Power of Dividend Growth 2011 (and beyond)

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ghariton
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Re: Power of Dividend Growth 2011 (and beyond)

Post by ghariton » 16 May 2017 21:58

NormR wrote:
16 May 2017 19:33
Ah, correct me if I'm wrong, but I think you're talking about the difference between geometric and arithmetic returns. In this case it seems to be applied index construction. That is, geometrically-weighted indexes.
Ah, my mistake.

In constructing an index, using geometric weights is the equivalent of using arithmetic weights of the logarithms of the values, and then exponentiating. This serves to reduce the impact of more extreme values. In practical terms, this reduces the relative weight of companies with very large market capitalization.

As Value Line says, both the geometric mean and the median have this property. In fact, in the case of returns that are log-normally distributed, the geometric mean coincides with the median.

I'm not sure why Value Line chose to use geometric weights rather than medians. Perhaps it's because geometric weights are maximum likelihood estimators, and so have all sorts of nice asymptotic properties, like laws of large numbers and central limit theorems. Or perhaps because their clients are more comfortable with geometric weights generally.

Did I answer the right question this time?

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The plural of anecdote is NOT data.

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Re: Power of Dividend Growth 2011 (and beyond)

Post by NormR » 16 May 2017 22:40

ghariton wrote:
16 May 2017 21:58
In constructing an index, using geometric weights is the equivalent of using arithmetic weights of the logarithms of the values, and then exponentiating. This serves to reduce the impact of more extreme values. In practical terms, this reduces the relative weight of companies with very large market capitalization.
Humm, it might be my confusion or poor description. But I think they are equal-weights but the daily return is either calculated arithmetically or geometrically as follows. (Again, I could be wrong!)

Arithmetic index = sum of % stock returns / # stocks
Geometric index = (product of stock returns {i.e. 1 + %stock return}) ^ (1/# stocks)

The arithmetic index has (in my view) a simple interpretation. It reflects what an investor would get by buying an equal amount of each stock.

It strikes me that one can't invest in a basket of stocks - in advance - and get the return of a geometric index. As a result it's interpretation, and usefulness, seems odd. That is, it tracks the performance of the median stock.

Now, my actual application of all of this goes to the point of this thread. Ned Davis Research used to just track a geometric index when studying U.S. dividend growth and now they offer both.

Code: Select all

Category          Geometric    Arithmetic
Div.Growers       9.96%        12.89%
S&P 500 Equal Wt  7.60%        12.34%
The outperformance is wide in the Geometric case but tiny in the Arithmetic one. It seems to me that investors are most likely to obtain the returns of the second. The returns of the first seem to be theoretical and designed to track median results. But investors don't earn the median they get the average. I'm having a hard time thinking of a good reason to opt for a geometric index and interpreting the difference between the two in this context.

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Re: Power of Dividend Growth 2011 (and beyond)

Post by ghariton » 17 May 2017 00:10

NormR wrote:
16 May 2017 22:40
It strikes me that one can't invest in a basket of stocks - in advance - and get the return of a geometric index. As a result it's interpretation, and usefulness, seems odd. That is, it tracks the performance of the median stock.
I think you're right.

The idea is still to give lower weight to more extreme values, in this case daily returns. You're de-emphasizing large swings (or, in the case of a median, discounting them completely). We know that the arithmetic average is always greater than or equal to the geometric average. But the difference depends on the variance of the observations (or some other measure of dispersion). The more dispersion, the greater the gap between arithmetic and geometric means.

Your table is consistent with a finding of less dispersion in returns among dividend growers than among members of the S & P 500. I suspect that doesn't come as a surprise.

As to the usefulness of the geometric mean in this context, I am unsure. Perhaps the purpose is to de-emphasize "tail" events, i.e. very large and very small returns. The result might (or might not) be a better estimator of over-all returns going forward. But that would require some empirical testing.

George
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Re: Power of Dividend Growth 2011 (and beyond)

Post by Taggart » 17 May 2017 05:43

Using just a static high dividend yield policy may work fine in a tax free environment, but for someone like myself who has all their individual Canadian stocks in a taxable account, I don't think it would work out too well. Plus I would always be worried about dividend cuts from these highest yield stocks. One of the requirements of running a high yield portfolio is to turn over the now lower yielders to make way for a new crop of highest yield stocks once a year. That creates a taxable event. When running a large portfolio of common dividend growth equities I attempt to have no turnover, except when a company forces my hand, which doesn't happen too often. It's been a good year, when there's no selling from the portfolio.

