just seems to me that, if that stock list you gave was so easy to see, why didn't many active funds jump on them, and show above average returns?

Is there some SDOG equivalent that has a longer track record?

-ERD50

SDOG as an index was back computed for a number of years, the same as VTI and other ETF’s and has vastly over performed the S&P500 in the long run based on the historical index data, had it been available for investing in the past. I will look for that study. VTI also did not exist in 2000 yet people seem to have no problem buying that....

I cannot explain the actions of active fund managers, and won’t seek to try as there is no one I am interested in advocating for, that does not take away from the obvious values at the time.

For another clear comparison compare DOD to the Dow Jones Industrial average. Starting in 2006 it has vastly outperformed. And here is a SEC filing showing how it did vs dow and S&P500 from 2000 to 2007.

https://www.sec.gov/Archives/edgar/data/1159508/000119312507240430/dfwp.htm

 

[Running_Man]

Constituent Data

That is a link to a performance of the index that SDOG seeks to match, though SDOG has .40% fund expenses so will underperform by at least that amount per year. A thousand dollars invested in the S&P500 and the SDOG index on 1/1/2000 would have resulted in $1,943 as of the end of last week and $5,938 in SDOG index. Pretty much a demolition for the SDOGS. More importantly if you were to take the 50 S&P500 stocks the SDOG index invests in out of the results of the S&P500 you would really be seeing how poorly the lower dividend stocks in the S&P500 have performed in this time frame. To me the outperformance of the better paying dividend stocks is clear to see.

 

[Gone4Good]

The blue chip dividend fund is SDOG which never gets over allocated in any sector as it takes even number of stocks from each sector.

How do you figure it's a blue chip dividend fund? This is from the SDOGX rule book:

The SDOGX methodology selects the five stocks in each of the ten GICS sectors that make up the S&P 500 which offer the highest dividend yields as of the last trading day of November. The fifty stocks that are selected for inclusion in the portfolio are equally weighted.

So it's just buying the highest yielding companies in each S&P sector. I wouldn't necessarily call that a blue chip investment strategy. It's more like buying the crappiest firms still paying dividends as of each November, no?

It seems a bit like a contrarian dividend cut strategy. The market clearly thinks many of these firms are going to cut their dividends, thus the high yields. To the extent they don't, Booyah! But if they do, and in greater numbers than expected

I just pulled up the Constituents List to see and top on the list is WYNN . . . sure enough Wynn Resorts Cuts Dividend 67%

 

[Running_Man]

If you do not believe S&P500 companies are blue chip and Dow Jones Industrial companies are not blue chip companies, I have no idea what a blue chip company is then.

 

[Running_Man]

