Readings & Updates

Portfolio updates will be posted this Sunday/Monday.  Below is a longer than usual reading list to carry you through the pre-holiday weekend:

Using Standard Deviation & Probability to Trade Options – J.W. Jones

Blood in the Streets, or Greece – Mebane Faber

What Will Germany Do? (pdf) John Mauldin

Hedge Funds Get Exotic in Hunt for Profits – Reuters

Risk Parity: Past Its Prime – Advisor Perspectives

IndexUniverse had a nice series of commodity focused articles recently, here are a few: Beyond Beta, The Role of Managed Futures and Commodities Funds, and Commodities in a Portfolio

Enter, the Blindside Recession – John Hussman

Beyond VIX: Using ETF Correlations to Measure Risk – ETF Trends

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Sunday Readings

Regular readers have probably noticed that posting has been lighter than usual the past few weeks. I expect to do more frequent posts and articles soon after the fourth of July holiday.  Below are a few articles I am reading this weekend:

U.S High Yield: A Closer Look at “Junk” Spreads – PIMCO

Daddy’s Home (pdf) – John Mauldin

A Message from the VIX? – Advisor Perspectives, Chris Kimble

Mike Shedlock: 12 Reasons US Recession Has Arrived (or will shortly) 

Sorting Country Equity Markets by Value and Momentum – Mebane Faber

 Improving on Buy and Hold: A Basic Sell Signal – George Vrba, Advisor Perspectives

How Much Risk Should a 65-Year-Old Take? Portfolioist

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Tuesday Readings

Below are a list of investment related articles I am reading this week:

As Europe’s Currency Union Frays, Conspiracy Theories Fly – NY Times

Satyajit Das on the Eurozone Debt Crisis: It’s Now About Germany

A Brief Primer on the European Crisis – John Hussman

Flirtin’  with Disaster(pdf) and The Bang! Moment is Here (pdf)  – John Mauldin

Barrons on the New Hedge Fund Clones (seealso AlphaClone  and a recent article I posted on their newest ETF here) 

The Smart Are MORE Biased To Think They Are LESS Biased – Overcoming Bias

Investment managers at-risk of disruptions: a debate – Abnormal Returns

At last, a bottom in natural gas – Peter Brandt

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More on this topic (What's this?) Read more on European Union at Wikinvest

Thursday Readings

Below are investment related articles I am reading this week:

Jack Schwager Q&A – Abnormal Returns

Mark Hulbert on Marketwatch: Don’t Fight the FedSignificance of 200-Day Moving Average

Reversion System Triggered – Mebane Faber

Necessary But Not Sufficient (pdf) – John Mauldin

Selling Options: Strategies and Results – All About Alpha

Satyajit Das: Spanish Bailout of Failout?

High Yield Momentum Portfolio for June

Once per month I update a high yield dividend stock momentum portfolio on Scott’s Investments.  The portfolio is comprised of the highest yielding stocks in the S&P 500 with high price momentum.

The portfolio is a simple quantitative strategy and begins by screening the S&P 500 for stocks yielding greater than 4%. The results are then ranked by their 6 month returns.  The top stocks are then added to a hypothetical portfolio and tracked publicly on Scott’s Investments.  This month there were 61 results this month, two more than last month.

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Per a previous article, the highest momentum, high-yield stocks have historically out-performed lower yielding, lower momentum stocks.  The screen is more of a trading strategy and less of a passive income strategy, although the dividends do play an essential component in the overall returns. Thus, turnover could be high and the strategy is not for everyone but I have added a modification to the strategy to minimize turnover.

In order to limit turnover stocks with yields that have fallen below 4% due to share price appreciation will remain in the portfolio. Stocks will only be sold when yield falls below 4% due to dividend cuts or when the six-month performance would otherwise lag the top 10-11 stocks in the screen. .

Click here for MarketClub’s Top 50 Trending Stocks

The portfolio has turnover in four positions for June. Gannett (GCI), Merck (MRK), Philip Morris (PM), and Hudson City Bancorp (HCBK) are all being sold due to lagging price momentum.  The proceeds were used to purchase positions in PG&E (PCG), The Dow Chemical (DOW), William Companies (WMB), and CMS Energy (CMS).

The High Yield Momentum Portfolio was designed to be fully invested at all times regardless of market conditions. However, as part of a larger portfolio there may be additional steps an investor can take to reduce risk and diversify strategies.  For example, the Ivy Portfolio uses a 10 month moving average to dictate an invested or cash position (signals are updated daily at Scott’s Investments). An investor could hedge long positions by shorting (or purchasing an inverse ETF) an equity market index such as the S&P 500 when it trades below a long-term moving average.

Below are the top 15 high yield momentum stocks as of June 11th.  Keep in mind that only 10 stocks are held in the portfolio, the 4 new additions are in bold and the current holdings can be viewed on the right-hand side of Scott’s Investments and in the second table below.

