The Truth about High Dividends

Research on Safe Withdrawal Rates

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JWR1945
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The Truth about High Dividends

Post by JWR1945 »


hocus2004
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Post by hocus2004 »

JWR1945:

I currently have a zero percent stock allocation. I am thinking I might put $5,000 into a high-dividend stock meeting the criteria described in your earlier posts as a means of taking a small first step toward my ultimate goal of getting up to a 50 percent stock allocation.

I believe that is it likely that the prices of most stocks will be heading downward over the course of the next few years. Some will be going down more than others, of course, and some might not go down at all.

If you were in my shoes, would you be looking to buy that $5,000 worth of stock at today's price level, or would you be holding off until overall prices returned to a more reasonable level?

Would you be able to name three stocks that appear to meet the criteria? If I knew the names of three stocks that met the criteria, my plan would be to spend a few months reading up on those companies before making a purchase.
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Post by JWR1945 »

I have bought Merck MRK. Today, its P/E is 15.17 and its yield is 3.37%. Moments ago its price was $45.06. I think that this would be a reasonable price even if the market were to fall by 50%. My best guess is that it will trade at lower levels (probably as low as $43.00, but I am not confident about anything lower) from time to time in the next few months.

Merck's current drug pipeline is not nearly as good as it has been in the past and several of its biggest moneymakers are coming off patent. The market is treating this as permanent condition. I doubt it.

Merck is listed in Mergent's Dividend Achievers, which I have purchased recently. I found out about it from one of unclemick's posts. Dividend achievers have increased payouts every year in each of the last ten years. [There are some minimal capitalization requirements as well.] They represent about 3% of all stocks. The list was compiled initially by Moody's.

That is the only stock that I can identify at this time. I have not researched high dividend stocks thoroughly. I cannot list another two companies because I don't know what they are.

Unclemick may have some good comments about specific companies. He has been buying high dividend stocks for quite a while and he is knowledgeable about the stocks in Dividend Achievers. Be sure to demand a quality company and be cautious about projecting dividend growth. Beyond that, I can add very little.

Have fun.

John R.
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Post by hocus2004 »

"That is the only stock that I can identify at this time. I have not researched high dividend stocks thoroughly. I cannot list another two companies because I don't know what they are. "

That's OK. That gives me a place to begin my personal investigations. Thanks.
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Post by JWR1945 »

You might also consider Fannie Mae FNM. Mergent's listed its price at $74.35, its yield at 2.80% and its P/E as 9.63 as of March 31, 2004. Its 52-week price range was $60.40 to $79.88.

Fannie Mae is always a hot political item. Because of its Governmental roots, it gets treated as if it has a Government guarantee even though it doesn't. It is just that most people expect the Government to prop it up if necessary. Competitors claim that FNM has an unfair advantage. It is able to borrow money at low cost because it receives an automatic AAA rating regardless of its outlook and its balance sheet.

I noticed that Diebold DBD is on Mergent's list. I have owned it in the past and it was a good company. It is now commanding a P/E of 20.02 and its yield is down to 1.54%. I would not buy it today at those prices. Diebold is great for bank security and ATMs. They got some big contracts to build new all-electronic, fool-proof voting machines, which I consider to be an impossible task. I expect Diebold to be in court for several decades on into the future because of that. IMHO, if anybody could do it, Diebold could. But nobody can.

Have fun.

John R.
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Post by unclemick »

When in doubt - start with the blindingly obvious:

Consolidated Edison
Florida Public Utilities

Verizon
SBC

Bank of America
Sun Trust Banks

Exxon
Chevron

Merck
Abbot Labs

At a stretch - Coke, Pepsi, Hormel
Wrigley, Nuccor(steel), Washington REIT, Weingarten Reality, Wells Fargo.

Now a days, I'm gambling on AT&T(not recommended, that's my Casino Magic money) and adding to Bank of America, Eli Lilly, Keyspan Energy, Consolidated Edison, Sun Trust Banks, Washington REIT, United Dominion Reality --old established positions I can add small amounts per month via DRIP plans - also not recommended unless you can put up with paperwork.

You're looking for a company that's paying more than it's historical average dividend (shades of P/E 10, heh, heh) and you plan to keep forever through thick and thin - hopefully buying more on thin. Screw performance - that will trick you into selling - plan on measuring dividends over ten years before you even think about selling.
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Post by unclemick »

I guess what I'm trying to say - is set up a watch list of companies that you might like to own - figure out at what price to dividend they might be bought, and wait.
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Post by hocus2004 »

"Now a days, I'm gambling on AT&T(not recommended, that's my Casino Magic money) and adding to Bank of America, Eli Lilly, Keyspan Energy, Consolidated Edison, Sun Trust Banks, Washington REIT, United Dominion Reality ...."

Thanks for putting forward some additional possibilities, UncleMick.
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Post by JWR1945 »

unclemick wrote:I'm gambling on AT&T (not recommended, that's my Casino Magic money)
ATT has a reputation of being able to destroy whatever they touch.

Historically, they have not known how to handle a competitive environment. They were great when regulated, but horrible since then.

They bought NCR (a Dayton, Ohio company) for a premium and promptly destroyed it. [The premium put a lot of money into my pocket. But it killed the company and hurt the local economy.]

That was over a decade ago. The story remains the same.

If they get their act together, ATT should be worth quite a bit. The question is how much management will reduce its book value before then.

Proceed with caution, unclemick. This might be a good time to look at those technical indicators that Lowell Miller keeps talking about. He insists upon waiting until after a bottom has been reached and until an upward trend is clearly in place.

In the mean time, monitor its book value.

Have fun.

John R.
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Post by unclemick »

Yep

The old Ma Bell - so ugly only a mother could ---- well you know.

A mini- concession to Bernstein's "bad company, good stock" - a reasonable number of which cease to exist. Hence his struggle's with Fama and French and how to understand the value premium.

To repeat - a gambler's pick. Another fallen angel - might be Duke Power - trying to get back to basics after the Enron era influence.
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Post by Mike »

Value has a better track record than growth, so these results do not surprise me. Merck has an interesting yield. I shall ponder it.
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Post by JWR1945 »

The next book on my reading list is What Works on Wall Street--Revised Edition, copyright 1998. by James P. O'Shaughnessy. The 1997 edition was listed by Lowell Miller among his references in The Single Best Investment.

What Works on Wall Street was the result of serious number crunching using the entire Standard & Poor's Compustat database for the first time.

I looked ahead and I have found a couple of important facts. From the Preface, page xvii:
You can do four times as well as the S&P500 by concentrating on large, well known stocks with high dividend yields.
Jumping ahead to Chapter 9, Dividend Yields: Buying an Income, we find that the advantage has been restricted to Large Stocks, not to stocks in general. In fact, if you select from among the 50 highest yielding stocks using all stocks, the performance was inferior to the market as a whole (i.e., the S&P500).

I note that utility stocks were excluded from these comparisons. Lowell Miller was accurate when he mentioned his own company's research into the performance of utilities as being unique.

What Works on Wall Street did not consider dividend growth.

There are other helpful factors: the Price-to-Sales ratio is the best of the value indicators. Best of all is a combination of attractive features: a low price-to-sales ratio, a low price-to-earnings ratio and a low price-to-book ratio. All of these measures work best with larger companies.

Another important point: the advantage claimed for small cap stocks applies only to micro-cap stocks (with capitalizations no higher than $25 million). Forget about that small cap value slice.

Again, this is just my first glance. It should be an interesting book.

Have fun.

John R.
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Post by Mike »

It is my understanding that Jim started several mutual funds that implement his strategy. I don't think they have done 4 times as well as the S&P. The books are interesting though.
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Post by JWR1945 »

I read the discussion of why index funds have outperformed actively managed funds. Noticeably absent was the issue of cost.

It takes a very long amount of time to make meaningful comparisons. The minimum amount of time, according to his reference, is 14 years.

Four times better, IIRC, refers to cumulative returns after 45 to 50 years (compounded with all dividends reinvested while making only a single investment at the beginning of the period).

Fees of 1% or more can really build up when compounded that long. They might offset part of the advantage (4 times final balance of the S&P500). [Sarcasm intentional.]

[Hint: An enterprising fund manager can collect a lot of fees before he has to demonstrate his relative performance at the end of 14 years.]

Have fun.

John R.
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Post by unclemick »

JWR

Read and report - look forward to your comments.

I'm pretty much hard core Bogle - costs matter (CMH) - and De Gaul of course - TSM - buy the U.S. at the lowest possible cost.

Now in hobby stock (aka dividend stocks) land AND ten years into ER - I still have to struggle sometimes (ala POGO) to let go of the performance mantra - and concentrate on 'an adequate dividend stream for MY needs'. Bear Bryant of Alabama football fame comes to mind - I ain't a quarterback anymore - it's defense - like a linebacker - 'agile, mobile and hostile' - to dividend cuts.

Interestingly - the more I hear from 'new books', the clearer I understand what Ben Graham was trying to tell me in his Intelligent Investor. There's a reason I keep my latest copy(4th or 5th?) hidden and don't loan it out anymore - it's the one that never gets returned.
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Post by JWR1945 »

I purchased Merck MRK today. It is yielding more than 4.5% and the dividend is secure.

I purchased Fannie Mae FNM as well. It is yielding more than 3.0%.

Both have had bad news recently.

Have fun.

John R.
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Post by ben »

MRK lost a BIG part of their biz - what makes you think that the management will protect the dividend? Cheers!
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
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Post by JWR1945 »

I checked the numbers at www.cbs.marketwatch.com .

Merck's management identifies the hit to earnings as $2.6 billion.

For 2003:
Merck had $26 billion in revenue.
Merck had $6.8 billion in net income.
Merck paid $3.25 billion in dividends.
The cost to earnings will be $2.6 billion.
[In addition, the operating cash flow is $9.8 billion.]

S&P500 is staying with its AAA credit rating for Merck. However, they have placed it under a credit watch for a possible future downgrade.

Merck has been careful to increase dividends in the past. They are one of Mergent's Dividend Achievers. They have a strong management policy bias towards maintaining and increasing dividends. They have sufficient earnings to cover the current dividend.

Have fun.

John R.
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Post by unclemick »

Yep

Merck is on my watch list now too - since they have a DRIP plan( high fees). Not yet but watching.

P.S. - that's when I bought my Eli Lilly - back in the 1990's when it yielded over 4% - each $ is now yielding over 14+ % with div growth plus reinvested divs.
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Post by JWR1945 »

P.S. - that's when I bought my Eli Lilly - back in the 1990's when it yielded over 4% - each $ is now yielding over 14+ % with div growth plus reinvested divs.
Lowell Miller selected Abbott Labs (pages 121-123 of The Single Best Investment) even though its dividend yield was "approaching 3%" (which turns out to be 2.5% to 2.6%!).

David Dreman mentioned the 1993-1995 crisis in pharmaceutical stocks as a group on pages 271-275. He did not identify individual stocks. He referred to low price-to-earnings, price-to-book and price-to-cash flow ratios and high yields as lifelines to help you stick with your stocks during a crisis.

It seems to me as if unclemick did at least as well as the pros.

Have fun.

John R.
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