The current dividend yield of the S&P 500 is 1.91%. It has stayed around the 2% mark for many years. Despite corporate profits soaring and reaching record-high levels most U.S. companies have not shared the higher earnings with their shareholders in  the form of higher dividend payouts.

The chart below shows the long-term declining trend of dividend payout ratio in the U.S.:

Click to enlarge

Source: Going Global Can Pay Dividends, PIMCO, December 2013

The takeaway here is that investors should not assume that higher profits will automatically lead to higher dividend payouts. This is especially true with U.S. firms. Hence investors should plan investment strategies accordingly. Some of the reasons for the low dividend payout ratios include: cultural change in the past few decades when stock prices soared and investors ignored dividends, many corporate management having crazy dreams of growing big by acquisitions, ability to “play” with companies’ retained earnings to manipulate stock prices via share buybacks, powerless mom&pop retail investors, docile big investors such as mutual funds and others, tax policies, etc. All these have contributed to this sad state of affairs of the U.S. corporate world. This situation is unlikely to change in the foreseeable future.

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)

Dislosure: No Postions

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The S&P 500 has more than doubled from the low reached during the global financial crisis. However some investors’ portfolios may still not have recovered fully because some individual stocks they own may still be down from the highs reached before the crisis. Hence cutting down losses on an investment is important. Waiting for a stock that has fallen hard to recover may not be always be the wise strategy especially if the stock shows no signs of uptrend even after many years. So in such cases it is better to take the losses and move on. For example, lets consider a hypothetical $10 stock that falls 90% . In order for an investor to recoup their original investment, the stock has to rise to $1 to $10 (or) to put it in another way it has to rise by 900% which is huge. This stock may take many years to get back to even. So the greater the loss the longer it takes to recover. This simple concept is very important to understand for ordinary investors. The following chart shows this concept figuratively:

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Source: Source:  Managing risk factors to build a better portfolio, Deutsche Asset & Wealth Management

Investing in foreign stocks involves many risks one of which is currency risk. While most currencies of developed countries remain stable  in relation to the US dollar there is still the risk that currency exchange movements can reduce returns earned from equities. Unlike emerging or frontier markets investors in developed countries need not worry about dramatic devaluation almost overnight or other extreme scenarios.

Lets review the impact of currency risks using the MSCI EAFE Index which measures the performance of developed equities outside of the U.S. and Canada. The iShares MSCI EAFE Index (EFA) ETF tracks the performance of this index and has net assets of over $54.0 billion. It is one of the largest ETFs out there in terms of assets as it provides a simply way to access developed markets outside of U.S. and Canada.Investors in this ETF and other funds that track the index will be exposed to many currencies such as the Swedish Krona, Japanese Yen,  Euro, Australian dollar, etc. For the 22 countries in the index investors will be exposed to 12 different currencies risks as shown in the graphic below:

Click to enlarge

Currency exchange movements affect the total return on an investment in foreign equities. In some years this impact can be significant when compare to equity returns. The following chart shows the contribution of currency effects to the MSCI EAFE Index by year from 1983 to 2013:

Source:  Managing risk factors to build a better portfolio, Deutsche Asset & Wealth Management

Related ETFs:

• Vanguard MSCI EAFE ETF (VEA)
• iShares MSCI EAFE Index (EFA)

Disclosure: No Positions

Test:

The History of the Atomic Bomb Project

13:35 29/08/2014 The first Soviet nuclear warhead was tested on August 29, 1949.>>

Other news of the day