Weight (%)
WYNN WYNN RESORTS LTD United States Consumer Discretionary 2.1914
OKE ONEOK INC United States Energy 2.18371
EMR EMERSON ELECTRIC CO United States Industrials 2.13814
COP CONOCOPHILLIPS United States Energy 2.12963
CMI CUMMINS INC United States Industrials 2.12333
ETN EATON CORP PLC United States Industrials 2.11729
HPQ HEWLETT-PACKARD CO United States Information Technology 2.08816
PBI PITNEY BOWES INC United States Industrials 2.08634
NAVI NAVIENT CORP United States Financials 2.08128
CAT CATERPILLAR INC United States Industrials 2.07944
MOS MOSAIC CO/THE United States Materials 2.07716
IVZ INVESCO LTD United States Financials 2.0734
IBM INTERNATIONAL BUSINESS MACHINES CORP United States Information Technology 2.07252
NUE NUCOR CORP United States Materials 2.06422
ETR ENTERGY CORP United States Utilities 2.05898
F FORD MOTOR CO United States Consumer Discretionary 2.0587
IP INTERNATIONAL PAPER CO United States Materials 2.05816
DUK DUKE ENERGY CORP United States Utilities 2.05514
SE SPECTRA ENERGY CORP United States Energy 2.05084
CNP CENTERPOINT ENERGY INC United States Utilities 2.05038
DOW DOW CHEMICAL CO/THE United States Materials 2.04708
SO SOUTHERN CO/THE United States Utilities 2.04495
PM PHILIP MORRIS INTERNATIONAL IN United States Consumer Staples 2.0408
PG PROCTER & GAMBLE CO/THE United States Consumer Staples 2.04022
VZ VERIZON COMMUNICATIONS INC United States Telecommunication Services 2.03298
STX SEAGATE TECHNOLOGY PLC United States Information Technology 2.02805
MET METLIFE INC United States Financials 2.02763
KO COCA-COLA CO/THE United States Consumer Staples 2.02362
ESV ENSCO PLC United States Energy 2.02021
CA CA INC United States Information Technology 2.01901
KMI KINDER MORGAN INC/DE United States Energy 2.01772
T AT&T INC United States Telecommunication Services 2.01633
PBCT PEOPLE'S UNITED FINANCIAL INC United States Financials 2.01594
LYB LYONDELLBASELL INDUSTRIES NV United States Materials 2.00908
CINF CINCINNATI FINANCIAL CORP United States Financials 2.00222
JNJ JOHNSON & JOHNSON United States Health Care 2.00196
GRMN GARMIN LTD United States Consumer Discretionary 2.00133
NRG NRG ENERGY INC United States Utilities 2.00003
WMT WAL-MART STORES INC United States Consumer Staples 1.9993
CTL CENTURYLINK INC United States Telecommunication Services 1.99517
MO ALTRIA GROUP INC United States Consumer Staples 1.99067
MAT MATTEL INC United States Consumer Discretionary 1.99009
BAX BAXTER INTERNATIONAL INC United States Health Care 1.98853
COH COACH INC United States Consumer Discretionary 1.98615
QCOM QUALCOMM INC United States Information Technology 1.98167
MRK MERCK & CO INC United States Health Care 1.97005
FTR FRONTIER COMMUNICATIONS CORP United States Telecommunication Services 1.96859
ABBV ABBVIE INC United States Health Care 1.96557
PFE PFIZER INC United States Health Care 1.93682

 

[ERD50]

Constituent Data

That is a link to a performance of the index that SDOG seeks to match, though SDOG has .40% fund expenses so will underperform by at least that amount per year. A thousand dollars invested in the S&P500 and the SDOG index on 1/1/2000 would have resulted in $1,943 as of the end of last week and $5,938 in SDOG index. Pretty much a demolition for the SDOGS. More importantly if you were to take the 50 S&P500 stocks the SDOG index invests in out of the results of the S&P500 you would really be seeing how poorly the lower dividend stocks in the S&P500 have performed in this time frame. To me the outperformance of the better paying dividend stocks is clear to see.

Thanks for the links Running_Man. Very interesting. The performance of that index is impressive. Though (and correct me if I'm off-base here), it seems like I keep hearing from the dividend crowd that an important reason for owning these stocks is that they are less volatile, don't do as bad in a downturn, etc. But looking at that chart, the SDOX looks to have dropped further than the 500 index (2007~2009 - granted, from a higher peak, though I'm also not adjusting for the slightly higher ER).

So with many considering the market as being at high valuations, maybe SDOX isn't a great choice at this time?

Indexing isn't religion for me, I've just felt for a long time it was the best path for me. But look at Wellesley, and the performance of SDOX - it has me thinking that some diversification across these different approaches, and maybe some rebalancing if they prove to be a little less correlated, might have a long term advantage? Maybe I'll start a thread on my thoughts on Wellesley later, if I can get my thoughts together!

... So it's just buying the highest yielding companies in each S&P sector. ...

Is there anything wrong with that? I like that better than just grabbing high yield, which might be concentrated in one sector. Anything outside of a broad market index needs to have some kind of guidepost, so maybe this is an OK choice (and the chart is impressive!)?

-ERD50

 

[dallas27]

Isn't indexing just buying stocks from some list, and then everybody just owns the same list of stocks? When the tech bubble happened the S&P 500 was 40% tech companies, and indexers were smiling paying low fees while they were getting wiped out. There are hundreds of indexes these days. I'd rather have someone at the wheel thinking. Individual stocks are great - and, even cheaper than index funds since there's no expense, and I know what I own at all times.

