“What to do??”

Years ago I had a Russian on my team; endowed with great technical skills, he would still periodically find himself with a dilemma, perhaps with a choice of differing approaches to resolution. He would come to me and lay out the problem, describe the various solutions, all viable, and then pausing, he would say in his thick accent: “what to do??”. Over the years, “what to do??” became something of a meme on my team, and even now, years past that career I still hear his voice. (Tangent: when Apple started to veer into music, Oleg did not come to me. I sold at $13. He knew “what to do”)

Free Lunch

Investing is hard. There are far too many Black Swans to make your ride go easy, some of which I talk about here and here, and of course there is the bi-polar nature of Mr. Market himself, so, excuse me if I look for ways to cut the risks and play market psychology to my benefit. Enter the DOG.

They say that there is no such thing as the “Free Lunch”, and every time I hear or read that, I pause and consider my current successes and feel a sense of foreboding, and then I remind myself that my 17 years of experience with this method should give me the buffer of confidence I need to carry on. The thinking that certain stocks will trade within a certain price range, and that that price range is determined to some degree by its yield. For example, BMO yielding 10% – given, in the midst of the financial crisis –  indicated a 100% upside, barring a dividend cut. The trick is determining your confidence that a dividend cut is not imminent, and if it is, how much of a cut you can stomach.

“Stock price inevitably follows earnings”, “consistency of earnings is rewarded by the multiple”, “look for earnings to track revenues”. Check, check, double check, and still you find yourself knee-capped by some unforeseen event. But in my experience managing my DOGS methodology, the risks are mitigated by “the wisdom of the crowds” driving the qualifying issues back to their historic yield. And therein lies my comfort.

Investing is Hard

The Theory of Dow Dogs failed in my experience; my application to the TSX is successful, so surely there must be other applications to other groups of stocks. Yes? Enter the “Dividend Aristocrats”. Developed by Standard & Poors, the Aristocrats are a group of S&P 500 issues that have increased their dividends for a period of at least 25 years. Using the same tracking methods I put together for my DOGS, I put together two model portfolios starting in June of 2009. One model tracked a group of the five highest-yield issues with market capitalisations greater than $20B, the other model tracked the five highest market cap stocks.

5 years hence, I now recognise that all my data is useless. Valid yes, but entirely useless. You see, my test started 3 months after the market bounced of the March 9 bottom. Of course results were spectacular. During that same time:

Dow Jones Industrial – 145%
S&P 500 – 22.3%
NASDAQ – 27.3%

Yup, a rising tide lifts all boats. Happy birthday, Baby Bull.

My interest in the next free lunch did not stop with the Dividend Aristocrats. From there I discovered “Dividend Growth Investment” and a forum dedicated to that method at Seeking Alpha  and from there I came across David Fish’s comprehensive work tracking the fundamentals and dividend growth records of what he calls Champions (25 years or greater), Contenders (10 to 24 years) and Challengers (5 to 9 years). Based on his efforts and following various SeekingAlpha contributors, I developed the rules applicable to my US-based, dividend-growth portfolio.

So Dear Reader, this brings me to my current conundrum. As you can see here, all US issues are Champions, and all follow most of my rules.

So what do I do about a company like HCP? It yields better than 5%, and has been increasing dividends for more than 25 years. It invests in health care related real estate such as long-term care facilities and hospitals and that is a demographic I want to be in, but, it is a REIT, and REITs are interest rate sensitive issues and as such HCP has been Screen Shot 2014-03-27 at 12.49.20 PMdragging me down every time Mr. Market goes weird over tapering. And most troubling, HCP’s dividend growth rate is anaemic.

I’ve been contemplating dumping HCP and buying GE instead. “Everybody” seems to think that GE is a proxy for the US economy and will soon be on a tear. Get on that train now!! they cry. Me, I see revenues still declining from the 2009 levels (see chart on left) and with the resulting dividend slash, I don’t have enough data to forecast. And of course GE, a past Dividend Aristocrat, showed no big concern over cutting shareholders paychecks. Fool me once and all that. And therein lies my discomfort.

So, yeah – investing is hard. What to do??

Things to remember and other data

Performance of my retirement assets since October:

  • Canadian DOGS – 6.25%
  • US portfolio – 1.14%

Buying is easy, selling is hard.
When benchmarking, timing is critical.
Rules are everything; change them if they are wrong.

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