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Re: Power of Dividend Growth 2011 (and beyond)

Post by NormR » 19 May 2017 19:18

Taggart wrote:
17 May 2017 05:43
Using just a static high dividend yield policy may work fine in a tax free environment, but for someone like myself who has all their individual Canadian stocks in a taxable account, I don't think it would work out too well. Plus I would always be worried about dividend cuts from these highest yield stocks.
People in high tax brackets should probably opt for low/no dividend value stocks instead.
Taggart wrote:
17 May 2017 05:43
One of the requirements of running a high yield portfolio is to turn over the now lower yielders to make way for a new crop of highest yield stocks once a year. That creates a taxable event. When running a large portfolio of common dividend growth equities I attempt to have no turnover, except when a company forces my hand, which doesn't happen too often. It's been a good year, when there's no selling from the portfolio.
I like the low turnover approach and have anecdotally done well with dividend growers selected largely for other reasons.

But, at this point, I'd put the strategy of buying dividend growers - and holding for a long time - into the category of basically untested. Most studies use 1-year turnover or 1-month turnover and the ones I trust show little improvement in returns. I'm not saying it isn't good, only that it isn't proven.

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Re: Power of Dividend Growth 2011 (and beyond)

Post by deaddog » 20 May 2017 00:06

Taggart wrote:
17 May 2017 05:43
Plus I would always be worried about dividend cuts from these highest yield stocks.
If you are well diversified one or two cuts doesn't hurt the overall performance.
One of the requirements of running a high yield portfolio is to turn over the now lower yielders to make way for a new crop of highest yield stocks once a year.
We set a target for each stock and change out stocks as they reach their target rather than do an annual rebalance. We also replace stocks that don't perform (AIM) and those that cut their dividends.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Power of Dividend Growth 2011 (and beyond)

Post by bpither » 20 May 2017 04:10

If you are well diversified one or two cuts doesn't hurt the overall performance.
Yes - Manulife, Telus and Trans Canada comes to mind in my case. My aggregate tax efficient yearly income went up during the same time. Sometimes a cut is a good thing - Telus and Trans Canada reinstated dividend growth shortly thereafter and the stock price fared well since.

"Diversification" - I have a tiny percentage in the resource sector. The earnings are too volatile. I prefer Utilities, Pipelines, a couple of banks, one insurer, two telecom, Metro, CN Rail, Brookfield Infrastructure. So far, so good. If I were to buy an dividend growth oil company it would have to be the best - EXXON

This strategy enables me to live off the income and to keep the principal untouched unless I really need it in future.
"We have two classes of forecaster: Those who don’t know and those who don’t know they don’t know.” John Kenneth Galbraith

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Re: Power of Dividend Growth 2011 (and beyond)

Post by Taggart » 21 May 2017 18:50

I watched David Stanley give a talk at an investment forum near the CN Tower a few years ago. I remember he actually mentioned dividend growth at least a couple of times which perked up my interest in what he had to say. I hadn't realized until today that his talk was posted on the internet in PDF format.

Hope you enjoy reading through it as much as I did.

https://www.canadianmoneysaver.ca/files ... tanley.pdf

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Re: Power of Dividend Growth 2011 (and beyond)

Post by longinvest » 21 May 2017 19:41

Taggart wrote:
21 May 2017 18:50
I watched David Stanley give a talk at an investment forum near the CN Tower a few years ago. I remember he actually mentioned dividend growth at least a couple of times which perked up my interest in what he had to say. I hadn't realized until today that his talk was posted on the internet in PDF format.

Hope you enjoy reading through it as much as I did.

https://www.canadianmoneysaver.ca/files ... tanley.pdf
Thanks.

I found the following multi-part webinar by David Stanley on Beating the TSX:
Beating the TSX with David Stanley Part #1
Beating the TSX with David Stanley Part #2
Beating the TSX with David Stanley Part #3
Beating the TSX with David Stanley Part #4
Beating the TSX with David Stanley Part #5
Beating the TSX with David Stanley Part #6

I also found this clip:
Beating The TSX (BTSX) by Robin Speziale

Disclaimer: I haven't watched any of them yet, as I just found them.

Let's not forget our own Finiki page: http://www.finiki.org/wiki/Beating_the_TSX
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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