Friday, March 11, 2011

Total Yield of the SP500

On this blog I don't spend much time focusing on Net Payout Yields and the model developed to mimic this concept. By its very nature the model is very conservative and hassle free as it completely focuses on what companies do with their excess cash. Hence its typically not as exciting as discussing the investments in the more aggressive opportunistic models.

If a company pays out a large percentage of the market cap in dividends or stock buybacks, then the portfolio invests in that company. Just a few restrictions exist such as the company having a market cap in excess of $10B (at least for the Covestor model) and with manager discretion high debt companies will be excluded. In the future, I'll try to highlight the NPY stocks and better explain the concept.

Its a very attractive conservative investment option. To me, its a sleep well at night investment. The stocks in this portfolio are by nature large and financially strong. Then, due to the dividends and buybacks, they provide major downside risk as they pay higher dividends and buyback more stock the lower it goes.

World Beta does a good job explaining the NPY concept. Below is from his post highlighting why dividends are no longer providing investors with a complete picture regarding how companies return cash to shareholders. Amazingly its actually been 30 years since dividends have predictable but the market hasn't really caught on.

Check out all the links in his blog post, but this pic is very indicative of the change. Notice how buybacks bottomed shortly after the market lows in March '09 and have increased since. It appears to be more of a coincident indicator, but if you know which companies are buying the most stock and investor can clearly benefit.




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