THIS IS THE LAST WEEKLY ISSUE. FUTURE ISSUES WILL APPEAR MONTHLY.
Situation: “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.
Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”
Execution: see Table
Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.
In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.
Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).
NOTE: This week’s Table will be updated at the end of each quarter.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.
Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.
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Sunday, December 30
Sunday, December 23
Week 390 - REITs That Qualify For "The 2 and 8 Club"
Situation: Membership in “The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which consists of the ~400 companies in the FTSE Russell 1000 Index that reliably pay an above-market dividend. Real Estate Investment Trusts (REITs) are excluded from the FTSE High Dividend Yield Index because their dividend payouts are variable, being fixed by law at 95% of gross income. But those payouts are usually higher than the yield on an S&P 500 ETF (e.g. SPY), which is ~2%. We are curious as to whether any REITs meet the 5 basic requirements for membership in “The 2 and 8 Club”, and find that there are 4 (see Table). However, REITs are typically “small cap stocks.” Only one of the four in our Table is a large enough company to be included in the FTSE Russell 1000 Index (Simon Property Group; SPG).
Mission: Populate our Standard Spreadsheet for REITs. Select only those that meet the 5 basic requirements for membership in “The 2 and 8 Club”:
1) above-market dividend yield;
2) 5-Yr dividend growth of at least 8.0%/yr;
3) a 16+ year trading record that is analyzed weekly for quantitative metrics by the BMW Method;
4) an S&P Bond Rating of BBB+ or higher;
5) an S&P Stock Rating of B+/M or higher.
Add a column for FFO (Funds From Operations; see Column P in the Table), which is a ratio that the REIT Industry substitutes for P/E.
Execution: see Table.
Bottom Line: Pricing for REITs is negatively correlated with rising interest rates but not as much as you might suspect. This is likely because the dividend yield for most REITs remains above the interest rate on a 10-Yr US Treasury Note. Pricing is more sensitive to the likelihood that the REIT will have enough FCF (Free Cash Flow) to fund dividend payouts (see Column R in the Table). Overall, it is hard to argue against the idea that high-quality REITs are a good “bond substitute.”
Risk Rating: 4 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into SPG and own shares of KIM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Populate our Standard Spreadsheet for REITs. Select only those that meet the 5 basic requirements for membership in “The 2 and 8 Club”:
1) above-market dividend yield;
2) 5-Yr dividend growth of at least 8.0%/yr;
3) a 16+ year trading record that is analyzed weekly for quantitative metrics by the BMW Method;
4) an S&P Bond Rating of BBB+ or higher;
5) an S&P Stock Rating of B+/M or higher.
Add a column for FFO (Funds From Operations; see Column P in the Table), which is a ratio that the REIT Industry substitutes for P/E.
Execution: see Table.
Bottom Line: Pricing for REITs is negatively correlated with rising interest rates but not as much as you might suspect. This is likely because the dividend yield for most REITs remains above the interest rate on a 10-Yr US Treasury Note. Pricing is more sensitive to the likelihood that the REIT will have enough FCF (Free Cash Flow) to fund dividend payouts (see Column R in the Table). Overall, it is hard to argue against the idea that high-quality REITs are a good “bond substitute.”
Risk Rating: 4 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into SPG and own shares of KIM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 16
Week 389 - Bond ETFs
Situation: You want to balance your stock portfolio with safe bonds. Right? Well, here’s a news flash: You need to start thinking about balancing your bond portfolio with safe stocks. Why? Because the world is gorging itself on debt--households, municipalities, states, nations, and corporations most of all. Yes, this is understandable because the Great Recession was so disabling that central banks everywhere dropped interest rates lower than the rate of inflation. It was free money, so people borrowed the stuff and invested it. Just as the central bankers had intended. Economic activity gradually returned to normal almost everywhere, now that 10 years have passed since Lehman Brothers declared bankruptcy on September 15, 2008. But the Federal Open Market Committee is removing the punch bowl from the party and raising short-term interest rates by a quarter percent 3-4 times a year. Bondholders are stocking up on Advil due to interest rate risk (duration), meaning that for each 1% rise in short-term interest rates there is a material reduction in the value of an existing bond that is worse for long-term than short-term bonds.
