Billytickets shares his study with the concepts of high dividend stocks and averaging down.
Two great concepts, high dividend stocks and averaging down, are at the basis of Billytickets latest theory. Buying stocks with high dividend yields that are large cap and solid and then averaging down was a winner. We would sell the position if the dividend yield went under 3% but that has not happened yet. Let's examine Dow Stocks since 2000.
Only 3 stocks fit our "parameters" of a 4.5% dividend yield and the companies’ capital expenditures can not exceed its earnings per share. Each position is averaged down 2 units (double the original investment) after a 15% drop in the calendar year.
Altria (MO, Financial) which was purchased in 2000 at $23.56 and averaged down at $20.02 and bought all the way until 2005. The average cost of 16 shares purchased was $37.46 and the holding period was 5.8125 Years. Last Friday's close the combined value of Altria (MO) and Kraft Foods (KFT, Financial) was $89.25.
JP Morgan was purchased in 2002 at $30.02 and averaged down to $25.68, $21.83, $18.56 and $15.77 and then bought again in 2003 at $26 and averaged down to $22.1. Despite the original purchase price of $30.02 our adjusted balance of 12 shares is $21.99, almost a 27% reduction from the first purchase price. J.P Morgan was $44.23 which is more than a double in the 4.75 years holding period. Without the average down the holding period would have been 5 years and return 43% which is nothing spectacular. Instead the JP Morgan return with the dividend yield included was about 20% compounded annually.
Merck was the last stock. It was identified in 2004 at an original price of $32.20. In 2004 an average down of $27.38 and in 2005 $30.40 and an average down of $25.84 and 2006 it was purchased at $32.52. Merck's closing price was $50.12 on last Friday and its 7 unit (share) purchase in the 3 year span was at $28.79 with a holding period of 2.28 years which was well over 25% compounded annually.
The total investment was $1064.77 and the total on Friday was $2305.60 which in a 3.914 year holding period gives us combined "appreciation" on all 3 stocks was over 21% annually, but when adding up the dividends and compounding them at an arbitrary figure of 10% (most value investors should "average" that) the dividends compounded added up to $407.12 which increases the return from 21% to almost 29% annually. The present dividend yield of the portfolio's purchase price is almost 8.5%. Having a nice portfolio of dividend payers serves 2 main purposes. 1) Don't have to sell off positions to pay bills as you reach retirement and 2) My dividends from Altria bought me personally substantial positions in BRK BUD and JNJ. I do not know if this works as well for small caps but I suspect the concept is the same. This portfolio is very balanced, very concentrated and is made up of large companies with strong balance sheets. Approaching 30% per year annually with very little "frictional" costs is every investors’ goal.
Two great concepts, high dividend stocks and averaging down, are at the basis of Billytickets latest theory. Buying stocks with high dividend yields that are large cap and solid and then averaging down was a winner. We would sell the position if the dividend yield went under 3% but that has not happened yet. Let's examine Dow Stocks since 2000.
Only 3 stocks fit our "parameters" of a 4.5% dividend yield and the companies’ capital expenditures can not exceed its earnings per share. Each position is averaged down 2 units (double the original investment) after a 15% drop in the calendar year.
Altria (MO, Financial) which was purchased in 2000 at $23.56 and averaged down at $20.02 and bought all the way until 2005. The average cost of 16 shares purchased was $37.46 and the holding period was 5.8125 Years. Last Friday's close the combined value of Altria (MO) and Kraft Foods (KFT, Financial) was $89.25.
JP Morgan was purchased in 2002 at $30.02 and averaged down to $25.68, $21.83, $18.56 and $15.77 and then bought again in 2003 at $26 and averaged down to $22.1. Despite the original purchase price of $30.02 our adjusted balance of 12 shares is $21.99, almost a 27% reduction from the first purchase price. J.P Morgan was $44.23 which is more than a double in the 4.75 years holding period. Without the average down the holding period would have been 5 years and return 43% which is nothing spectacular. Instead the JP Morgan return with the dividend yield included was about 20% compounded annually.
Merck was the last stock. It was identified in 2004 at an original price of $32.20. In 2004 an average down of $27.38 and in 2005 $30.40 and an average down of $25.84 and 2006 it was purchased at $32.52. Merck's closing price was $50.12 on last Friday and its 7 unit (share) purchase in the 3 year span was at $28.79 with a holding period of 2.28 years which was well over 25% compounded annually.
The total investment was $1064.77 and the total on Friday was $2305.60 which in a 3.914 year holding period gives us combined "appreciation" on all 3 stocks was over 21% annually, but when adding up the dividends and compounding them at an arbitrary figure of 10% (most value investors should "average" that) the dividends compounded added up to $407.12 which increases the return from 21% to almost 29% annually. The present dividend yield of the portfolio's purchase price is almost 8.5%. Having a nice portfolio of dividend payers serves 2 main purposes. 1) Don't have to sell off positions to pay bills as you reach retirement and 2) My dividends from Altria bought me personally substantial positions in BRK BUD and JNJ. I do not know if this works as well for small caps but I suspect the concept is the same. This portfolio is very balanced, very concentrated and is made up of large companies with strong balance sheets. Approaching 30% per year annually with very little "frictional" costs is every investors’ goal.
