Mid-Week Reads

Below is my investment reading list this week:

Silver, Gold & Miners About To Sell Off Again – Chris Vermeulen

Focus on What You Can Get for Free: Part 2/2 – Turnkey Analyst

Biggest 2013 ETF Launches Tell New Tales – Index Universe

GMO’s quarterly letter is out, it can be viewed at GMO’s site or Jeremy Grantham’s portion of the letter can be read at Barron’s

Perhaps the Only Chart that Matters (for now) – McClellan Financial Publications


Mid-Week Investment Readings

Below are my mid-week investment readings.

If you are looking for a backtest platform to test both stock & ETF strategies consider Portfolio123

Are Stocks Overvalued? CAPE vs Dividends & The Dividend Challenge – Mebane Faber

Fear is Killing Your Investments; see also Ray Dalio – MarketWatch

Are We in Global Bubble Territory? Not Yet – Blackrock

Robust Risk Parity & The Bomb Shelter Portfolio – Advisor Perspectives

The Language of Inflation & Jonathan Tepper on Obamacare -John Mauldin

Swedroe: Questioning Emerging Markets & The Cheapest ETF in the World – IndexUniverse


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

Dual ETF Momentum Portfolio – November Update & Backtests

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.

An “average” return signal for each ETF is also available 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.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12”).  I did not require an ETF to be ranked above the combined return of SHY; rather, an ETF simply needed the average of its 13 week/26 week/52 week total return to be greater than 0% (the “absolute” momentum filter). Also, the portfolio re-balanced every 4 weeks as opposed to the end of each month.  No considerations were made for taxes or commissions. The test time period was 11/11/08 – 11/11/13 and the benchmark is SPY:

dual momo

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 32.74 15.6 Invested Invested
International Equities VEU 20.01 9.54
Cash SHY 0.32 0.24
Credit Risk Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 7.73 3.53 Invested Invested
Interm Credit Bond CIU -0.3 -0.26
Cash SHY 0.32 0.24
Real-Estate Risk Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 8.72 -0.99 Invested
Mortgage REIT REM -5.9 -8.54
Cash SHY 0.32 0.24 Invested
Economic Stress Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -26.19 -13.11
Long-term Treasuries TLT -15.91 -9.09
Cash SHY 0.32 0.24 Invested Invested

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.

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November High Yield Dividend Champion Portfolio

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 changes were made to the ranking system. We still begin with the Dividend Champion list, which is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a relatively “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, as with the previous two months, there is no portfolio turnover. All current positions will be held until next month.

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

Name Symbol Yield Payout A/D* 3-yr
Chevron Corp. CVX 3.33 32.41 0.96 9.68
Helmerich & Payne Inc. HP 2.58 30.44 1.52 11.87
ExxonMobil Corp. XOM 2.81 31.74 1.08 9.51
Altria Group Inc. MO 5.16 87.67 1.25 8.71
American States Water AWR 2.84 53.29 1.53 7.93
Target Corp. TGT 2.65 41.45 1.10 24.74
UGI Corp. UGI 2.73 47.48 1.15 10.53
Universal Corp. UVV 3.77 33.96 0.58 2.13
WGL Holdings Inc. WGL 3.73 62.22 1.35 2.89
Leggett & Platt Inc. LEG 4.03 69.77 1.15 3.81
Questar Corp. STR 3.04 60.50 1.03 9.61
Northwest Natural Gas NWN 4.24 86.38 1.24 3.81
Genuine Parts Co. GPC 2.73 48.21 1.17 6.76
Eagle Financial Services EFSI 3.58 37.44 0.31 2.39
McDonald’s Corp. MCD 3.36 59.34 0.49 11.87

The current portfolio is below:

Position Purchase Date
CVX 12/6/2012
WGL 12/6/2012
HP 7/5/2013
UVV 4/5/2012
UGI 8/5/2013
LEG 8/5/2013
XOM 4/5/2013
MO 3/5/2013
AWR 7/5/2013
NWN 4/5/2013

The portfolio performance is below along with three benchmarks:

november high yield

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Read more on Dividend Investing at Wikinvest

Sunday Readings

Below is my Sunday night investment reading list:

Black Box Investing Versus Common Sense Quant & Focus on What You Can Get for Free: Part 1/2 – Turnkey Analyst

The CAPE Ratio Weekly

Ride This Market’s Last-Gap Rally – Jim Jubak, MSN

The 420 Investor – Free eBook

The Problem With Market Neutral & Is the Stock Market Expensive? – Mebane Faber

Scrooge McDucks – Bill Gross

 6 Things You Should Quit Doing To Be More Successful – Forbes

Is the Stock Market Cheap? Doug Short

Bubbles, Bubbles Everywhere – John Mauldin