Allen Roth article on how to get 5% income

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FBN2014
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Allen Roth article on how to get 5% income

Post by FBN2014 » Fri Jun 09, 2017 7:18 am

https://www.wsj.com/amp/articles/how-to ... 1492787140

How do you determine how much of an index fund yield is dividends and how much is stock buyback? Thanks
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The Wizard
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Re: Allen Roth article on how to get 5% income

Post by The Wizard » Fri Jun 09, 2017 7:24 am

Sadly, that article is blocked...
:(
Attempted new signature...

ljb1234
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Re: Allen Roth article on how to get 5% income

Post by ljb1234 » Fri Jun 09, 2017 7:26 am

The Wizard wrote:Sadly, that article is blocked...
:(
Try from his Twitter feed:
https://twitter.com/Dull_Investing/stat ... 2574218244

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Re: Allen Roth article on how to get 5% income

Post by smackboy1 » Fri Jun 09, 2017 7:41 am

The Wizard wrote:Sadly, that article is blocked...
:(
WSJ still grants free access through Facebook https://m.facebook.com/l.php?u=[TYPE IN WSJ URL HERE]

https://m.facebook.com/l.php?u=https:// ... 1492787140
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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SimpleGift
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Re: Allen Roth article on how to get 5% income

Post by SimpleGift » Fri Jun 09, 2017 8:57 am

FBN2014 wrote:How do you determine how much of an index fund yield is dividends and how much is stock buyback? Thanks
The only index fund for which I’ve seen data published regularly is the S&P 500. This publication from Yardeni Research is updated monthly, I believe. See the dividend and buyback yields on Page 9, Figure 10: S&P 500 Buybacks and Dividends

Wisdom Tree also occasionally publishes the dividend and buyback yields for their (proprietary) index funds:
Note that Small-cap and Mid-cap Indexes have buyback yields that are generally smaller than the Large-cap Indexes.
Cordially, Todd

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Svensk Anga
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Re: Allen Roth article on how to get 5% income

Post by Svensk Anga » Fri Jun 09, 2017 9:07 am

Roth's source (S&P Dow Jones Indices) claims that the buy-back yield last year was 2.91%. I did not realize it was so high. Dividend yield was 2.16%.

If we add a term for buyback yield to the Gordon equation that Jack Bogle favors for estimating future returns and assuming 1.3% real earnings growth, we could see:

2.16% + 2.91% + 1.3% = 6.37% expected real return (absent any change in valuations, i.e. Bogle's "speculative return").

This is higher than most forecasters expect, but is in line with long term historic returns. Maybe the "new normal" angst is misplaced.

I expect that the buyback yield is more fragile than the dividend yield. Companies seem loathe to cut dividends but buybacks come and go in tune with the economy. Maybe the buyback term should have a discount factor for this fragility.

Those of us following the Bill Bernstein formula for liability matching portfolios were taught to count on only half of our equities' dividends, in real terms, in hard times, since that is the worst cut in the historic record. I think the high buyback yield makes it less likely that dividends will be cut severely in the next downturn. In the 2008 crash real dividends were cut by 25%, per the Shiller data set.

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Re: Allen Roth article on how to get 5% income

Post by lazyday » Fri Jun 09, 2017 9:25 am

Svensk Anga wrote:If we add a term for buyback yield to the Gordon equation that Jack Bogle favors for estimating future returns and assuming 1.3% real earnings growth, we could see
It seems appropriate to use net buybacks in the Gordon equation, but it should be net of dilution. After dilution, the buyback yield is close to zero.

found somewhere in here:

https://www.aqr.com/library/aqr-publica ... et-classes

Note that the appendix linked there is a separate document from the main paper which also has an appendix.

dbr
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Re: Allen Roth article on how to get 5% income

Post by dbr » Fri Jun 09, 2017 10:35 am

I don't understand the article. Why do investors have to "give themselves permission" to cash out the "buyback yield." Is this really helping anyone understand how to take income from an investment portfolio, a problem that just is not a problem in the first place as far as I am concerned.

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Re: Allen Roth article on how to get 5% income

Post by SimpleGift » Fri Jun 09, 2017 10:55 am

lazyday wrote:
Svensk Anga wrote:If we add a term for buyback yield to the Gordon equation that Jack Bogle favors for estimating future returns and assuming 1.3% real earnings growth, we could see
It seems appropriate to use net buybacks in the Gordon equation...
I don’t believe this is correct. Both the dividend yield and the earnings growth rate factors used by Mr. Bogle in his simple expected value formula are per share. In other words, the net effect of share repurchases are already included in the dividend and earnings growth data.

