Chowder Rule

[Be Here Now]

(07-04-2014, 10:19 AM)rnsmth Wrote: I'd be interested in knowing how ya'll define HYLG.

There are also some HYHG stocks available, like OHI, for example, unless you consider 5.5% to be lower than high yield.

By my definition, HY stocks yield greater than 8%. MY stocks yield from 4% to 8%. OHI is a MYHG stock.

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(07-03-2014, 11:17 PM)Ok Red Wrote: Thanks for the primer, Be Here Now! That is excellent!

In my transition from LYHG to HYLG I had stumbled upon Upstream and Midstream MLPs along with BDCs. Don't know a thing about the ETNs but now I have homework. mREITs still scare me.

The big challenge is in the portfolio construct. Obviously, this is a pretty limited group of securities, and so it would be nice to figure out a way to smooth out the returns. For instance, I have been restructuring my port and am a bit heavy in REITs and BDCs right now. Today was a pretty solid day for all the 'normal' indices, but my port was in the red because REITs were punished for some reason.

I don't have a solution, but I'm thinking that for now - in my transitory phase, with 5-10 years to retirement - that I will keep some high quality LYHG equities while I increase my HYLG positions. And if I pick right, some of those LYHG positions will get me my desired 10% YOC over that time period, so I can simply keep them in the port!

It will be interesting for sure....

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And here is an interesting SA article on just this subject....

http://seekingalpha.com/article/2298795-...-investing

Hmmmm....

If you have as many as five years to retirement, there is no need that I can see to do more than dabble in HY, just enough to get experience with the various categories without putting a significant amount at risk. Maybe 5% of your total portfolio spread across the various categories. There is nothing like first hand experience as a teacher. In the time until your retirement you will see at least one of your HY stocks go out of favor and drop in price.

I have 14% of my portfolio in equity REITS. These are in my MY category. Some are HG - e.g. OHI, DLR, VTR, WPC. Others are LG - e.g. O. When the equity REIT category swooned last year, I was able get some real bargains, and none of them froze or cut their dividend. I currently use most of my HY dividends to fund purchases of either equity REITs or the consumer stocks that I want to be holding into my old age, such as GIS, PG, MCD, MO.

My posts are getting disjointed. In hopes of clarifying any confusion, here are my categories (I copied this from my Seeking Alpha profile):

> HY categories (yield > 8%)

* 2x leveraged ETNs with monthly reset from UBS: BDCL, CEFL, DVHL, MORL, MLPL
* mortgage REITs
* BDCs: e.g. NMFC
* Upstream MLPs (however, as the bear raid on LINE/LNCO becomes a distant memory, some of these are now MY)

> MY categories (yield >=4%, <8%)

* 2x leveraged ETNs with monthly reset from UBS: DVYL, SDYL
* Unleveraged ETNs: BDCS, DVHI
* BDCs: e.g. HTGC
* Tobacco
* equity REITs
* midstream MLPs

[rnsmth]

I think I would tie my definition to the average yield of the S&P 500. Anything with a yield > double that I would consider high yield. That would include many eREITS, some utilities (like NGG and SO), KMI , most tobacco companies and telecoms - basically anything yielding over about 4%. I own quite of few of those.

I also own a lot in the 2.8-3.5% range.

Lower than that I own WAG and AAPL - though WAG was at 3% when I bought it and YOC is now at 3.65%. That brings up another question - current yield or yield on invested funds (YOC). My OHI is close to 10% YOC.

All of my companies grow their dividends. I will not hold a company for long that misses a dividend increase, or (if not a utility) increases at less than 5% a year. O gets a pass for another year due to the 19% increase it gave when it acquired ARCT, giving it a five year dividend CAGR of over 5% and a 3 year of over 8% - which of course brings up another question - what time period do you use to figure the dividend growth rate

[Be Here Now]

(07-04-2014, 02:26 PM)rnsmth Wrote: - which of course brings up another question - what time period do you use to figure the dividend growth rate

I use dividend growth rates provided by Morningstar. If anything I own does not yet have a 3 year or 5 year DGR according to M* then my numbers for those time periods are necessarily approximate so I don't bother. All have a 1 year growth rate so that is all I calculate for now. Those newer than 3 years include HTA, STAG, QRE, TCPC, NMFC, KMI, BDCL, MLPL, MORL, LNCO.

The weighted average 1 year dividend growth rate for my entire portfolio is 5.95%. The portfolio current yield is 6.84%, which gives a portfolio chowder number for 1 year of 12.79.

[Ok Red]

I'm using FAST graphs for most of my analysis, and in that format I use 10 years with dividends reinvested for my research. I'm not sure why, but that gives an 8 year DGR, which is right in my retirement sweet spot.

This works well with older companies, and was VERY illuminating. I was able to quickly eliminate some positions based on my desire for approximately 10% YOC after 8 years have elapsed. It was amazing to see how DGRs combined with initial yield can make a huge difference. For instance, AFL didn't even come close, and so I eliminated that position with a very small gain. But UNP, which has a very low dividend yield, but a huge DGR, made the cut.

I was blown away by the YOC on some of the BDCs and REITs after 8 years. For instance, O has an 8 year DGR of 6%, but when you start at 5% Yield it's easy to get to 10% YOC after just a few years. And when you start looking at BDCs it's even more positive.

For equities that do not have long histories, it's a bit more problematic. But in some cases, you can get an idea of the DGR in other ways. For instance, I have LNCO in my portfolio. It basically has zero history. But, if you look at the 'parent' MLP (LINE), the 8 year DGR is 8%. Combine that with the current yield on LNCO - 9% - and it certainly appears that my goal of 10% YOC is achievable.

It's been really eye opening. A year ago I wouldn't have touched these equities. Now, I'm looking at them in an entirely different light.

[AlanC]

It might be helpful to point out that the Chowder rule is a quite straightforward approximation to your discount rate. Use the constant growth dividend discount model. Solve for the discount rate, r, drop the small second order term, and you will find that your rate of return is approximately the current yield plus the growth rate. It's a quick back of the envelope approximation that I've used for years and I'm somewhat surprised that it's presented as some mysterious thing that Chowder invented. The issue, of course, is the growth rate. I think Chowder uses the past 5 year dividend growth rate but I tend to be more conservative, particularly if the rate has been decelerating.

[EricL]

Had an article published this morning where I further share my thoughts on the Chowder Rule.

The Downfall Of Using The Chowder Rule As An Investment Guideline

In short, I think it is a good tool for the toolbox that can help screen and get a snapshot for past performance, but make sure you don't rely on it for projections going forward.

[Dividend Watcher]

Good article, Eric. Read it with breakfast and you bring out some salient points.

Those cuts or outsized increases sure can muck up the DGR calculations.

[EricL]

(10-30-2015, 10:12 AM)Dividend Watcher Wrote: Good article, Eric. Read it with breakfast and you bring out some salient points.

Those cuts or outsized increases sure can muck up the DGR calculations.

Thanks, glad to hear it didn't ruin your breakfast!