Sunday Reads

Below are a list of my readings for this week:

MarketClub 2 Week FREE Trial

What Siegel is Missing & Dividend Yield Strategies in a Rising Rate Environment – Mebane Faber

New Fundamental ETFs Broaden Field – IndexUniverse

What Has QE Actually Accomplished? & Signs of the Top – John Mauldin

Dalio Patched All Weather’s Rate Risk as Bonds Fell – Bloomberg

Does Jeremy Siegel Trust the Shiller P/E?  – Turnkey Analyst

Stress Testing Risk Parity, Momentum, and Moving Average Asset Allocation Models – Empiritrage

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Investment Readings

Below is my investment reading list for this week:

The SP500 Enters Major Correction Period – The Market Trend Forecast

Schwab Fundamental ETFs Launching – IndexUniverse

Bond Wars – Bill Gross, PIMCO

The Best Hedge Fund You’ve Never Heard of – Turnkey Analyst

Dynamic Asset Allocation for Practitioners Part 3: Momentum Weighting & Path Dependency in Financial Planning: Savings Edition – Advisor Perspectives

We Can’t Take That Chance & The New Normal—Some Expensive Consequences – John Mauldin

 

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Dual ETF Momentum Portfolio – August Update

In February I announced a new “Dual ETF Momentum” spreadsheet. The idea was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott’s Investment’s here. The objective of the spreadsheet is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

I have added an “average” return signal for each ETF on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Using Portfolio123 I backtested a similar strategy using the same portfolios and combined momentum score used above. You can view the backtest results in June’s update.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz

Equity Representative ETF Signal based on 1 year returns Signal based on average returns
US Equities VTI Invested Invested
International Equities VEU
Cash SHY
Credit Risk Representative ETF Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG Invested Invested
Interm Credit Bond CIU
Cash SHY
Real-Estate Risk Representative ETF Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ Invested
Mortgage REIT REM
Cash SHY Invested
Economic Stress Representative ETF Signal based on 1 year returns Signal based on average returns
Gold GLD
Long-term Treasuries TLT
Cash SHY Invested Invested

US equities are leading international equities, high yield bonds lead credit bonds, and cash leads gold and long-term treasuries. Equity REITs lead mortgage REITs and cash based on 1 year returns, while cash leads both equity and mortgage REITs based on the average of 3/6/12 month returns.

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future

Tuesday Readings

Below is my reading list for tonight. If you are new to the site, I typically post investment and market-related articles of interest once per week:

The S&P 500 is Plagued with Divergences

Asset Allocation Strategies & Just Go Halfsies – Mebane Faber

The Correlation Conundrum – The Capital Speculator

A Lost Generation & The Blip  – John Mauldin

Is Risk Parity an Effective Asset Allocation Tool? Empiritrage

Why Past Performance of a Conventional (60-40) Portfolio Is NOT Indicative of Future Performance – Jackass Investing

Market Valuation Overview – Doug Short

First Trust Managed-Futures ETF Is Live & Global X ‘Cheap’  MLP ETF Goes Live – Index Universe

 

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August Dividend Champion Portfolio Update

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.

Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I 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.”

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio 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.

In January I announced some changes to the ranking system. The changes were not due to poor performance – the strategy has returned over 75% since late 2010.

We still begin with the Dividend Champion list. The list is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a “high” yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and 5/10 year Dividend Acceleration/Deceleration (5-year average increase divided by 10-year average increase).  Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system 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 15 (to limit turnover) and are replaced with the next highest rated stock.

This month there is turnover in two positions – California Water Service (CWT) was a holding since 4/5/13 and appreciated 11.14%. Air Products & Chem (APD) was a holding since 2/5/13 and appreciated 23.25%.

The two new positions are UGI Corp (UGI) and Leggett & Platt Inc. (LEG).  As of the end of July UGI yielded 2.7% with a 51% payout ratio and LEG yielded 3.7% with a payout ratio of 67%.

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are July month-end):

Name Symbol Yield Payout A/D* 3-yr
Helmerich & Payne Inc. HP 3.16 35.46 1.517 11.9
Chevron Corp. CVX 3.18 30.23 0.956 9.7
WGL Holdings Inc. WGL 3.65 55.45 1.347 2.9
Altria Group Inc. MO 5.02 80.37 1.251 8.7
ExxonMobil Corp. XOM 2.69 25.69 1.081 9.5
UGI Corp. UGI 2.69 51.36 1.147 10.5
Leggett & Platt Inc. LEG 3.69 67.44 1.153 3.8
Tompkins Financial Corp. TMP 3.37 58.91 0.843 5.7
Target Corp. TGT 2.41 40.38 1.102 24.7
Northwest Natural Gas NWN 4.14 86.26 1.245 3.8
Clorox Company CLX 3.30 66.51 0.910 8.9
Genuine Parts Co. GPC 2.62 48.31 1.170 6.8
Questar Corp. STR 3.02 60.50 1.035 9.6
Universal Corp. UVV 3.26 42.92 0.585 2.1
American States Water AWR 2.52 54.36 1.528 7.9

The current portfolio is below:

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 106.45 12/6/2012 16.48%
WGL 38.61 12/6/2012 19.61%
HP 65.48 7/5/2013 1.25%
UVV 45.55 4/5/2012 39.10%
UGI 42.49 8/5/2013 0.00%
LEG 31.72 8/5/2013 0.00%
XOM 89.01 4/5/2013 2.90%
MO 34.24 3/5/2013 4.00%
AWR 54.5 7/5/2013 19.65%
NWN 44.24 4/5/2013 -0.66%

 

The portfolio performance is below along with three benchmarks:

august dividend champ

 

If you enjoy these free tools, please consider making a donation on the home page of Scott’s Investments using the Paypal link in the upper-right corner!

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