Checking on the Shiller data website, these are the definitions used for the S&P 500 data:
  • Dividend Yield: "12 month dividend per share/price."
    Earnings Growth Rate: "Percentage change in 12 month earnings per share."
So it wouldn't be proper to use the buyback yield in Mr. Bogle’s formula or the Gordon Equation — the net effect of the share buybacks are already included in the per share data to begin with.
Cordially, Todd

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Re: Allen Roth article on how to get 5% income

Post by lazyday » Fri Jun 09, 2017 11:23 am

Simplegift wrote:I don’t believe this is correct. Both the dividend yield and the earnings growth rate factors used by Mr. Bogle in his simple expected value formula are per share. In other words, the net effect of share repurchases are already included in the dividend and earnings growth data.
Since buybacks change over time, wouldn’t it be better to try to include them somehow? If we ignore them, but use the historical earnings growth rate from a time with much lower buybacks, then can’t we underestimate future returns? Similar for dilution, though maybe in the other direction if it's increased over time.

The truth is I’m not comfortable enough with the Gordon Model to properly argue this with you… but I can try. I believe I was once able to convince myself that for a single company with characteristics that never change, expected returns = starting yield + growth. But once we allow a dynamic world, it seems we need to make assumptions that I don’t understand why it’s ok to make. So I just take the model as a better-than-nothing guess and trust the academics at RA and AQR to do their best in their assumptions. Maybe over time I can better understand.

By the way, I still have a window up on your other thread, and hope to read the article to see if it helps me understand your simple chart.

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SimpleGift
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Re: Allen Roth article on how to get 5% income

Post by SimpleGift » Fri Jun 09, 2017 11:41 am

lazyday wrote:
Simplegift wrote:I don’t believe this is correct. Both the dividend yield and the earnings growth rate factors used by Mr. Bogle in his simple expected value formula are per share. In other words, the net effect of share repurchases are already included in the dividend and earnings growth data.
Since buybacks change over time, wouldn’t it be better to try to include them somehow? If we ignore them, but use the historical earnings growth rate from a time with much lower buybacks, then can’t we underestimate future returns? Similar for dilution, though maybe in the other direction if it's increased over time.
My point is that the effect of net share buybacks are already included in the per share dividend and earnings growth data reported for the S&P 500 Index. If net share buybacks are positive in a given year and decrease the number of shares outstanding, the denominator in the per share calculation is decreased. And vice-versa: If net share buybacks are negative, the shares outstanding increase. So no adjustments are needed for buybacks in the historical, per share data.

Also, as you point out, this is the reason it’s important to use net share buybacks in any repurchase calculations.
Cordially, Todd

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Re: Allen Roth article on how to get 5% income

Post by lazyday » Fri Jun 09, 2017 11:56 am

Simplegift wrote:My point is that the effect of net share buybacks are already included in the per share dividend and earnings growth data reported for the S&P 500 Index.
For r = y + g, it makes sense to me that we would use current y (dividend yield). But should we use current g? Doesn't it move all over the place? I thought most predictions use a long term average.

If we were to see for example, net buybacks after dilution permanently rise to 1%, is it safe to ignore this while using the long term earnings growth rate? Shouldn't we expect a higher EPS growth than in the past?

In the extreme, companies could stop paying dividends altogether and buy back shares instead. Using the old g would seem to be incorrect. Adding net buybacks to r while using the old g might be better than doing nothing.

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Re: Allen Roth article on how to get 5% income

Post by jalbert » Fri Jun 09, 2017 12:01 pm

I wasn't able to read Mr. Roth's article due to the paywall, but if this is a useful mechanism, I think it would be necessary to distinguish buybacks funded by revenue earned by the company from buybacks funded by taking on additional debt. In the low interest rate environment, there has been discussion of many companies issuing debt to fund buybacks.

Wouldn't debt-funded buybacks would have to be excluded from this? In a total return calculation, I think the market would have priced in the present value of the debt change to a stock price, so it would not be a concern, but if using buybacks and dividends as some sort of measure of sustainable income earned by the company, I'd be inclined to think it would matter.
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Re: Allen Roth article on how to get 5% income

Post by dbr » Fri Jun 09, 2017 12:07 pm

jalbert wrote:I wasn't able to read Mr. Roth's article due to the paywall, but if this is a useful mechanism,

But the article seems to be incoherent about what use the "mechanism" is supposed to have in any context having to do with an investor "getting" income.

