- Yesterday, a breaking news article on Seeking Alpha mentioned the newly launched iBillionaire High Dividend Index, which tracks the trading moves of 25 investing-savvy billionaire investors.
- No mutual fund or ETF tracks this index, but it offers a fishing pond of income investment ideas to research further.
- But how big are the fish in this pond? I ran the numbers on each stock in the index, and here are the results.
Yesterday, a breaking news article on Seeking Alpha mentioned the newly launched iBillionaire High Dividend Index. which tracks the trading moves of 25 investing-savvy billionaire investors such as Stanley Druckenmiller, James Dinan and Nelson Peltz.
In our current low-yield world, the newly launched index looks attractive with a 5.34% dividend yield, 24% exposure to energy shares, and several high-yielding mortgage REITs included.
A sentence I've seen a couple of times in articles describing the index is:
[The index] offers a fishing pond of income investment ideas to research further.
But is this true? Are there any big fish in this pond? To find the answer, I ran all 50 stocks in the index through my own stock analysis method in search of high-quality dividend stocks for me to buy.
My stock analysis method
I am a dividend growth investor with a buy and hold strategy. I look for stocks with a relatively high yield and a solid balance sheet that promises lots of dividend raises in the future. I also like to buy low, and if I really need to sell, to sell high.
Nothing spectacular so far, right?
To quickly scan a list of stocks I focus on four financial metrics:
Yield. I am looking for stocks that yield 4% or more. The reason for this is that 4% is the maximum safe withdrawal rate established by the Trinity Study. When I retire, I want my entire portfolio to yield at least 4%, so I can live off the dividend and never have to sell stock.
Sometimes I spot a good deal and go for stocks yielding less than 4%. But I will always stay above 2.5%, because the combined effect of inflation and taxes in The Netherlands (where I'm taxed) is roughly 2.25%, and I want to stay above that limit by a comfortable margin.
Anybody who has read my previous articles knows that I am a big fan of color-coded dashboards. When I color-code yield values, I always use red for values below 2.5%, orange for 2.5-4% and green for anything over 4%.
P/E. As a dividend investor I like to buy when stocks are cheap. A common rule of thumb being thrown around the dividend investor community is: "never buy anything with a P/E over 20."
I will consider buying stocks with a P/E value below 20 (green), I'm wary of anything in the 20-22 range (orange), and don't touch anything over 22 (red).
Chowder number. There is a common problem with high-yielding dividend stocks: they often have very low dividend growth. To make sure I don't buy these stocks I use the Chowder number. This is the sum of the yield and the 5-year compound annual DPS growth.
By rejecting stocks below a certain Chowder limit I ensure that anything I pick has a good yield and a good dividend growth, promising lots of dividend raises in the future.
I consider a Chowder number of 12 or more to indicate healthy dividend growth (green). Anything between 10 an 12 is suspicious (orange), and anything below 10 is too low (red).
Discount rate. Another common problem with high-yielding dividend stocks is that sometimes companies finance the dividend with buybacks, loans, sell-offs or free cashflow. This is all fine and good, but in the end I like to see actual earnings providing an influx of money. You can only survive for so long as a company without earnings, especially if you pay out a rising dividend each year.
To make sure I buy stocks with a healthy earnings growth, I use the discount rate: the sum of the yield and the 5-year compound annual EPS growth.
I consider a discount rate of 10 or more to be healthy (green), anything in the 9-10 range is suspicious (orange), and anything below 9 is too low (red).
I am going to filter the iBillionaire index based on these four metrics, but for good measure I'm going to throw in two more bonus metrics:
Dividend Payout Ratio (DPR)
The DPR is the dividend divided by the earnings per share. This indicator tells me how much of the earnings are being paid out as dividend.
If the DPR is too high, then there is no more room for future dividend growth, as pretty much all of the earnings are already flowing to the shareholders. A stock with a DPR of 100% and a dividend growth of 10% is running out of money fast, and something has to give.
I prefer stocks with a DPR below 60% (green). Anything in the 60-80% range is suspicious (orange), and a DPR over 80% is bad (red).
Caveat: the red/orange/green scale is not set in stone. For example, REITs are required to have a DPR of 90%, so for them I'm going to ignore the metric. Also, in some industries (i.e. the tobacco industry) a high DPR is considered normal and not a cause for concern.
52-week low percentile change
The famous Walter Schloss published his "16 Rules to Making Money in the Stock Market" in 1994. His 10th rule reads:
When buying a stock, I find it helpful to buy near the low of the past few years [. ]
Good advice! To incorporate his rule into my method I calculate the percentile difference between the current stock price and the 52-week low.
I've only just started using this metric, so I have no idea yet which values are good or bad. For now I consider a difference of over 15% as bad (red), anything in the 10-15 range is suspicious (orange), and values under 10% are good (green).
Putting it all together
I started by getting the constituents of the index from the iBillionaire website. I copied the ticker symbols into a Google spreadsheet and used a combination of Google and Yahoo Finance API functions to automatically retrieve yield, P/E, DPS and EPS.
Unfortunately I need to calculate the 5-year DPS and EPS compound annual growth values for the Chowder number and Discount rate, and no API lets me read in data from 2009. So I had to manually look up these values on Morningstar and type them into the spreadsheet.
