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Paid To Wait? 2.5 Years' Dividends Wiped Out In 30 Days
Much has been made of the 'terrible-taper' losses that bondholders face (and have supposedly suffered in May) as the reason for the great rotation myth to rise phoenix-like from the flames of all-time-low yields. Talking-head after talking-head appears to make the same sheep-like thesis of buying dividend-paying stocks - being "paid-to-wait", why earn low Treasury yields when stocks offer more? Well the answer, though obscured from view to most, came in May. As we have noted over and over again (most recently here and here), the difference between bond (yields) and equity (dividends) are risk, drawdown, and uncertainty. It should be obvious - but with such a strong anchoring bias for stocks, sadly it is not. By way of example, the 4% dividend-paying Dow Jones Utility Index fell over 10% in May (losing 2.5 years worth of dividends) while the 2.3% yielding 10Y Treasury fell 2.5% in price. As we noted before, there is a reason boomers prefer bonds.
So - it would appear that dividend-paying equities are nothing but a high-beta play on rates - if you seek safe yield, high-beta capital loss does not seem like the appropriate strategy... though of course - blinded by the last few months, managers can only see the upside to stocks... being paid to wait (to lose more capital possibly) seems wrong-headed when put in context of return and drawdown potential. But none of that matters...
Pile up on stocks with dividends (from a week ago...)
Cramer -
"most people don't realize the importance of dividends. They think they're boring, for senior citizens, retirees only.
...
all the reasons that make dividend stocks worth owning become even more compelling in a down market.
That's when they really, really give you that cushion...
because as their share prices go lower, their yields go higher - making them more attractive to other investors who don't own them yet and giving you a better return for just owning the darn things.
You can buy stocks with bountiful dividends safely on the way down. I can't emphasize enough how important that fact is in a horrible market."
Somewhat stunned by this advice:
1) doesn't seem like the cushion was so great (doubling the loss of the market)
2) as share prices drop - for economic reasons? - so the firm is likely to cut the dividend!!
3) high dividend-paying stocks are 'high' for a reason in general (just as high-yield credit is high for a reason)
4) simply put, a dividend is not sacrasanct; a bond coupon is.
Also - do not forget that balanced funds, major pension managers, and any relatively conservative fund will have a weighting in their holdings between bonds and stocks and when a month like May comes along, the 'bond portion' will have become more under-weighted and actually, to rebalance to the mandated allocations, the rotation is from equities (which outperformed) to bonds...
So which one would you rather own here?
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That is why you must buy and hold -- forever. Duh.
Marc Faber sees the Fed's QE to infinity program priced in to the stock market and huge trouble ahead:
http://www.ftense.com/2013/06/marc-faber-sees-current-qe-program.html
Maria B to Faber in a recent CNBC interview: "I have gold on my neck, so I own gold." He laughed knowingly.
You don't get to Maria's "position" w/o wearing a few "pearly necklaces"
What position is she in now?
doggy
on her knees
Who still watches CNBS?
"Maria B to Faber in a recent CNBC interview: "I have gold on my neck, so I own gold." He laughed knowingly."
Marc Faber Tells Maria Bartiromo on CNBC's Closing Bell 'You Should Buy some gold"
http://www.youtube.com/watch?feature=player_embedded&v=ZZ0AariGGMk
The definition of risk is: Losing an entire years of dividends & capital appreciation in just one day.
Got it now?
I'd rather own neither.
Yea, because waiting until after you are dead sort of takes the fun out of earning capital gains in stocks.
Meanwhile, I expect it won’t be long before most of the advertisements on Cramer’s Mad Money Show are for either Alzheimer’s treatments or toys. That’s because most of his audience is now either over the age of eighty-five or under the age of six, all of whom watch primarily for the entertainment value of him acting sooo silly.
Which leads us once more to that lingering question about financial advice in the media: “Who gives better guidance, Jim Cramer or Cosmo Kramer?”
I do like Cosmo's standup act.
People are idiots.
How many of these dividends are beating inflation after tax ?
Im not even mad
And I recall in 2009 some blue chips cut their dividends sharply. That never gets mentioned by the talking dildos on CNBC.