Since inception the portfolio is up 6.32%, down over 3% versus last month’s update. Returns exclude commissions, taxes, and are hypothetical:

Data source: Finviz.

Ticker Company Dividend Yield Payout Ratio Performance (Half Year)
FII Federated Investors, Inc. 4.85% 64.57% 31.37%
CINF Cincinnati Financial Corp. 4.45% 137.37% 27.23%
T AT&T, Inc. 5.09% 249.25% 23.32%
PCG PG&E Corp. 4.04% 83.60% 21.47%
DOW The Dow Chemical Company 4.06% 53.49% 19.73%
MO Altria Group Inc. 4.98% 96.90% 18.69%
WMB Williams Companies, Inc. 4.10% 68.10% 17.74%
CMS CMS Energy Corp. 4.09% 64.71% 16.82%
KIM Kimco Realty Corporation 4.26% 244.35% 16.67%
LO Lorillard, Inc. 5.04% 67.74% 15.61%
VZ Verizon Communications Inc. 4.70% 212.49% 15.53%
DTE DTE Energy Co. 4.04% 57.60% 15.52%
DUK Duke Energy Corporation 4.35% 89.36% 14.76%
PGN Progress Energy Inc. 4.16% 118.01% 14.42%
PNW Pinnacle West Capital Corporation 4.14% 68.11% 14.04%

.Current positions including the new updates:

Position Shares Purchase Date Percentage Gain/Loss Excluding Dividends Current Yield
MO 312 05/11/12 3.68% 4.98%
DOW 334 06/11/12 0.00% 4.06%
CINF 312 02/10/12 5.05% 4.45%
WMB 360 06/11/12 0.00% 4.10%
FII 529 03/12/12 -5.17% 4.85%
T 295 05/11/12 2.98% 5.09%
CMS 448 06/11/12 0.00% 4.09%
KIM 628 04/10/12 0.34% 4.26%
PCG 233 06/11/12 0.00% 4.04%
LO 87 02/10/12 0.41% 5.04%
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Sunday Readings

Below are some investment-related articles to start the week:

Wall Street Food Chain – Bill Gross

The Heart of the Matter – John Hussman

How to Backtest Your Trading Strategy Correctly – TradingMarket.com

Macro-Eu: The Solution Illusion & A Dysfunctional Nation (pdf) – John Mauldin

Group Forms to Urge Strict Oversight of Wall Street – NY Times

How the FDIC Can Curb Banks’ Reckless Speculation – Barry Ritholtz

Finding the Best Dividend Fund – Geoff Considine

Adaptive Risk Parity for a Better ‘Balanced Fund’ – Advisor Perspecitves

High Yield Dividend Champion Portfolio for June

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments (see the right hand column for a link to the spreadsheet).

Like many of the screens, strategies, and portfolios I track and prefer, this strategy takes a small number of historically relevant ideas, to create a simple, yet powerful action plan for the individual investor. As I have previously detailed,

 

Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.

 

This portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to gauge the “best” high yield/low payout stocks. The list starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years

The Dividend Champions are the starting point and we first rank them based on yield. The highest 1/3 yielding stocks are kept and the rest are eliminated. With the remaining high yielding stocks we eliminate half with the highest payout ratio. The remaining stocks are then assigned a rank based on the ratio of their dividend yield to payout ratio (the same as a trailing earnings/price ratio, or the inverse of the trailing P/E ratio).

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The top 10 stocks based on this ratio make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 12 (to limit turnover) and are replaced with the next highest rated stock.

For June 6th we are selling 212 shares of Consolidated Edison (ED), which was purchased at the portfolio inception over a year ago (12/6/2010) and sold for a capital gain of 15.34% (excluding dividends).  The proceeds were used to purchased Nucor (NUE), which currently yields 3.97% and has a payout ratio of 61%.

In April the Dividend Champion Portfolio update stated “The technical analyst in me has seen momentum in US equities slow the past few weeks. This particular portfolio has returned over 27% since inception but now may be a time to temper expectations.”

May was a difficult month for equities and the forward technical picture for equities still looks precarious.  The High Yield Dividend Champion Portfolio was designed to be fully invested at all times regardless of market conditions. However, as part of a larger portfolio there may be additional steps an investor can take to reduce risk and diversify strategies. Additional hedging or diversification techniques can serve to reduce risk but may also reduce potential capital gains.

For example, using Born To Sell we can explore potential covered call opportunities on stocks in the portfolio. At the time of writing last month the CVX June $105 calls had bid of $1.74 and the June $110 calls had a bid of $.38.  With CVX now trading below $100 and option expiration next Friday, those calls have declined significantly in value. An investor could roll the covered calls on CVX by closing the existing position (the $105 strike at $.15 or the $110 at $.05) and selling a July 105 call for $.93 or a July 100 call for $2.98 (Quotes reflect today’s closing bid/asks).

The equity curve of the portfolio is plotted below and since inception it is up over 27%. All discussions of returns are strictly hypothetical and exclude commissions and taxes.

The top 17 rated stocks for the purposes of this portfolio’s criteria are listed below:

Company Symbol Yield Payout Ratio E/P
Chevron Corp. CVX 3.66 26.45 0.138
Mercury General Corp. MCY 5.60 64.89 0.086
Tompkins Financial Corp. TMP 3.93 46.60 0.084
Community Trust Banc. CTBI 3.75 46.10 0.081
Sysco Corp. SYY 3.87 55.38 0.070
Eagle Financial Services EFSI 3.31 48.98 0.068
Nucor Corp. NUE 4.08 60.83 0.067
Emerson Electric EMR 3.42 51.12 0.067
Universal Corp. UVV 4.34 65.77 0.066
Sonoco Products Co. SON 3.90 60.30 0.065
Clorox Company CLX 3.72 63.37 0.059
UGI Corp. UGI 3.77 64.29 0.059
Johnson & Johnson JNJ 3.91 67.03 0.058
Consolidated Edison ED 4.01 70.14 0.057
MGE Energy Inc. MGEE 3.39 59.78 0.057
Kimberly-Clark Corp. KMB 3.73 68.68 0.054
Procter & Gamble Co. PG 3.61 70.03 0.052
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New Hedge-Fund ETF from AlphaClone

AlphaClone launched their first ETF, the AlphaClone Alternative Alpha ETF (ALFA), which began trading on May 31st.

Long-time readers of Scott’s Investments will recognize the name AlphaClone. I have periodically back-tested portfolios using their online service, which enable investors to systematically invest in stock strategies derived from the holdings of top managers at the time their stock ideas become public – a process called “cloning.”

One interesting feature of the new ETF, ALFA, is that it hedges its long positions during periods of market weakness. IndexUniverse notes:

The portfolio, which focuses on mitigating downside volatility and reducing overall market correlations, can be anywhere from 100 percent long—selecting long positions from hedge funds’ public disclosures—to as much as 50 percent short, depending on market volatility targets the methodology stipulates.

 

For instance, if the S&P 500 Index closes below its 200-day moving average at the end of any month, ALFA turns to a market-hedged position—it goes short—to seek positive returns while offsetting the long exposure to that index.

 

While I am not so vain as to think I inspired this strategy, it is interesting to see the tests I ran in March 2010 using an almost identical strategy. The custom back-test I ran went 100% long in the top 5 popular stocks in World Beta Clone when the S&P 500 was above its 10 month simple moving average. When the S&P 500 closed below its 10 month SMA, I hedged the portfolio beginning the following month by going 50% short the S&P 500 and holding a 50% long exposure to the 5 stocks in the World Beta Clone. At the time of the test the strategy had not had a down year since 2000.

The ETF sports a .95% expense ratio, somewhat high, so an alternative for those interested in replicating a similar strategy is to use the AlphaClone site.

Sunday Night Market Readings

Friday was a rough day in the equity market. I did not write up a month end review of the Ivy Portfolio, but as of the end of the month 5 of the 10 ETFs in the Ivy Portfolio were below their 10 month simple moving average. As of the close Friday, VTI and RWX had also slipped below the 10 month simple moving average. Only TIP, BND, and VNQ remain above their 10 month moving average.

Below are some investment and market related articles I am reading this weekend:

First Deflation, Then Inflation But the Timing…? (pdf) – John Mauldin

True Out-of-Sample Test of “Best” Technical Trading Rules – CXO Advisory

Run of the Mill – John Hussman

Secular Bull and Bear Markets & Is the Stock Market Cheap? – Doug Short

Full-On Panic Into T-Bonds – Tom McClellan

Surveying the Dividend ETF Landscape – ETF Trends

Why India’s Not Quite the Shining Star Many Hoped – Satyajit Das

The Asymmetric Recovery – NY Times Economix, Casey Mulligan

 

ETF Portfolio Updates

The US Sector, Basic ETF, and ETFReplay.com portfolio’s have been updated for June.  I will try to write a more robust write up this weekend, but the key points are below:

US Sector Momentum – Rotating from consumer discretionary (XLY) into financials (XLF) based on 6-month price momentum. Year-to-date the strategy is down over 6%. For background on this strategy click here.

Basic ETF Portfolio – No change in the existing positions of  Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), and Vanguard Total Bond Market ETF (BND). These three ETFs remain above their 200 day simple moving average and have the highest momentum of the five.  For strategy background, click here.

ETFReplay.com Portfolio –  There is a full rotation out of current positions into four new positions for June.  New additions are  iShares iBoxx Invest Grade Bond (LQD), iShares Barclays 7-10 Yr Treasury (IEF), iShares Barclays TIPS (TIP), and U.S. Utilities Sector SPDR (XLU).  Since inception the portfolio is up 9.25%. For background and last month’s update, click here.

Question to readers: Are these brief month-end summaries adequate? Or do you find value in more in-depth summaries of each portfolio?

Tip: When viewing portfolios on the site, use the links on the right hand side of the page to give a better view.

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