A couple of fun odds and ends today starting with a post by Josh Brown about dividends. The TLDR is buying stocks just for their dividends is a bad idea. He's not against dividends, he is saying that buying just for the dividend is a losing strategy. I would say, and I think he was on a similar page, that in a diversified portfolio that goes narrower than a very broad based index fund will probably have a couple of "good" dividend stocks in it.
I'm many, many years out of touch with the vibe at Seeking Alpha but 15 years ago, so many of the contributors and readers were dividend-crazy. I think I referred to them as Dividend Zealots.
The chart compares the S&P 500 (SPY) to four long standing dividend focused ETFs with dividends reinvested. Lagging the market cap weighted SPY doesn't have to be a bad thing but the max drawdown numbers are not compelling and neither is the volatility. Lagging with much less volatility is appealing but that's not what the dividend funds have done. Yes the dividend funds did better than SPY in 2022 but not 2020 and in the financial crisis, I believe DVY was the only one that was around and being heaviest in financials, it did very badly.
One more point Josh makes that echoes what we've talked about before is that total return and being willing to sell occasionally makes better tax sense. Long terms gains get better tax treatment everything else being equal. This won't matter of course to IRA accounts and the effective tax rate on dividends can be very low depending on having a low earned income but with a low enough income, long term capital gains can be taxed at 0%.
Josh also had an anecdote about shipping companies, the kind that transport oil and the like and have crazy high yields. One of the "stalwarts" in that space was Nordic American Tankers (NAT) which still trades and still has a crazy high yield, Yahoo shows it yielding 14%. Twenty years ago it had a similar yield in a three percent world. I was of course fascinated by the stock and the space but the refrain that kept me from ever buying it was that getting double digit yields in a low single digit rate environment takes on a lot of risk regardless of whether you understand that risk or you do not. I remember the CEO used to be on CNBC with Jim Cramer all the time being touted as a great CEO.
That chart reinvests the dividends. Without reinvesting, NAT compounded at a negative 7.10%. It's not that something with NAT's risk should be avoided at all costs or that something yielding 14% in a 4% world must be a bad holding but not understanding these dynamics will lead to regret. Something like NAT could make sense for barbelling yield and taking the dividends out. Maybe some of NAT's payout is characterized differently than dividends, I don't know but some other crazy high yielders do characterize some of their payouts differently (tax friendlier) and erode slower than NAT.
As I was writing the above section, the following barbell strategy occurred to me.
If you just saw the result, not the constituencies, they would be very compelling. Instead they are very extreme. I don't think picking Amazon for this exercise is too far out there, it's been publicly traded for almost 30 years. The timeframe of the backtest is very short. Going from memory, Amazon dropped 90% in the tech bubble, 75 or 80% in the Financial Crisis and in 2022 it dropped 49%. It's a good bet that the next time the stock market goes down a lot, Amazon will go down a lot more. If the common cut in half again, it would create a huge hole for a 2x Amazon fund to dig out of and that would blow up the model.
Take this just as a though exercise to look at how volatility can work, both buying it and selling it. As we've said before, the crazy high yielding single stock covered call funds are not proxies for the underlying, they are products that sell the volatility of the underlying. AMZY is not a proxy for Amazon, it is a product that sells Amazon's volatility.
Small weightings to the 2x fund and crazy high yielding covered call fund blend together to do something interesting. I chose T-bills for Portfolio 1 because there is essentially no volatility or risk and for the other I chose catastrophe bonds which also have very low volatility with only limited windows for when there is potentially a serious risk event. Cat bonds yield about three times what T-bills yield so there is risk there even if you don't understand the risk and an 85% allocation is good in theory, it would be an accident waiting to happen in reality.
Maybe instead of thinking of a 2x single stock fund being 2x, we should think of it as magnified exposure. AMZU seems to reliably magnify the exposure of the common but not necessarily at 2x of what the common is doing.
This is all interesting work, and fun, even if I haven't figure out what to do with it just yet.
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4 comments:
I see on Bloomberg that Bridgewater laid off my 7% of its workforce today. Employee stack ranking? It that's so great for hedge funds, is stack ranking the best strategy for a dividend zealous fund?
I may not be following but WisdomTree has a dividend/quality ETF and there might be others out there too.
OK, what about https://www.paceretfs.com/products/qdpl/ - superficially 4x is better than 2x, though the comparison is not fair.
The 4x refers to the dividend. I wrote about that one in October. It has 89 or 90% in the S&P 500 and the rest in dividend futures to create the outsized yield. Where so much of the yield comes from futures, the yield might get 60/40 tax treatment but you'd need to double check with Pacer to confirm.
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