I think it would be necessary to distinguish buybacks funded by revenue earned by the company from buybacks funded by taking on additional debt. In the low interest rate environment, there has been discussion of many companies issuing debt to fund buybacks.

Wouldn't debt-funded buybacks would have to be excluded from this? In a total return calculation, I think the market would have priced in the present value of the debt change to a stock price, so it would not be a concern, but if using buybacks and dividends as some sort of measure of sustainable income earned by the company, I'd be inclined to think it would matter.

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Re: Allen Roth article on how to get 5% income

Post by SimpleGift » Fri Jun 09, 2017 12:25 pm

lazyday wrote:For r = y + g, it makes sense to me that we would use current y (dividend yield). But should we use current g? Doesn't it move all over the place? I thought most predictions use a long term average.

If we were to see for example, net buybacks after dilution permanently rise to 1%, is it safe to ignore this while using the long term earnings growth rate? Shouldn't we expect a higher EPS growth than in the past?
Now I see where you’re coming from. Right, annual EPS growth rates jumps all over the place from year to year — so one has to use a smoothed long-term average. And the net effect of all the share buybacks in recent years has been to increase the EPS growth rates over historical averages.

From the Shiller database, I get these (arithmetic) average earnings growth rates:
  • 1872-1980: 6.9%
    1981-2016: 12.9%
Since share buybacks only began in 1981 (they were illegal prior to 1981, I believe), one has to believe their net effect has been to increase earnings growth rates in recent decades — along with many other factors. But the net effect of these buybacks is already included in the EPS growth data above.

PS. History tells us that earnings growth rates of 10%+ are certainly not sustainable long-term (buybacks or no buybacks)!
Cordially, Todd

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Re: Allen Roth article on how to get 5% income

Post by lazyday » Fri Jun 09, 2017 1:11 pm

Simplegift wrote:Since share buybacks only began in 1981 (they were illegal prior to 1981, I believe), one has to believe their net effect has been to increase earnings growth rates in recent decades — along with many other factors. But the net effect of these buybacks is already included in the EPS growth data above.
So I guess your solution is to use more recent g data, and avoid fouling the per-share assumptions of the model.

I've started to reread the AQR appendix I linked above. Now on p.2, where they justify using buyback data partly with this:
5 Boudukh et al (2007) find that post-1984, dividend yields have become
less reliable predictors of equity market returns and find that payout
yields have out-of-sample predictability while dividend yields do not. They
further find net total payout yields have higher predictive power than
buyback yields that ignore issuance. One caveat here is that the negative
sign of issuance tends to (except very recently) make the net buyback
yield negative, more so when prices plummet as in 2008 (cf. the
downward spike in the net buyback yield in Exhibit 1 while the two
positively-signed series spiked upwards). The inverse sign can offset the
predictability of dividend yield, leading to an overall lower predictability of
net total payout yield.
Haven't gotten to the formula yet.

By the way, relevant to the OP article, the footnote continues with:
Aside: some commentators simply add the gross buyback yield to the
dividend yield, ignoring issuance. Such a broad yield measure overstates
the level of payouts that investors receive.

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Re: Allen Roth article on how to get 5% income

Post by lazyday » Sat Jun 10, 2017 7:36 am

AQR uses two different expected returns r=y+g predictions that handle the problem of increasing buybacks.

First method, found near the top of p3 of the appendix, is essentially to replace dividend yield with .5/CAPE, or half the earnings yield. Historical payout ratio isn’t far from 50%, so it’s like using dividends and pretending the payout ratio didn't change. Assuming reinvested earnings make the same returns as the stock market (r), it shouldn’t matter if earnings go to dividends, buybacks, or investment. This method produced a 3.7% real return prediction using end of 2016 data.

Second method, later on p3, is to replace dividend yield with net payout yield (dividend yield + 10 yr smoothed net buybacks after share issuance) and for g to use a rate for not earnings growth but total payouts. g is the average of (A) consensus forecast gdp (note 11 below) and (B) if I understand correctly, long term historical payout growth + (EPS growth since 1970 - long term EPS growth). B is considered to be EPS growth + dilution, see note 12. This method produced a 4.8% prediction.
11 Ibbotson and Straehl (2016) find that the long-run growth in total
payouts empirically matches the growth in aggregate GDP ...
Grinold et al (2011) forecast real equity returns summing together
dividend yield, net buyback yield, and aggregate GDP growth.

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