Much to learn, you have.


Sent from my iPhone using Early Retirement Forum

 

[Running_Man]

Thanks for the links Running_Man. Very interesting. The performance of that index is impressive. Though (and correct me if I'm off-base here), it seems like I keep hearing from the dividend crowd that an important reason for owning these stocks is that they are less volatile, don't do as bad in a downturn, etc. But looking at that chart, the SDOX looks to have dropped further than the 500 index (2007~2009 - granted, from a higher peak, though I'm also not adjusting for the slightly higher ER).

So with many considering the market as being at high valuations, maybe SDOX isn't a great choice at this time?

Indexing isn't religion for me, I've just felt for a long time it was the best path for me. But look at Wellesley, and the performance of SDOX - it has me thinking that some diversification across these different approaches, and maybe some rebalancing if they prove to be a little less correlated, might have a long term advantage? Maybe I'll start a thread on my thoughts on Wellesley later, if I can get my thoughts together!



Is there anything wrong with that? I like that better than just grabbing high yield, which might be concentrated in one sector. Anything outside of a broad market index needs to have some kind of guidepost, so maybe this is an OK choice (and the chart is impressive!)?

-ERD50

I do not really consider SDOG an index either, merely a company that paid to have an investment strategy formalized into an index. In another world this would have been a managed account, probably with much higher fees because the technique would not have been disclosed to the investing public.

The dividend at 3.21% is not extraordinary even though it is better than the S&P500 by half and SDOG has shown to be a real good value when the dividend exceeds 4 percent. However, in 2000 it greatly outperformed the market in a downturn. By December 2002 it held up to a 4% gain while the S&P500 was down 40% so it actually might be better in a down market.

I think this particular investment would make a great core holding for a retirement portfolio for someone seeking income not willing to look for their own individual stocks, but that is just my own preference from years at looking at various stock market returns and strategies employed. A $100K turned into 600K vs 200K over 15 years is more than just a lucky random shot to me, and the 70% return over the last 3 1/2 years versus the 55% return for the S&P500 since SDOG was created is just a continuation of that same trend.

 

[Gone4Good]

Is there anything wrong with that? I like that better than just grabbing high yield, which might be concentrated in one sector. Anything outside of a broad market index needs to have some kind of guidepost, so maybe this is an OK choice (and the chart is impressive!)?

-ERD50

My comment wasn't meant as a criticism but rather a description. If it took a critical sounding tone that may more reflect my surprise that the original description was "blue chip dividend fund."

A "blue chip" dividend paying company is one that is highly unlikely to cut it's dividend. SODGX meanwhile, is made up of companies that almost as a rule are facing some questions about their ability or willingness to maintain their existing payout. There's nothing inherently wrong with pursuing either strategy, but they are diametrically opposed strategies.

I'd categorize SODGX strategy as contrarian value not defensive.

But one of the features I hadn't considered is that the screening technique has an interesting quirk. The fund changes it's holdings annually. So the composition changes and that change seems like it would be counter-cyclical.

After a long economic expansion most of the S&P's highest yielding companies will be defensive in nature. They'll be the boring blue chips that pay out a large share of earnings. And you'll own a lot of these at the top of the market.

At the bottom of a recession, the highest yielding companies will be the one's whose share prices are the most beaten down. And you'll own a lot of these at the bottom of the market.

So defensive at the top and aggressive at the bottom. Definitely a simple rule that yields a contrarian portfolio.

 

[ERD50]

My comment wasn't meant as a criticism but rather a description. ...

So defensive at the top and aggressive at the bottom. Definitely a simple rule that yields a contrarian portfolio.

OK. I guess I read it as a bit of both. Thanks for the explanation.

Yes, it does seem to provide an interesting approach, and I am giving some consideration to some kind of rebalancing a fund like that with some others, maybe some non-correlation can work for me?

-ERD50