Sunday, September 22, 2013

International Dividends! Money Honey 10

Have you heard of the "Dogs of the DOW" strategy?

It involves buying the top 5/10 (the strategy varies) highest dividend yielders on the DJIA from the bottom 10 stocks with the lowest P/E ratios.

So, after stumbling upon this interesting strategy, I went to do some research on it. Most importantly, I wanted to see if the same rationale would work in other markets, not just the DJIA.

After some stumbling around and googling, I came across this fantastic research paper. It's the real life application and backtesting of this strategy, but with the SX5E. That's the Euro STOXX 50. I just learnt it myself too, don't worry haha.

Apparently, this has been replicated in the UK, Canada, Chile and Norway, though only Canada does seem to be substantial, while the rest does not prove this theory.

I am honestly intrigued by this strategy. Following some of the blogs on my blog roll and reading books, I can honestly say that I am quite sold that stable dividend returning stocks are generally better. There are lots of reasons why I think this, but I'll maybe write about it another time.

Well anyway, how can I put this strategy into context as a Singaporean investor? I think as you might know, I detest the US stock exchange. I think they are crazy, and I doubt I would actively want to invest there unless its at the bottom of a crash. Anyway, their witholding tax makes this dividend strategy a very unpleasant choice as well.

I mentioned the Standard Chartered online equities trading platform before. Well, here's the link anyway. Just check out the markets that they allow access to. (I've removed the US listed since they don't appeal to me). The mains perks of this is No minimum commission, No custodian fees and Low brokerage fees of just 0.25%. Damnit, I could build my own portfolio if I was free enough, haha.

Market Stock Exchange
Australia Australia Stock Exchange (ASX)
Japan Tokyo Stock Exchange (TSE)
Singapore Singapore Stock Exchange (SGX)
Hong Kong Hong Kong Stock Exchange (SEHK)
France NYSE EN Paris (PAR)
Switzerland SIX Swiss Exchange (SWX)
SIX Swiss Exchange (VTX)
Germany Deutsche Boerse (XETRA)
UK London Stock Exchange (LSE SETS)
Netherlands NYSE EN Amsterdam (AMS)

Anyway, that's a whole lot of markets that I'll have access to! Honestly, what excites me is the possibility to instead of being restricted to just a few stocks in 1 exchange, I am now able to trawl through all these exchanges and look for them!

I think that what I'd do is to go to this website (a lovely Dutch website, no less) and hunt down and make a shortlist of stocks across these exchanges.

Surely just 5 is not good enough. I'm thinking along the lines of 10 maybe? 1 stock each from ASX, SGX, SEHK, PAR, SWX, XETRA, LSE and AMS, along with the next 2 best contenders. How does that sound? Haha! Honestly, you know I love diversification, I'd do 20! But 10 is a manageable lot I think. I think the best screen would be based on:

1) Dividend yield (targetting only 4% and above)
2) Dividend growth (annual growth)
3) Payout ratio (less than 100%, probably between 40-80%)
4) Non-financials
5) Low P/E ratio (below 10)
6) Low Price to Book ratio (below 1.5)
7) Large market cap
8) Constant dividend flows
*Perhaps instead of arbituary P/E ratios, I will look at P/E ratios relative to it's on exchange average.

My plan is that based on the criteria that I have set above, I will make a shortlist of 2 stocks from every exchange that meets the above criteria, and then monitor them for a month until T-day. Held stocks will then sold and the top 10 list of the new stocks will be bought.

As of now, I am looking to begin some backtesting (if I figure out if its even possible) and perhaps even fund this strategy after the stock market crash! From the study, this strategy was the worse in a falling market.

Additionally, before the T-date, I may review the current holdings. If they still seem rather reasonable in terms of a NORMAL stock valuation, I may then just decide to hold on it and keep it!

I think having a rule of when to realize profits is a fantastic rule that the DIY Income Investor advocates. If I recall, he will take profits if he has already made 5 years worth of expected returns from the product. I think that is a fantastic idea, and I might copy to do the same. Now the question poses, how do I calculate the expected returns of a specific product? Heck, I'll just link his post and quote him.

Here's the decision process (for what it's worth):
  • the increase in capital value is higher than my 'trigger' of five times current annual income (in other words, five years' income is 'in the bag'.
  • the yield has fallen to around 4.5%: not bad but not particularly good either
  • I can't see anything much that has changed, so this probably means that I'm missing something
  • for once, I don't have much cash available at the moment in case an interesting opportunity pops up
  • and, finally, that price curve looks like it's going down again.

I think he has great criterias for deciding when to "harvest". Anyway, I was so excited about this strategy, just thought I'd pen it down before I forget about it.

To summarize:
  1. Identify 2 of the best dividend stocks from the 8 various exchanges
  2. Ensure that they meet the criteria set out above
  3. Create a shortlist of the 16 stocks and monitor them for a month while understanding their business
  4. On T-day, pick the 10 best contenders and fund each of them in equal weights
  5. Name it the Money Honey Select 10 (MH10 for short)
  6. "Harvest" if criteria is met
  7. "Sell" any individual stock that posts a -20% from date of purchase
  8. Repurchase if the stock bounces back up to the sell price
  9. Don't meddle with the stocks unless there is a crisis looming
  10. Decide which stocks to continue to keep outside of this portfolio as a longer term investment 
  11. Wash, rinse, repeat
I mean, they are all blue-chips in their own countries. You would buy blue chips in your own countries, so why not others? Haha!

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