S&P 500 Index Returns By Decade Since 1940

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Dividends account for a significant portion of the total returns of the S&P 500 over long periods. The table below shows the contribution of dividends to the total returns of the S&P 500 over the decades since 1940:

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SP500 Returns by Decade

Source: A Brave New World, Dec 2014, The Absolute Return Letter, Absolute Return Partners

It is surprising to note that during the 1940s and 70s dividends accounted for 75-80% of the total returns. These two decades were also characterized by slow economic growth. So it can be argued that during periods of slower GDP growth dividends play a much more important role in total returns.

During the 90s many U.S. firms slashed their dividend payouts as investors preferred share price growth than dividends. Also the bull market of that decade made dividends almost “meaningless” as stock prices were soaring on a consistent basis.Up until the 1970s, dividends contributed at least 45% to the total returns in each of the decade shown.

It would be interesting to see how much dividends end up contributing to total returns at the end of this decade.

Related ETFs:

  • iShares Dow Jones Select Dividend ETF (DVY)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard Dividend Appreciation ETF (VIG)
  • Vanguard High Dividend Yield ETF (VYM)

Disclosure: No Positions

Do Reverse Stock Splits Work?

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Reverse stock splits rarely work. When a company is in serious trouble a silly reverse stock split will not change its fortune. Fundamental changes including new management, growth and other things have to occur in order for a reverse stock split to be successful. In most cases this does not happen. Rather the same incompetent managers would be in control of the company hoping the reverse stock split would save the company, their jobs, stock options, etc.

National Bank of Greece S.A(NBG) is one such company. I have written about the bank’s reverse splits before here and here.Despite two reverse stock splits, NBG is trading at just $1.81 today. Another example is Puerto Rico-based Doral Financial Corporation (DRL). Doral got into a financial mess even before the global financial crisis. In August, 2007, as the stock price continued to decline the company initiated a 1 for 20 reverse stock split. The stock failed to stabilize and grow. So the bank implemented a second reverse split in the ratio of 1:20 again in July, 2013. Today a share of Doral goes for about $3.94. More recently the FBI visited its office in PR in connection with the fraud investigation.

The chart below shows the performance of NBG and Doral in the past five years:

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NBG vs DRL-5 Years

Source: Google Finance

Doral is down over 93% and NBG is off by an astonishing 96%.

The key point to remember is that reverse splits will not automatically cure a company’s ills. Hence investors have to be very cautious and take actions when a company initiates a reverse stock split.

Disclosure: No Positions

Chicago Sears Tower

Sears Tower, Chicago

Why Did The Canadian Stock Market Underperform The U.S. Market

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I came across an interesting article titled  Stampede to the International Market by Edward Friedman, Senior Research Analyst at McLean&Partners of Canada. In the article Mr.Friedman discussed the importance of diversification for Canadian investors. The following post is based on that article.

The S&P/TSX Composite Index has lagged the performance of the S&P 500 this year. While the S&P 500 is up by 12.6% as of Dec 22, the TSX Composite is up by only 7.1%. Canadian stocks have under-performed their American peers in the past few years.As the chart shows below, the TSX Composite diverged strongly from the S&P 500 since mid-2011. In the past five years, the S&P 500 is about 89% compared to just 22% for the TSX Composite.

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SP 500 vs TSX Returns-Best

Source: Google Finance

Why did Canadian stocks lag the performance of U.S. stocks?

The answer to the above question is due to the over-reliance of the Canadian economy on the energy sector. As the prices of crude oil and other commodities declined in the past few years Canadian firms got hit hard which in turn led to the crash in their share prices.

The TSX Composite is highly concentrated with just energy and financial sectors accounting for about 58% of the index. On the other hand, these two sectors contribute only about 25% to the S&P 500 with energy accounting for 8.4%. The composition of the S&P 500 index  is is much more diversified than the TSX.