(if anybody knows how I can get free access to historic stock metrics, please let me know)
Here are the first 20 index constituents:
To quickly filter the list for "good" stocks, I added a scoring column -- this is column M in the picture. The score
is simply the sum of all green cells in that row. If the yield, P/E, chowder number and discount rate are all green, this score is 4. If they're all red, the score is zero.
This is the score distribution across the entire index:
Only 16% of the index (8 stocks) have healthy values for all four metrics: yield, P/E, chowder number and discount rate. Another 26% (13 stocks) have three out of four green metrics, and the remaining 58% (29 stocks) have only two or less green metrics.
And keep in mind that I'm not looking at DPR or the 52-week change right now. Stocks in the green segment could still be excluded due to astronomically high DPR values, or day prices far above the 52-week low. But we'll get to that in a moment.
For now I am going to limit my fishing expedition to stocks with a score of 3 or 4. Let's start with three.
Stocks with a score of 3
Here are all the stocks in the iBillionaire index with a score of three, meaning three out of four metrics are green:
NRF. APL and ARP have a P/E of 99, meaning their earnings are negative. I don't like stocks with negative earnings and tend to avoid them.
If I ignore all P/E values over 20, I don't worry too much about low dividend growth (= low Chowder number) and I pick stocks that are close to their 52-week minimum, then that leaves me with: F, OXY. T. CIM. LVS and DOW .
This is supposed to be a high dividend yield index, so I can't say I'm very happy with yield values below 4%. When I remove those from the list I'm left with: T and CIM.
T has a 5-year compound annual dividend growth of only 2.31%, and CIM's dividend has actually shrunk by -3.5%.
In my book a company cutting its dividend is a big no-no, so that only leaves T.
Stocks with a score of 4
The segment with stocks scoring 3 did not prove to be a very bountiful fishing pond. So how about the next segment?
Here are all the stocks in the iBillionaire index with a score of four, meaning all four metrics are green:
But wait. KKR, MIC and PMT are currently selling way above their 52-week minimum. Even though their P/Es are low, you might not get a good deal if you buy today.
And CVI has a crazy DPR of 132.74%! The company is actually paying out more dividends than it is receiving in earnings. Now, DPS and EPS growth are very good, but you need to ask yourself if you are comfortable with a company that earns money by the truckload, and throws all of it back at its shareholders as fast as it can. That doesn't seem like a good growth proposition to me.
That leaves: COP. PM. WYNN and WMB. All with yields in the 4.2-4.5% range.
So, in the top two segments I found T, COP, PM, WYNN and WMB. Five fine stocks with good and healthy metrics, and perfect candidates for my watchlist.
But this is only 10% of the index. The remaining 90% failed my stock analysis method. That seems like a lot to me, for a stock list curated by billionaires.
The average yield of these five stocks is 4.63%. Not bad, but I expected a little more from an index that calls itself the iBillionaire High Dividend Index. What's going on with these billionaires?
I mean, I bought Shell two weeks ago, with a yield on cost of 6.22%. I also averaged down on Billiton last month, which is now yielding a comfortable 5.11%. How come I'm doing better than the billionaires?
Here are three theories on why the iBillionaire index doesn't seem like a very good fishing pond for dividend growth investors:
Theory 1: the puck has moved
A famous ice skating quote says:
Don't skate to where the puck is, skate to where it will be
In this case we are seeing the buying decisions the billionaires have made in the past. In the meantime the prices have gone up, the yields have dropped, and what was probably a very good investment decision several months ago now appears mediocre at best.
What we would like to see is the investment decisions made by the billionaires right now, but the index is always skating behind the facts and can't show us that info.
Theory 2: we're looking at more than one portfolio
The index consists of stocks bought by billionaires. But each billionaire will have a different investment strategy, and the index shows us a mishmash of stocks from everyone.
One portfolio might go all-in on REITs, another plays it safe with blue chips, another goes into energy stocks. But all we get to see is everything thrown together into one index.
The individual portfolios of the billionaires probably make a lot of sense, but the index shows us 50 top stocks from everybody -- a useless average.
Theory 3: billionaires are not interested in growing wealth
I have been looking at the index with a very specific lens: that of a dividend growth investor with a buy and hold strategy. I'm looking for stable companies with high yield, high DPS and EPS growth, low DPR, and low P/E and day price. These companies give me a solid and relatively risk-free high dividend income.
But billionaires are already swimming in money. Maybe they don't care about wealth generation anymore? Their portfolios could be specialized financial constructs for shielding income from tax, making business losses disappear, "parking" money for a couple of years, etc.
We naturally assume that billionaires are always focused on making more money. But maybe the index is showing us stocks that are not very good at generating wealth, because the portfolios are not being used for this purpose?
In conclusion I found five stocks in the index that might be good candidates for a dividend growth investment strategy: T, COP, PM, WYNN and WMB.
The remaining 90% of the fish in this pond seem either dead or unhealthy to me, and I would reject them for my own stock portfolio.
So what were those billionaires thinking? If you have any good theories, please leave them in the comments!
If you want to play around with my Google spreadsheet, it's here:
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.