Billy and Akaisha take in the view from their hostel in Zacatecas, Mexico
By Akaisha Kaderli
Special to the Financial Independence Hub
We understand that not everyone likes to travel. No doubt it can be challenging, but there are significant benefits if you choose to enliven your routine with a little excursion.
Traveling makes you smarter
From the beginning of choosing a location, packing your suitcases and figuring out the logistics of who will water your plants or sit with your pet, traveling takes you out of your routine. Anything new and different like this that engages your brain causes new neurological pathways to grow.
Learning a new language, taking a cooking or painting class while on your trip and meeting new people all place you in unique situations, and your brain strengthens.
Traveling is healthy for you!
Traveling makes you strong
For some people, all these new patterns outside the everyday routine can be perceived as a hassle. Yes, and that’s good! We learn flexibility, creativity and self-reliance. Those are great attributes to have and they are useful to daily living.
Flexibility of mind, finding new solutions to new challenges and our sense of who we are and how we cope all get stronger.
Traveling helps you become an interesting story teller
When things don’t go according to plan, those seemingly challenging circumstances make for the best stories!
If everything goes perfectly on your trip or vacation, and people ask “How did you enjoy yourselves? How was your trip?” then all you can say is “Great!” Continue Reading…
When your starting point is a 1.4% dividend yield,1as is the case with the S&P 500 Growth Index, the group of stocks that make up the basket need to have long-term dividend growth that performs like Seabiscuit, the super horse. No tripping out of the gate or getting bumped in the stretch.
Latching on to the concepts in my white paper, Dividend Growth’s Drivers: Picking Apart Quality, we present figure 1, which shows the interrelationship between the percentage of earnings that are retained (as opposed to paid out as dividends) and the return on equity (ROE), which is net income as a percentage of shareholders’ equity.
This relationship is thedriver of dividend growth, and as the years go on, concepts like figure 1 have become core tenets of second-decade WisdomTree.
Figure 1: The Critical Equation
Figure 2 uses the critical equation to calculate long-term dividend growth at prevailing profitability levels.
As it stands, the S&P 500 Growth Index’s 23.2% ROE implies long-term dividend growth of 16.8%. That could happen, yes. Anything canhappen. But here’s a better idea: expect downward revisions instead.
Figure 2: Implied Dividend Growth Estimate
After all, look at the historic record in figure 3. There isn’t a single five-year period that had growth stocks’ earnings running forward at a 16.8% clip, not even in the roaring 1990s. In contrast, value stocks’ implied dividend growth is on planet Earth.
Does anything jump out in figure 3? Look at the dividend growth experience of growth and value from 2010 to 2015 and from 2015 to the present.
Those growth stocks start to look less like Seabiscuit and more like also-rans if recent years are any indication. Granted, value indexes are dominated by banks, and the period from 2010 to 2018 was characterized by the benefit of their reinstated dividends. Nevertheless, if growth stocks were only able to increase their dividends at a high single-digit rate during this period of irrepressible economic expansion, what happens if recession hits? Let someone else pay 22 times earnings to find out.
Slow and Boring? Better than Growing Out of 1%
The S&P 500 Value Index has a dividend yield that is about double that of the S&P 500 Growth Index (2.7% vs. 1.4%). This kind of gap makes it nearly impossible for the latter index to ever grow out of its valuation.
If U.S. growth could not differentiate its … ahem … dividend growth relative to value from 2010 to 2018, what makes anyone think the next several years will be different? For growth stock skeptics, the WisdomTree Fund that hits value is the WisdomTree U.S. High Dividend Index ETF (HID/HID.B).
It retains 38% of its earnings, pays out the other 62% as dividends and has an ROE of 13.5%. That ROE is satisfactory enough. Using the “critical equation,” it has long-term implied dividend growth of 5.1%, which is less than the levels of the S&P 500 Growth Index. But when the starting point is a 1.4% forward dividend yield, companies that populate indexes like the S&P 500 Growth Index would have to run up their dividends at a 15% or 20% annual pace for a long time before the math even thinks about shifting in their favour.2
For investors who do not want to commit to value because they keep getting burned, a fund like the WisdomTree U.S. Quality Dividend Growth Index ETF (DGR/DGR.B), which tracks the WisdomTree U.S. Quality Dividend Growth Index CAD, seeks to target companies that rank well on our ROE x earnings retention framework.
Critically, its dividend weighting methodology also checks valuations at the door. That gives it a starting dividend yield of 2.7%, about 130 bps more than the S&P 500 Growth Index. It also has an explicit screen for ROE and return on assets (ROA). Its 15.8x forward earnings multiple is 3.3 multiple points below the S&P 500 Growth Index.
Over the next 5 or 10 years, we’ll take DGR.B or HID.B over S&P 500 Growth Index. This is where the rubber meets the road, when the cap-weighted U.S. large-cap growth indexes start to be priced like they’re Seabiscuit, when in reality they’re an underlay.
1Sources: WisdomTree, Bloomberg, as of 11/15/18.
2Sources: WisdomTree, Bloomberg. Unless otherwise stated, all data in this blog as of 11/15/18.
Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.
This is Part 1 of a two-part blog post series on the market’s current expectations for U.S. growth and value stocks.
Figure 1: S&P 500 Growth Total Return Index Relative to S&P 500 Value Index
By Jeff Weniger, CFA WisdomTree Investments
Special to the Financial Independence Hub
At the risk of making a 34-year-old pop culture reference, growth stock fundamentals beg the question first posed by Wendy’s: “Where’s the beef?”
As was the case in 1984, when war was declared on McDonald’s and Burger King, there appears to be a lot of “bun” in U.S. growth stocks but not a lot of “meat.”
Face it: the magnitude and duration of the multi-year clobbering of value strategies by growth stocks in the current cycle is second only to the legendary 1994–2000 “New Economy” years. That epic mania for growth as an investing style began about a year before the 1995 Netscape IPO,1 at which point the tech boom began to rage. That furious less-than-six-year rally in the second half of the 1990s took the S&P 500 Growth Index 400.7% higher (31.2% annualized), trouncing the S&P 500 Value Index’s gain of only 198% (20.2% per year).2 When the rug was ripped out in the 2000–2002 crash, value stocks picked up thousands of basis points of outperformance.
Today, the cumulative gap between the two indexes, which has been stretching out since 2006, is once again in triple digits. From July 31, 2006 to October 31, 2018 — more than 12 years — the S&P 500 Growth Index returned 296% (or 11.9% annually), about doubling the 152% appreciation of the S&P 500 Value Index (7.8% annually).
That’s 144 percentage points.
Before we begin searching for The Beef, consider the striking picture painted by figure 1 (at the top of this blog). As a reminder, the NASDAQ, about as “growthy” an index as can be constructed, started its crash in March 2000. The S&P 500 Index topped out later that summer. When they did, the rotation to value stocks was a flood.
Piggybacking on WisdomTree’s Prior Dividend Growth Work
We received positive feedback on our white paper, Dividend Growth’s Drivers: Picking Apart Quality, and this analysis builds on many of those concepts for the growth/value debate. In that piece, we looked at our Quality Dividend Growth suite, diving into the interaction of return on equity (ROE) with earnings retention and dividend payout ratios to determine the long-term drivers of shareholder wealth. The interrelationship between profitability and dividend policy is critical, and the more research we do on it, the more these concepts are becoming core parts of second-decade WisdomTree.
Figure 2 shows profitability and growth metrics for the S&P 500 Growth, S&P 500 and S&P 500 Value Indexes.
Figure 2: S&P 500 Growth, Core and Value Metrics
The Critical Equation
Dividend Growth’s Drivers: Picking Apart Quality identified profitability (ROE) as the driver of dividend growth, presenting the critical equation recreated in figure 3.