S&P 500 stocks paid a dividend of $30.85 in January 2009. A year later this dropped to $23.87 in January 2010.
http://www.multpl.com/s-p-500-dividend/table
This table also shows the dividend paid of $23.04 in January 1999 dropped and did not exceed this amount until January 2005, 6 years later.
Good job Bearded Clam, you sucked in mom and poor savers at the...top
The morons running the companies are taking on debt to buy back shares (at the worst price of course) allowing them to massage earnings and pay dividends. Soon they will be issuing shares (at the worst price) to stay alive.
One of the biggest scams in the world is executives being paid in shares (instead of wages like everyone else)...its counterfeiting in a sense...instead of wages coming out of profit, it comes from diluting original/older shareholders.
As soon as they vest, they dump for the green, which has a natural Fed bid under it in a QE world.
I may be a capitalist at heart but I'm not blind to ALL the thievery.
I agree. I'm all for building honest wealth. Not for being paid to destroy a company.
You forgot to mention them crowing about stock buy backs, which at best counter the dilution, at a higher cost to the company (and shareholders) than just handing the executives the net cash of the option value.
It doesn't help that the taxation structure incentivises this behavior by making cash pay more expensive to both the company and employee.
Anybody wanna talk me out of buying a Jan14 JNK straddle? The option prices are crazy cheap because imp. vol is still so low.
What's the worst that could happen?
Have fun
they are but if enough people do that and the Fed knows this they'll flatten the markets on purpose to cause the most losses.
On the other hand if you do something like slv call to jan15 and spy call maybe you could get a better rise in the same time frame. Depends how you prefer to quantify the benefit: the bigger gains or the lower cost in. I do prefer, honestly to use the cost basis as the real judgement of risk. I use no margin so what's gone is the limit, nothing more can be taken.
Looking at this chart http://scharts.co/ZNke2W , I would not reasonably expect SPY to exceed 180 (my chart, add grain of salt, http://flic.kr/p/enJ7Cs ), and that corresponds with JNK hitting 44. No promises but that's what the trends look like together. Sorry I have no time for a scatterplot but the log-scale overlays (LHS = JNK, RHS = SPY) should be enough.
Now if SPY should drop to say, 145, I'd expect to see JNK hit around 37.50 at the same time. The Jan14 puts are not priced quite so cheaply as the calls that I can see. That being the case I think the put-side of the JNK straddle would at best break-even. that means when you add in the cost of the Call you're at a loss. Perhaps I'm wrong and the market slides more but ask yourself:
would you expect, by Jan 2014, that SPY would be under 130 so JNK would be under 36, maybe tap 35?
I'm not. I had SPY puts for 150 and 130 in regardless but I was willing to take the loss if it was to be so, put them in a while back so obviously you can see that isn't working (and they expire this month).
If on the other hand we have a repeat of this , http://scharts.co/ZNlaEE , where in 2011 the SPY and JNK are mostly flat then drop, yet silver and SLV take off a fair bit, the upside for SLV looks good AND correlated to the downside of JNK or SPY.
Hence my reasoning that provided SLV and SPY are cheap enough you could pair them.
I am however swayed by the ultra-cheap pricing I see on the JNK calls.
How's this sound instead of JNK-straddle but intended for the same effective outcome: 1 jnk call Jan14 and one SLV call Jan14, given they are also quite cheap: say, estimation that SLV could hit 40, perhaps even 35?
If one proposes SLV could hit 35 or JNK could hit 44, I see SLV jan14 for strike 28 looking priced just like JNK strike 40.74, both around ask=0.42 to 0.45
So if you see SLV hit say 29 or 30 (fees?) you're good there, perhaps JNK,SPY,QQQ,DIA etc are all down on that case but you're break-even, or say slv goes down but QE4eva pushes SPY up, JNK up and JNK hits 42 (say, SPY at 172?), you're break-even there.
Again my reasoning here is that those JNK puts are simply not as cheap yet the SLV calls are. Who knows, maybe in some crazy QE4eva moment JNK and SLV go up together. Yes, they could go down together but with a total hurt of say 0.45+0.45+fees is that risk worth it, unmargined?