SectorS&P/TSX Composite IndexS&P 500 Index
Consumer Discretionary6.4%12.0%
Consumer Staples3.4%9.9%
Energy21.6%8.4%
Financials36.7%16.3%
Health Care3.6%14.3%
Industrials8.7%10.4%
Information Technology2.1%20.0%
Materials10.4%3.2%
Telecom Services4.9%2.4%
Utilities2.2%3.1%
Total100.0%100.0%

Source: Standard&Poor’s

The following chart shows the concentration of the S&P/TSX Composite Index:

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Tsx index Weightings

Source: Why it’s time for investors to move out of Canada — and stay out, Dec 27, 2014, Financial Post

The above discussion shows how very high concentration of few sectors in a country’s economy will adversely impact the return of equities when those sectors suffer. In the Canadian context, the decline in crude oil prices is one major factor. Hence investors must take into account concentration risks and build their portfolios accordingly when selecting stocks for investment in other countries.

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • iShares MSCI Canada Index Fund (EWC)

Disclosure: No Positions

TEST:

Family Ownership: A Compelling Reason To Invest In Emerging Market Companies?

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In developed countries most publicly-listed companies are not controlled by families. In the U.S. less than one-third of the S&P 500 companies are family-owned businesses according to a study by McKinsey&Company. But in emerging markets many of the large public companies are owned by families. This is similar to the situation that existed in the U.S. in the 19th century when much of the economy was dominated by a handful of powerful families like those of the Carnegie, Morgan, Vanderbilit and Rockefeller families.

The U.S. equity market has performed extremely well this year also following a solid performance in 2013. Among the emerging markets, most of them have been poor performers this year with the exception of India and China which have posted double-digit returns. As a result of the strong returns of U.S. stocks two years in a row and poor returns of emerging markets, investors may be tempted to avoid emerging markets.However there are many reasons to invest in emerging stocks one of which is the family ownership of public companies. From an article by David L. Ruff, CFA of Forward Management, LLC:

Why should family ownership be a recurring investment theme? We see some examples of publicly traded family businesses in the U.S. — think of Walmart and News Corp.— and even more in Europe. The family-run model is most common in Asia, where research has found it to be “an important pillar of Asian economies.”1 According to a 2011 Credit Suisse study, family businesses account for 50% of all listed companies and 32% of market cap across 10 Asian countries. Moreover, listed family businesses outperformed local benchmarks in seven of those 10 countries between 2000 and 2010 with those in China, Malaysia, Singapore and South Korea showing the strongest performance.2

We’ve found that an ongoing family presence can contribute positively to a company’s dividend culture. Where families retain a controlling interest or have a significant minority stake, they generally want to keep paying themselves a dividend. Such companies seem to be more focused on long-term stewardship of the enterprise, more patient when investing in expansion projects and less inclined to boost short-term results through the use of leverage or accounting tricks. Family members are also more likely to object to questionable expenditures like over-the-top executive compensation or an ill-advised acquisition.

1 Credit Suisse Emerging Market Research Institute, Asian Family Businesses Report 2011, October 2011.
2 Credit Suisse Emerging Market Research Institute, Asian Family Businesses Report 2011, October 2011.

Source: Family-Owned Businesses: One More Reason Not to Neglect Emerging Markets,  Dec 17, 2014, David L. Ruff, CFA,Forward Management, LLC

The McKinsey report noted that the significance of family-owned businesses with revenues of over $1.0 billion to their national economies in emerging countries is projected to increase in the coming years.

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Family_owned Businesses in Emerging Markets

Family-owned companies have many advantages over non-family owned companies. From the report:

They can also work fast. As one executive at such a company told us: “All the world is trying to make managers think like owners. If we put in one of the owners to manage, we don’t need to solve this problem.” An owner–manager can move much more rapidly than an executive hired from outside. There’s no need to pass decisions up a chain of command or to put them in front of an uncooperative board, and many of the principal–agent challenges that confront non-family-controlled companies are neutralized. Family-owned businesses can therefore place big bets quickly, though of course there’s no guarantee that they will pay off. Still, manager–owners are largely relieved of the quarter-to-quarter, short-term benchmarks that can define—and distort—performance in Western public companies, so they’re freer to make the hard choices necessary to create long-term value.

