The Investment Scientist

Posts Tagged ‘high dividend

This is the complete list of US dividend oriented ETFs.

Symbol Asset (mm) Expense Yield* Name
DVY 4782 0.40% 4.67% iShares DJ Select Dividend
VIG 402 0.28% 2.20% Dividend Achievers Select
PFF 308 0.48% 11.21% iShares S&P US Preferred Stock
DLN 288 0.28% 3.61% WisdomTree LargeCap Dividend
SDY 230 0.35% 4.40% SPDR S&P High Yield Dividend Aristocrats
DTN 145 0.38% 4.82% WisdomTree Dividend 100
PEY 139 0.60% 5.69% Mergent Dividend Achievers 50
FVD 137 0.70% 3.20% First Trust Value Line Dividend
VYM 120 0.25% 3.72% FTSE High Dividend Yield
DHS 120 0.38% 5.50% WisdomTree High-Yielding Equity
DES 80 0.38% 4.73% WisdomTree SmallCap Dividend
DTD 80 0.28% 3.71% WisdomTree Dividend
DON 78 0.38% 4.31% WisdomTree MidCap Dividend
PFM 53 0.60% 2.72% PowerShares Dividend Achievers
CVY 50 0.60% 7.61% Claymore Yield Hog
FDL 45 0.45% 5.52% First Trust Morning Star Dividend
PHJ 23 0.61% 2.70% PowerShares High Grow Rate Dividend Achievers
LVL 7 0.60% 11.21% Claymore High Income

* Yield information is according to Yahoo Finance as on 9/30/08.

The high-dividend-yield ETFs could come to the rescue of your retirement if we have a prolonged recession.

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“This sucker could go down!”

That was what President Bush said during the recent $700 billion bailout plan meeting with congressional leaders at the White House. The market has gone down another 20% and talk of another Great Depression has filled the airwaves ever since.

If you are a listener of Jim Cramer, you would have heard his advice: Sell, sell, sell! He constantly reminds his listeners how the Dow went down 83% during the Great Depression; and never fully recovered until 1954.

Cramer forgot to account for dividends. If dividends from the Dow stocks were reinvested, then investors would have been able to recoup all losses by 1945. That’s a full nine years sooner! Think about this: what if investors held only high-dividend stocks? Would they have recovered their investments even sooner?

To find out, I examined the following four portfolios’ performance from 1929 onwards:

  1. Portfolio A: stocks with zero dividends.
  2. Portfolio B: stocks with bottom 30% dividend yields.
  3. Portfolio C: stocks with middle 40% dividend yields.
  4. Portfolio D: stocks with top 30% dividend yields.

All four portfolios peaked in August, 1929. With the exception of portfolio B, all portfolios bottomed in May, 1933. Portfolio B bottomed in June, 1933. For each of the four portfolios, the total peak-to-trough decline (drawdown) and the number months it took to recover are presented here:

Buy at the top and hold during Great Depression
A B C D
Drawdown 89% 86% 85.4% 84%
Months to recover 132 154 144 44

Data source: Kenneth French Data Library

It is probably not surprising that the highest dividend-yielding portfolio D fell a little less than other portfolios. It’s striking that portfolio D recouped all losses in just three-and-a-half years – eight to nine years before other portfolios.

Why did high dividend-yield stocks performed so well?

During the Great Depression, stock prices on average fell more than 80%. Dividends fell only about 11%. (See Chart below) As Yale University professor Robert Shiller has found, historically dividend volatility was about 15% of price volatility (meaning dividend declines were a fraction of price declines in recessions.) Stable dividend payments quickly made up for losses in price.

If the price gyration makes you dizzy, focus on dividends instead. They don’t gyrate and ultimately, they will sustain your retirement.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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