Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 1:12 am

Hello,

I've noticed that different formulas for yield can give very different answers. For example, comparing the ITOT, IJS, IXUS, and IEMG ETFs from iShares, you get very different yields depending on which definition you pick:

Code: Select all

ETF                            P/E     P/B    SEC Yield    Dist Yield   12mo Trailing Yield
ITOT - US Total Stock Market   23.75   3.12   1.76%        1.61%        1.72%
IJS  - US Small Cap Value      22.24   1.77   1.54%        1.28%        1.35%
IXUS - Int'l Total Market      14.14   1.65   2.46%        3.25%        2.78%
IEMG - Emerging Markets        12.71   1.59   2.12%        1.82%        2.69%
I am concerned that these columns don't seem to agree on which equity classes are cheap or expensive. The closest match seems to be P/E, SEC Yield, and 12mo Trailing Yield (TTM). I understand that the SEC yield is a very short-term measure of yield and the TTM is much longer term. I am not sure how the "distribution yield" is defined. How do I know which definition of yield to use if I want to judge how expensive equities are?

zmaqoptyxbglp
Posts: 117
Joined: Wed May 16, 2018 10:17 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by zmaqoptyxbglp » Tue Jul 10, 2018 1:25 am

How do I know which definition of yield to use if I want to judge how expensive equities are
I think the more important question is - why do you think it makes sense to look at various yields to measure some sort of intrinsic value of the underlying equities in a fund?

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 2:00 am

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 1:25 am
I think the more important question is - why do you think it makes sense to look at various yields to measure some sort of intrinsic value of the underlying equities in a fund?
The dividend discount model also known as the Gordon equation or the Gordon growth model can be re-arranged to express the cost of capital (aka real return rate) as:

(real return) = (dividend yield) + (dividend growth rate)

This formula lines up with the long-term real return rate of equities both in the United States and other countries. It is discussed in many works, including Bernstein's Rational Expectations: Asset Allocation for Investing Adults and Bogle's The Little Book of Common Sense Investing. In the latter book, Exhibit 2.1 on chapter 2 shows a plot similar to the one below:

Image

For this reason, I have an academic interest in dividend yields as one of the ways to measure of the current valuation of equities.

zmaqoptyxbglp
Posts: 117
Joined: Wed May 16, 2018 10:17 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by zmaqoptyxbglp » Tue Jul 10, 2018 2:10 am

danielc wrote:
Tue Jul 10, 2018 2:00 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 1:25 am
I think the more important question is - why do you think it makes sense to look at various yields to measure some sort of intrinsic value of the underlying equities in a fund?
The dividend discount model also known as the Gordon equation or the Gordon growth model can be re-arranged to express the cost of capital (aka real return rate) as:

(real return) = (dividend yield) + (dividend growth rate)

This formula lines up with the long-term real return rate of equities both in the United States and other countries. It is discussed in many works, including Bernstein's Rational Expectations: Asset Allocation for Investing Adults and Bogle's The Little Book of Common Sense Investing. In the latter book, Exhibit 2.1 on chapter 2 shows a plot similar to the one below:

Image

For this reason, I have an academic interest in dividend yields as one of the ways to measure of the current valuation of equities.
I have seen that before and it seems like a pretty odd thing to do. There are plenty of models that attempt to predict future total return and this one seems particularly strange, especially in this day and age. Since Berkshire's current dividend and future expected dividends are 0, is the company doomed to not have any growth? Was that the case in 1970 or 1980 or 1990 or 2000? I'm picking on this clean example for a good reason.

The payout ratio is a totally artificial figure fixed by the board of directors. If the company has a earnings yield of 5%, the can set the dividend yield at 5%, or 2% or 10% or 0%. They might decide to return capital to shareholders strictly in the form of buybacks, or they might decide to just retain earnings or reinvest. But why would such an artificial figure determine anything about the future of the company? Empirically, there're all kinds of things you could come up with, through backtesting. But why does it make sense fundamentally?

Long run earnings yield, and expected growth in earnings might be much more meaningful figures to look at/think about. Dividends don't say anything other than how much taxes you'll pay this year if you don't hold the stock in a retirement account.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 2:23 am

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:10 am
I have seen that before and it seems like a pretty odd thing to do. There are plenty of models that attempt to predict future total return and this one seems particularly strange, especially in this day and age.
I am not really looking to start a debate on the Gordon equation. There is a great deal of literature surounding it and it has been an important aspect of finance theory and the way we value assets for a very very long time.
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:10 am
Since Berkshire's current dividend and future expected dividends are 0, is the company doomed to not have any growth? Was that the case in 1970 or 1980 or 1990 or 2000? I'm picking on this clean example for a good reason.
Berksire is more or less guarnateed to give dividends at some point. The value of a share of Berksire is still approximately equal to the present value of all expected future dividends.
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:10 am
The payout ratio is a totally artificial figure fixed by the board of directors. If the company has a earnings yield of 5%, the can set the dividend yield at 5%, or 2% or 10% or 0%. They might decide to return capital to shareholders strictly in the form of buybacks, or they might decide to just retain earnings or reinvest. But why would such an artificial figure determine anything about the future of the company? Empirically, there're all kinds of things you could come up with, through backtesting. But why does it make sense fundamentally?
Reinvested earnings are supposed to translate in greater future dividends than if earnings had not been reinvested. The fundamental model for how equities (and in fact, all investments) are valued remains the same.

Again, I would rather not be diverted into having to justify the dividend discount model. There is more literature on that topic written in the last 72 years than I could even read or write.

zmaqoptyxbglp
Posts: 117
Joined: Wed May 16, 2018 10:17 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by zmaqoptyxbglp » Tue Jul 10, 2018 2:36 am

danielc wrote:
Tue Jul 10, 2018 2:23 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:10 am
I have seen that before and it seems like a pretty odd thing to do. There are plenty of models that attempt to predict future total return and this one seems particularly strange, especially in this day and age.
I am not really looking to start a debate on the Gordon equation. There is a great deal of literature surounding it and it has been an important aspect of finance theory and the way we value assets for a very very long time.
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:10 am
Since Berkshire's current dividend and future expected dividends are 0, is the company doomed to not have any growth? Was that the case in 1970 or 1980 or 1990 or 2000? I'm picking on this clean example for a good reason.
Berksire is more or less guarnateed to give dividends at some point. The value of a share of Berksire is still approximately equal to the present value of all expected future dividends.
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:10 am
The payout ratio is a totally artificial figure fixed by the board of directors. If the company has a earnings yield of 5%, the can set the dividend yield at 5%, or 2% or 10% or 0%. They might decide to return capital to shareholders strictly in the form of buybacks, or they might decide to just retain earnings or reinvest. But why would such an artificial figure determine anything about the future of the company? Empirically, there're all kinds of things you could come up with, through backtesting. But why does it make sense fundamentally?
Reinvested earnings are supposed to translate in greater future dividends than if earnings had not been reinvested. The fundamental model for how equities (and in fact, all investments) are valued remains the same.

Again, I would rather not be diverted into having to justify the dividend discount model. There is more literature on that topic written in the last 72 years than I could even read or write.
Ah, so when companies don't give out dividends, you assume the figure that they would have issued if they had? Based on what? [OT comment removed by admin LadyGeek]. Why is Berkshire guaranteed to pay dividends? How do you know that? The board can quite reasonably decide to never pay any dividends. Are you saying that you look at what they COULD have paid if they wanted to? Based on what metric?

[OT comment removed by admin LadyGeek]The yield you're looking for to fill into the equation is likely the trailing twelve month yield. [OT comment removed by admin LadyGeek]

jbranx
Posts: 264
Joined: Thu Feb 09, 2017 6:57 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by jbranx » Tue Jul 10, 2018 2:48 am

It's a bit difficult to figure out which numbers to use for Gordon. For the US, 1.8% for the 500 plus a div. growth rate of 1.5% p/a is logical.

If you choose to do global, Vanguard currently shows 2.27% yield for Total World ETF.