Source: The family-business factor in emerging markets, Dec 2014, McKinsey Quarterly

While conventional wisdom holds that families that control public companies may not be shareholder-friendly, it is not always true as discussed above. One of the key takeaways from this post is that when investing in emerging markets investors have to dig deep into the ownership structure of companies and should not avoid public companies that are majority controlled by families. I have written in my earlier posts on how high state ownership in some emerging firms actually is a good thing for investors since they are more likely to payout a higher portion of their profits as dividends.Along the similar line, it is also not a bad idea to invest in family-owned firms in emerging countries.

Related ETFs:

  •  iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard Emerging Markets ETF (VWO)
  • iShares MSCI Malaysia ETF (EWM)

Disclosure: No Positions

Why Always Invest For The Long-Term

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When investing in stocks it is always a good strategy to invest for the long-term. Short-term investing is not investing but more must be more aptly called trading.Trading commissions and taxes eat away at any gains that can be made in short-term. Most of the retail investors are better off holding stocks for the long-term.

Trying to time the market is a fool’s game as nobody can predict what can happen from one day to the next. For example, during the month of October equity markets worldwide plunged suddenly for a variety of reasons. U.S. stocks fell by an astonishing 8% from September high to reach October lows.

The following chart shows the Intra-year Declines and Calendar Year Returns for the S&P 500:

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Invest For Long Term

Data Source:  Standard & Poor’s, Factset, J.P. Morgan

Source: Corrections are Normal, Market Intelligence – October 2014 Anil Tahiliani, Head of North American Equities, McLean & Partners

From the linked article:

As shown in Figure 1, the average decline is 15% in the last 35 years based on the U.S. stock market (S&P 500 Index). When we exclude the recessionary periods and the 1987 crash, the average decline is 10%. Using a longer time period, the average U.S. stock market correction since 1956 is 13% when excluding bear markets (corrections of 20% plus).

Thus this recent correction is in line with historical averages. Investors need to also keep in mind that the current stock market correction is the 19th correction since March 2009.

In 2013, the S&P 500 declined by 6% during the year but still ended the year with a solid return of 30%.Similar decline and rise occurred in most of the years shown as well.

Long-term investors can consider adding the following ten stocks from the S&P 500 index:

1.Company: Abbott Laboratories(ABT)
Current Dividend Yield: 2.10%
Sector: Pharmaceuticals

2.Company: Caterpillar Inc (CAT)
Current Dividend Yield: 2.99%
Sector: Machinery

3.Company: Mondelez International Inc (MDLZ)
Current Dividend Yield: 1.60%
Sector: Food Products

4.Company: General Dynamics Corp (GD)
Current Dividend Yield: 1.76%
Sector: Aerospace & Defense

5.Company: Emerson Electric Co (EMR)
Current Dividend Yield: 2.99%
Sector: Electrical Equipment

6.Company: Procter & Gamble Co (PG)
Current Dividend Yield: 2.76%
Sector: Household Products

7.Company: Fluor Corp (FLR)
Current Dividend Yield: 1.39%
Sector: Construction & Engineering

8.Company: T. Rowe Price Group Inc (TROW)
Current Dividend Yield: 2.01%
Sector: Investment Management

9.Company: Kimberly-Clark Corp (KMB)
Current Dividend Yield: 2.85%
Sector: Household Products

10.Company: Marathon Oil Corp (MRO)
Current Dividend Yield: 2.93%
Sector: Oil, Gas & Consumable Fuels

Note: Dividend yields noted above are as of Dec 23, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions