You can stack the odds in your favor. At its root, buying above average yields means the “market” or index yields less. Your task is to root out the higher yields, a contrary stance, and pick the winners from there. Your work has just begun.
Because relying simply on the highest dividend yields is a fool’s errand. If the top dividend payers were always the top performers then investing would be easy. You and I know that’s false. What Dick Young has taught you, and tens of thousands of investors like you, is that a large part of investing involves art, not science.
In baseball, there’s been an over reliance on WAR—wins above replacement. It’s more of a construct borrowed from ESPN analyst and former Blue Jays executive Keith Law, who wrote a book called Smart Baseball, explains John Tomase at WEEI radio Boston:
The idea is that WAR combines a player’s various contributions – offense, defense, pitching, baserunning – and assigns them a number of wins relative to what a team could expect if an average Triple-A player started in his place. There are many different ways to arrive at this number – bWAR and fWAR differ in their lifetime assessment of Hall of Famer Nolan Ryan, for instance, by a whopping 22 wins – but the more detailed the data, the better a player can be evaluated.
I’m not a WAR denialist. I use it as part of my Hall of Fame evaluation, and I’ve referenced it in years when I’ve had MVP or Cy Young votes. It’s a useful tool. My problem is with WAR absolutists who vote based on differences that are statistically insignificant, or who ignore other means of evaluating a player. A 6.0-WAR player and an 8.0-WAR player might be the same; it’s not enough to stop there.
Take this year’s AL MVP race. Betts led the league in WAR, will win the award, and deserves it. Hard to argue with Trout or Ramirez, either, based on performance, though I’m certainly open to the idea of an MVP coming from a winning team, and not Trout’s sub-.500 Angels.
But there are other deserving candidates whose WAR won’t give them a sniff. Red Sox slugger J.D. Martinez is one of them. For five months, he flirted with the Triple Crown. Because he’s mostly a DH and no better than an average fielder when he does don a glove, he never had a chance, though his 5.9 fWAR is roughly in range of Ramirez.
Using stats like WAR and dividends helps you find values. But it’s only the beginning of a long season of research and analysis.
In the recent Richard C. Young & Co., Ltd. client letter, Matt Young explains the mistake many investors make when investing in dividend paying stocks. He writes:
Higher Dividend-Yields Not Always Better
The mistake many novice investors make when choosing dividend stocks is to focus on the highest-yielding companies. Yield is, of course, an important factor in dividend investing, but a high yield may indicate the dividend is not sustainable at current levels.
The last nine decades of stock market history show that, when you sort stocks into five groups based on yield, higher-yielding stocks outperform lower-yielding stocks. However, when you sort stocks into 10 groups based on yield to ferret out the highest yielders, you find that bucket ten, the highest-yielding 10% of stocks lags the performance of buckets eight and nine, the next two highest yielders.
Dividend Growth a Necessary Ingredient
Dividend growth is an important factor when selecting dividend stocks. At Richard C. Young & Co., Ltd. we craft global dividend portfolios focused on companies offering above-average dividend yields which also have records of making regular, annual dividend increases.
Read more here.