Figure 3: The Critical Equation
Figure 4 uses the critical equation to calculate “long-term” dividend growth for the three indexes. We added quotation marks to “long-term” because, frankly, looking into the future involves a lot more art than science.
Figure 4: Implied Dividend Growth Estimate
Can the S&P 500 Growth Index achieve long-term dividend growth of 16.8%? And how long is long-term? No one knows, including us. But we can engage the numbers to get a feel for whether we want to pay nearly 22x forward earnings for growth stocks when value stocks are on offer for 15x earnings.
In Part 2 of the blog post, we consider the possibility of multi-year 17% growth in dividends, and whether it even makes sense. Spoiler alert: it doesn’t.
Stay tuned for our suggestions for growth investing: namely ideas like the WisdomTree U.S. Quality Dividend Growth Index ETF (DGR.B), which tracks the WisdomTree U.S. Quality Dividend Growth Index CAD, and the WisdomTree U.S. Quality Dividend Growth Variably Hedged Index ETF™ (DQD), which tracks the WisdomTree U.S. Quality Dividend Growth Index Variably CAD-Hedged. For investors that want more of a switch in the direction of value stocks, one of our better yielders in broad U.S. equities is the WisdomTree U.S. High Dividend Index CAD, tracked by the WisdomTree U.S. High Dividend Index ETF (HID.B). The quality dividend growth indexes yield 2.7%, while the high dividend index has a yield north of 4%, putting them handily above the dividend yield on offer for the S&P 500 Growth Index.3
1The famed 1995 Netscape IPO is widely regarded as one of the first newsworthy events of the dot.com boom. 2Sources: Bloomberg, WisdomTree, 04/29/1994–03/31/2000. Unless otherwise stated, all returns in this blog in CAD. 3Sources: WisdomTree, Bloomberg, as of 11/15/18.
Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.
No matter what stage of life you are in, it is important to know your financial health. This is not something you do just around income tax time but throughout the year. It’s good to check in at least monthly or, as we do, daily. The same as any successful business must know their income and liabilities, so should you.
Today there are plenty of free online tools that can help you, but we are old school and prefer to be able to check and edit our data anywhere in the world and at any time regardless of an internet connection. We have done this since we retired in 1991. Back then we used a paper notebook and pen, but today we created a spreadsheet using an Excel program that is on most computers sold today.
How it works
Throughout the day as we spend money we keep a mental note of the cost. Then, usually in the evening while winding down, we enter the data into our spreadsheet. We created categories such as housing, food, dining, transportation, donations, healthcare, and so on. Each of those entries then gets automatically added giving us a total for the day. That number is added to all of the previous entries and then divided by the day number in the year, 1 through 365, giving us a daily average.
Utilizing this system we can adjust the entries using local currencies, therefore knowing what we are spending in Mexican Pesos, Thai Baht, Vietnamese Dong, Guatemalan Quetzales or the money of any place where we are traveling. While this figure can easily be converted to dollars if we want, we prefer to think of our costs in the currency of our host country. This keeps our spending at the perspective of the natives instead of distorting it by thinking in Dollars.
This information is important
Once you know how much you are spending per day you can utilize this information to adjust spending accordingly if necessary. You are in control of your outflow at this point, and you can make changes in real time.
Net worth: What is it?
Another important tool for understanding your financial health is calculating your net worth. This number is derived by adding up all of your assets minus your liabilities. Do you own a house or rentals? Figure out what they are worth, then subtract out what you owe and this equates to the equity you have. It is important to use realistic numbers knowing that if you sold today, there would be fees and expenses involved as well as taxes to be paid. Do you have cars? Even though they are a depreciating asset, meaning they lose money over time, you still have some value there. How about retirement accounts? IRAs or RRSPs, 401(k)s or Defined Contribution pensions, regular banking and brokerage accounts, credit-card and student loan debt: all need to be factored into the equation.
This information is a powerful retirement tool
Now that you know your net worth and what you are spending per day, you can take further control of your future by figuring out what percentage of your net worth you are spending. Continue Reading…
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