If a company is struggling and has to refinance a maturing issue of long-term debt, it will have to pay a materially higher rate of interest vs. that paid to holders of the expiring bond. This may impact the credit rating of its existing bonds, driving it closer to insolvency. General Electric (GE) is an especially vivid example of how this works. A few short years ago, GE had an S&P rating of AAA for its bonds. That rating is now BBB+ and falling fast. Larry Culp, the CEO, is desperately selling off core divisions of the company in an attempt to avert bankruptcy.
Mission: Use appropriate columns of our Standard Spreadsheet to evaluate the leading bond ETFs, and compare those to the S&P 500 Index ETF (SPY) as well as a stock with an S&P Bond Rating of AA or better.
Execution: see Table.
Bottom Line: To offset the risks in your stock portfolio (bankruptcy, market crashes and sensitivity to fluctuation of interest rates), you need a bond portfolio. Why? Because high quality bonds rise in value during stock market crashes and/or recessions, have much less credit risk, and usually less interest rate risk. Stock prices are more sensitive to short-term interest rates than any but the longest-dated bonds, e.g. 30-Yr US Treasury Bonds. Stock indexes like the S&P 500 Index (SPY) have average S&P Bond Ratings of BBB to BBB+, compared to AA+ for 30-Yr Treasuries. To cover those risks, you’ll need a bond fund that has low-medium interest rate risk and high credit quality. BND and IEF are examples (see Table). BIV differs only in having medium credit quality per Morningstar. TLT has high credit quality but also has high interest rate sensitivity. TLT can be compared to a stock with high credit quality and high interest rate sensitivity, e.g. Pfizer (PFE; see Table). The main thing to remember is that stock market crashes are invariably accompanied by a booming bond market (flight to safety). That’s a good thing because governments will have to take on a lot more debt to finance social programs like unemployment insurance.
Risk Rating: 1 for BND and IEF (where 10-Yr Treasuries = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I own bond funds that approximate BIV and TLT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If a company is struggling and has to refinance a maturing issue of long-term debt, it will have to pay a materially higher rate of interest vs. that paid to holders of the expiring bond. This may impact the credit rating of its existing bonds, driving it closer to insolvency. General Electric (GE) is an especially vivid example of how this works. A few short years ago, GE had an S&P rating of AAA for its bonds. That rating is now BBB+ and falling fast. Larry Culp, the CEO, is desperately selling off core divisions of the company in an attempt to avert bankruptcy.
Mission: Use appropriate columns of our Standard Spreadsheet to evaluate the leading bond ETFs, and compare those to the S&P 500 Index ETF (SPY) as well as a stock with an S&P Bond Rating of AA or better.
Execution: see Table.
Bottom Line: To offset the risks in your stock portfolio (bankruptcy, market crashes and sensitivity to fluctuation of interest rates), you need a bond portfolio. Why? Because high quality bonds rise in value during stock market crashes and/or recessions, have much less credit risk, and usually less interest rate risk. Stock prices are more sensitive to short-term interest rates than any but the longest-dated bonds, e.g. 30-Yr US Treasury Bonds. Stock indexes like the S&P 500 Index (SPY) have average S&P Bond Ratings of BBB to BBB+, compared to AA+ for 30-Yr Treasuries. To cover those risks, you’ll need a bond fund that has low-medium interest rate risk and high credit quality. BND and IEF are examples (see Table). BIV differs only in having medium credit quality per Morningstar. TLT has high credit quality but also has high interest rate sensitivity. TLT can be compared to a stock with high credit quality and high interest rate sensitivity, e.g. Pfizer (PFE; see Table). The main thing to remember is that stock market crashes are invariably accompanied by a booming bond market (flight to safety). That’s a good thing because governments will have to take on a lot more debt to finance social programs like unemployment insurance.
