Russell Bailyn has a article up at Seeking Alpha about WisdomTree ETFs that is a good read.
In it he makes one comment that we have all heard before many times which is that "as baby-boomers start retiring, portfolio managers will be allocating portfolios towards dividend and other income-oriented products."
The logic is obvious and I can't really argue with it but I do question it whether the outcome can possibly be as expected. Specifically I question whether money allocated to dividend payers in the manner suggested will actually lift prices in some sort of advantageous manner for the people who get in now.
So many people believe it so (it seems) that I don't think it will play out as expected. This strikes as the type of thing that will just turn out to be wrong. I am not saying these types of stocks will do poorly or even be a drag but simply there will be no out of the ordinary excess return.
I do believe in yield but the way I think of it is what is the yield of the entire portfolio in relation to the market. You can add 100 basis points in yield quite easily when you add yield in certain sectors like utilities, telecom, energy and of course financials and then add in one or two things, modestly weighted, that yield 7-8%. One example would be a call writing fund and for anyone new; modestly weighted is 2-3% of the portfolio.
As important as I think dividends are I think it would be a mistake to own nothing but high yielding stocks. You can't be properly diversified owning nothing but yielders.
Now from the Hey Ma, Look category a bunch of blogs got mentioned here in BusinessWeek, including this one, but quite frankly I can't tell if it is just online or made the print edition too but I suspect the former.
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8 comments:
Seems like the same kind of boiler plate logic that analysts roll out to tout healthcare stocks--the population is aging, so healthcare is the logical place to put some money. Well, maybe yes, maybe no, or maybe sometimes. I love the Wisdom Tree approach and own some of their funds but find a dose of skepticism mixed with common sense is a helpful filter.
People who chase yield will fail...too much risk for too little reward...if everyone invests in dividend growers and payers the yield falls right? so.... If analysts want to play baby boomers they are going to have to be more creative than blanket buying of div. etf's...think spices, think grandchildren...this can be a creative business if you are a creative person. An interesting read: Investing, The Last Liberal Art. I have no association with the bood author etc.
"People who chase yield will fail...too much risk for too little reward."
I think Jeremy Siegel might disagree with you. Though it should be pointed out that, even in his own book, he showed that while dividend stocks can beat the S&P 500 long term, dividend stocks can also be beaten my long term investments in tech.
i do not think Siegel advocates chasing yields.
Structuring an index based on fundamentals instead of capitalization (or worse, price) is not about chasing yield.
buying NEW during its death spiral because of its "dividend" would be an example of chasing yield.
The two BEAR hedge funds that just failed would be another good example.
I hight doubt that Siegel advocated investing in either of those two examples.
Seems just as likely to me that the 15% federal tax on dividends will be increased over the next 10 years.
The Wisdomtree backtest results of their DEFA index (DWM ETF) vs. the EFAE index sure are interesting.
Wisdomtree index vs. EAFE index through June 2007:
1 yr: 33.51% vs. 27.54%
3 yr: 26.22% vs 22.75%
5 yr: 21.58% vs. 18.21%
10 yr: 12.89% vs 8.04%
Posting from a very slow 22.6 dialup makes it tough to follow the links. But, the last two days I have been thinking of how to construct a basically all equity retirement portfolio that yields, say, 3%. If that could be done reasonably, then I would only have to withdraw about 1% a year to get to the 4% annual withdrawal rate.
This is not a strategy to beat the market. It is a strategy to preserve capital. Just as examples, when I bought CAT, it was yielding 2.2, BAC was at 4.4, and the covered call ETF BEO was yielding 6.6%, FRO is around 10%.
At first glance, it just seems reasonable that it is possible to construct a diversified portfolio and still pay attention to yield. While the portfolio probably won't outperform in an up market, it may well outperform in a down or flat market when the dividends are considered.
Thoughts?
Rick C
My dad has alzheimers.
Plenty of people I have met are not as sharp in retirement as when they were younger.
IMO for retirement I would look for an ETF or mutual fund with high yield not individual stocks. You need to accept that at some point your analytical abilities will suffer. DVY or wisdom tree funds will provide high yield diversification and let you concentrate enjoy your retirement.
I do strongly agree with your main point though - high yield equities for retirment.
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