Wednesday, November 2, 2011

Covestor Net Payout Yields Model Completes First Year

Our Net Payout Yields model on Covestor began last year on November 2nd. It wasn't the greatest of starts as the market soared before the model was fully invested placing it behind the SP500 benchmark by 2.5% as of Nov 6th.

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Considering this model invests in high paying net payout yields (NPYs) and moves as a normal dividend paying fund would, recapturing a 2.5% deficeit was a very daunting task.

Ultimately though, the model has performed as expected. Even beating expectations if excluding the first week.

The model was up 6.44% for the year compared to the 2.07% for the SP500 (since inception data in the table below). Even better, YTD the model is up 3.73% versus the 3.13% decline of the SP500. That's a nearly 700 basis point outperformance on a very conservative (Covestor risk score 1) model.

Clearly once fully invested,  the model has done exceptionally. Constantly outperforming in weak months while keeping pace with gains in stronger periods.

For anybody not yet familiar with this model, NPYs are the combination of dividends and net stock repurchases. The model really gains an advantage these days as most investors ignore net stock buybacks and concentrates only on dividend yields. Since most of the stocks in this model have higher yielding buybacks, the market is typically missing the best yielding options.

Companies can repurchase nearly 20% of their outstanding float within 12 months and the market will hardly notice. Pay a decent 3% dividend and everybody goes bonkers. Would you rather have a 20% return of capital or only 3%?

Better yet, most companies in the model pay at least a 2-3% dividend while buying back 7-10% of the outstanding stock in any given year. So basically investors get above normal SP500 yields with the added bonus of a company trading far below its cash on hand and cash flow generating capabilities.

Table from Covestor model (for whatever reason didn't copy as a table. Click on the Covestor graph below and it'll take you to the model with an easier reading format)

Inception Nov 02, 2010    Manager*     S&P 500    Avg Sub
Month to date (%)    -2.34    -2.79    -2.13
1 month (%)    9.41    10.77    8.02
3 month (%)    0.43    -3.02    -0.41
Annualized since inception (%)    6.45    2.08    n/a
Since inception (%)    6.44    2.07    n/a
Sharpe (annualized)    0.32    0.09    n/a

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