I would be very tempted. You may not like how I did my math but now I've thought about it I'm going to put a little to-do note so I reconsider it and if I still like it I think I'll do it. I like to give myself some time to consider once I propose so many if's no matter how cheap it looks at the outset, before I actually go ahead.
Thank you for such a considered reply. I agree with you that JNK puts are not nearly tasty as the calls. However, I have trouble with the idea that SLV is an effective replacement only because I do not think SLV etf will track any future up moves in the physical metal. I can't imagine it will do anything except go to 0 when SHTF, even while the real stuff is shooting to the moon. Do you disagree?
I do not disagree hence my tentative time for considering such an action :D
The future is simply unclear on this. The paper game WILL end badly but then I consider: before or after Jan 2014?
If it's after then there's some faitbux to be scooped. Otherwise it's bye-bye hard-earned work-hours represented as the fiat formerly known as dollars. I could equally go down the other rabbit-hole to question if JNK will lose index-correlation due to changes in credit, rehypothecation, yields to junk bonds or issuance of junk bonds or a re-jiggering of how the ETF calculates its own underlying price therefore what the options will themselves do. It's a real briar-patch.
In trying to find another suitably priced replacement I took a look at VXX calls and at FAZ calls and in those cases also the prices are not so hot. Just keeps pushing break-evens out to where I feel maximum boundaries are and that's not an ideal situation into which to use a strangle. I'd like to have some confidence there's room to move after hitting the break-evens.
If you're reaching for yield when rates are going up, you're gonna get hammered, no matter where you are. I ran the numbers on the charts above: -10% for div stocks, -4% for 10 year Treasuries. Given a 4% yield on the div stocks and 2% on the Treasuries. The break-even point is roughly a similar timeframe on the divs making up the capital losses.
Who knows, it's getting late and I'm losing focus. Maybe think about it again tomorrow.
Wait until rates rise higher.....stocks (and house prices) will bite the dust.
Everyone is getting screwed one way or the other by the owners.
If you the author read his own charts...
The 12-month return on the utilities is much better than the same period in 10-year treasuries.
The author drew his red lines for 11-months to ignore the early rsie in stocks and the decline in bonds. Very shoddy and intentionally misleading information.
"Gold and silver are money. Everything else is debt"---JPMorgan I think I'll park on my silver bullion and wait for the paper chase to zero out. Long term provisions are high on my list also.
In 1983, Dad left Mom 300 sh of CIN that she put in dividend reinvestment.
In 2008 that had become 2500 sh of DUK and 1250 sh of SE.
People will always want electricity and gas.
and yet with changing technologies like the Bloombox one can get just the gas and PRODUCE the electricity from it cheaper than burning with no long-distance transmission losses. And no electrical grid is required for the house/shack/trailer / whatever.
This is why I've always said a dividend is a bribe to hold a losing stock.
You should never chase yield or seek dividend INCOME. You can get cheaper tax rates, 0 in Canada for TFSA, writing covered calls from ANY shares just as long as you pick one that is affordable (shares) and volatile enough.
Those ignoring non-dividend etf's or stocks seeking "income" are fools. You'll either lose it all or you'll gain much more by selling at a peak or writing covered calls into slide-downs.
Idiots. What were they thinking.
If only the markets went back to boring old dividends instead of "trading".
I had bank of America at 44-45 and 5% yield, you know the end of that story. I just gave up on France Telecom though the dividend was huge and paid every year the stock kept going down. Finally it was clear the new leader in France was as stupid as ours and i sold for a big loss wiping out all those dividends that i paid taxes on. I can claim capital losses , big deal.
Just because they provide a dividend doesn't make it a good idea to buy high. Buy low for dividend, capital (ponzi) gains are gravy.
These dividend preachers are the same people who told us back in 2008 that Citicorp had paid a dividend for over 100 years and would never cut it back. These people don't care what they say or what the outcome is as long as it persuedes you to do a trade today. That's all they're about. They're salesmen, nothing more.