Risk Rating: 1 for BND and IEF (where 10-Yr Treasuries = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I own bond funds that approximate BIV and TLT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 9
Week 388 - Has The 4-Yr Commodities Bear Market Ended?
Situation: In Q2 of 2014, the trade-weighted index of 19 Futures Contracts for raw commodities peaked (DJCI; see Yahoo Finance), as did the SPDR Energy Select Sector ETF (XLE; see Yahoo Finance). Both hit bottom in early Q1 of 2016. That should have been the end of the Bear Market but prices have not risen much since then. On the plus side, both ETFs tested their early 2016 bottom in Q3 of 2017 and failed to reach it, suggesting that prices for both are in a new (albeit weak) uptrend.
Interestingly, the SPDR Gold Shares ETF (GLD; see Yahoo Finance) has traced a similar track, peaking in Q1 of 2014, bottoming at the beginning of Q1 2016, and failing a test of that low point late in 2016. Other metrics also suggest that the Bear Market has ended. For example, recently posted earnings for Exxon Mobil (XOM) in Q3 of 2018 were robust enough to have reached a level last reached in Q3 of 2014.
Mission: Use our Standard Spreadsheet to track key investment metrics for companies that buy and/or extract raw commodities for processing, transport those by using 18-wheel tractor-trailers or railroads, or manufacture the diesel powered and natural-gas powered heavy equipment tractors that are used to mine and harvest raw commodities. Confine attention to companies that have at least a BBB+ S&P rating on their bonds and at least a B+/M rating on their common stocks, as well as the 16+ year trading record on the NYSE that is needed for long-term quantitative analysis by the BMW Method.
Execution: see Table.
Bottom Line: Near-month futures prices for commodities have come down off a supercycle that blossomed in 1999, and are now back to approximately where they started. This represents a classic “reversion to the mean”, likely due to supply constraints growing out of the somewhat rapid buildout of China’s economy. We’re not at the end of a 4-Yr Bear Market. Instead, we’re in the long tail of a remarkably strong 2-decade commodities Bull Market. It is important to note that commodity production is changing away from fossil fuels. However, petroleum products still represent more than 30% of trade-weighted commodity production. Going forward, the composition of that production will shift toward environmentally cleaner transportation fuels. Gasoline and diesel will yield dominance to CNG (compressed natural gas) and hydrogen (sourced from natural gas). This will mirror the shift toward clean electrical energy that has replaced coal with natural gas during the build-out of wind and solar sources, along with the necessary enhancements to electricity storage and transmission.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into CAT, XOM, R and UNP, and also own shares of NSC, BRK-B and CMI.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Interestingly, the SPDR Gold Shares ETF (GLD; see Yahoo Finance) has traced a similar track, peaking in Q1 of 2014, bottoming at the beginning of Q1 2016, and failing a test of that low point late in 2016. Other metrics also suggest that the Bear Market has ended. For example, recently posted earnings for Exxon Mobil (XOM) in Q3 of 2018 were robust enough to have reached a level last reached in Q3 of 2014.
Mission: Use our Standard Spreadsheet to track key investment metrics for companies that buy and/or extract raw commodities for processing, transport those by using 18-wheel tractor-trailers or railroads, or manufacture the diesel powered and natural-gas powered heavy equipment tractors that are used to mine and harvest raw commodities. Confine attention to companies that have at least a BBB+ S&P rating on their bonds and at least a B+/M rating on their common stocks, as well as the 16+ year trading record on the NYSE that is needed for long-term quantitative analysis by the BMW Method.
Execution: see Table.
Bottom Line: Near-month futures prices for commodities have come down off a supercycle that blossomed in 1999, and are now back to approximately where they started. This represents a classic “reversion to the mean”, likely due to supply constraints growing out of the somewhat rapid buildout of China’s economy. We’re not at the end of a 4-Yr Bear Market. Instead, we’re in the long tail of a remarkably strong 2-decade commodities Bull Market. It is important to note that commodity production is changing away from fossil fuels. However, petroleum products still represent more than 30% of trade-weighted commodity production. Going forward, the composition of that production will shift toward environmentally cleaner transportation fuels. Gasoline and diesel will yield dominance to CNG (compressed natural gas) and hydrogen (sourced from natural gas). This will mirror the shift toward clean electrical energy that has replaced coal with natural gas during the build-out of wind and solar sources, along with the necessary enhancements to electricity storage and transmission.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into CAT, XOM, R and UNP, and also own shares of NSC, BRK-B and CMI.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 2
Week 387 - A-Rated Members of "The 2 and 8 Club" In The S&P 100 Index
Situation: If you’re a stock-picker, you’ll need a special watch list so you can work at home. Consider the fact that your spouse and children will want to know what you’re doing and why. Think of it as an opportunity. You’ll get to spend more time at home and convince them that you’re not a gambling their future away!
Mission: Use our Standard Spreadsheet to illustrate members of “The 2 and 8 Club” in the S&P 100 Index that having S&P ratings of A- or better on their bonds stocks.
Execution: see Table.
Administration: Our least restrictive definition of “The 2 and 8 Club” is all companies in the Russell 1000 Index that reliably pay an above-market quarterly dividend (meaning a yield of ~2% or more) and have raised it at least 8%/yr over the past 5 years. So, we mine the FTSE High Dividend Yield Index because it is composed of the ~400 companies in the Russell 1000 Index that reliably pay an above-market dividend. We exclude any companies that have an S&P rating on their debt lower than BBB+ or an S&P rating on their common stock lower than B+/M. For this week’s blog, we’re listing the few companies in top tier of “The 2 and 8 Club”, which are those in the S&P 100 Index that are A-rated.
Bottom Line: Only 12 companies meet our criteria, half of which are in the highest risk S&P industries: Financial Services and Information Technology. Over the long term, investment in high quality companies drawn from those industries will bring greater rewards than investment in the S&P 500 Index or Dow Jones Industrial Average (as well as sharper losses during intervening Bear Markets). Boeing (BA) and Texas Instruments (TXN) appear overpriced, which we determine by using Graham Numbers and 7-Yr P/Es (see Columns W-Z in the Table). Accordingly, investment in these stocks is best conducted by using an automatic monthly dollar-cost averaging plan, e.g. Computershare.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of MMM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Use our Standard Spreadsheet to illustrate members of “The 2 and 8 Club” in the S&P 100 Index that having S&P ratings of A- or better on their bonds stocks.
Execution: see Table.
Administration: Our least restrictive definition of “The 2 and 8 Club” is all companies in the Russell 1000 Index that reliably pay an above-market quarterly dividend (meaning a yield of ~2% or more) and have raised it at least 8%/yr over the past 5 years. So, we mine the FTSE High Dividend Yield Index because it is composed of the ~400 companies in the Russell 1000 Index that reliably pay an above-market dividend. We exclude any companies that have an S&P rating on their debt lower than BBB+ or an S&P rating on their common stock lower than B+/M. For this week’s blog, we’re listing the few companies in top tier of “The 2 and 8 Club”, which are those in the S&P 100 Index that are A-rated.
Bottom Line: Only 12 companies meet our criteria, half of which are in the highest risk S&P industries: Financial Services and Information Technology. Over the long term, investment in high quality companies drawn from those industries will bring greater rewards than investment in the S&P 500 Index or Dow Jones Industrial Average (as well as sharper losses during intervening Bear Markets). Boeing (BA) and Texas Instruments (TXN) appear overpriced, which we determine by using Graham Numbers and 7-Yr P/Es (see Columns W-Z in the Table). Accordingly, investment in these stocks is best conducted by using an automatic monthly dollar-cost averaging plan, e.g. Computershare.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of MMM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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