If you want to account for total investor yield on the 500 due to all the buybacks, then something around 3.5% -4% makes sense; anyone's guess what the growth rate will be in the future re buybacks, but you could use a low number like the 1.5% above. See this thread from Simplegift:

viewtopic.php?f=10&t=253114

The Modified Gordon using EPS growth might work even better in today's world given central bank action over the last few years and the buyback phenom from corporations. Just use GDP growth for the EPS growth, so 2% or so added to the 1.8% div yield. Almost all ways of calculating Gordon today don't come up with the high numbers of the past as far as I can estimate. Using the equity premium ends up with low numbers as well. The current Vanguard numbers are for something like a low of 1-3% real return for an 80/20 portfolio. There's a lot of "roughness" in my perspective in trying to find any great formulas for estimating future returns. Just proximate estimates to insoluble questions.

Wm Bernstein did some good work on the topic back in the old efficient frontier.com days: Full Quote:

The Expected Return One-Step:"

"Now the punch line: the long-term equivalency of interest rates and GDP growth supplies us with a way of estimating the equity premium with breathtaking simplicity. This is because long-term corporate earnings and dividend growth must also be equivalent to GDP growth. And since long-term equity returns are closely approximated by the sum of dividend/earnings growth and the dividend rate, then the equity premium is simply the dividend rate. In other words, since in the long run it is approximately true that:

Treasury yield = GDP growth = Corporate dividend/earnings growth
And that:

Expected equity return = Corporate dividend/earnings growth + Corporate dividend rate
Then, it must be so that:

Stock return – Treasury yield = Equity premium = Corporate dividend rate
(For the purposes of this paper I’ve avoided the term "equity risk premium," as this properly refers to the stock return in excess of the risk-free T-bill rate.)

It’s just that simple. From 1926 to 1994 stocks returned 5% more than Treasury notes—almost exactly the average dividend rate for the period. And going forward, in the very long term, you’re gonna get all of a 1.3% excess return over bonds.

The problem is that on a day-to-day basis you get your return from multiple (PE) change—so-called "speculative" return in Bogle’s terminology. But over the ages your return is dividends plus growth, Bogle’s "fundamental" return. The trick is to think like Samuelson, Sharpe and Bogle, not like the Three Stooges. Is 1.3% an adequate reward for favoring stocks over bonds? You be the judge."

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 3:05 am

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:36 am
Ah, so when companies don't give out dividends, you assume the figure that they would have issued if they had? Based on what? [OT comment removed by admin LadyGeek]
What? No. I did not say that. Please stop trying to hijack my thread.
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:36 am
Why is Berkshire guaranteed to pay dividends? How do you know that?
Because no company can grow indefinitely. At some point it will become mathematically impossible for them to continue to usefully reinvest 100% of their earnings. If it was a known fact that Berksire stock will never distribute dividends, its fair market value would be $0.
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 2:36 am
The board can quite reasonably decide to never pay any dividends. Are you saying that you look at what they COULD have paid if they wanted to? Based on what metric?
I did not say that. [OT comment removed by admin LadyGeek]

[Response to quoted post removed by admin LadyGeek]

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 3:31 am

jbranx wrote:
Tue Jul 10, 2018 2:48 am
Wm Bernstein did some good work on the topic back in the old efficient frontier.com days: Full Quote:

The Expected Return One-Step:"

"Now the punch line: the long-term equivalency of interest rates and GDP growth supplies us with a way of estimating the equity premium with breathtaking simplicity. This is because long-term corporate earnings and dividend growth must also be equivalent to GDP growth. And since long-term equity returns are closely approximated by the sum of dividend/earnings growth and the dividend rate, then the equity premium is simply the dividend rate. In other words, since in the long run it is approximately true that:

Treasury yield = GDP growth = Corporate dividend/earnings growth
And that:

Expected equity return = Corporate dividend/earnings growth + Corporate dividend rate
Then, it must be so that:

Stock return – Treasury yield = Equity premium = Corporate dividend rate
(For the purposes of this paper I’ve avoided the term "equity risk premium," as this properly refers to the stock return in excess of the risk-free T-bill rate.)
Ha! That is fascinating. Thank you. That would never have occurred to me. I'm not sure I understand why long-term interest rates have to match GDP growth though. I think I almost understand why earnings growth (and hence dividend growth) has to follow GDP growth... though I think I still need to think about that a little more.


jbranx wrote:
Tue Jul 10, 2018 2:48 am
The problem is that on a day-to-day basis you get your return from multiple (PE) change—so-called "speculative" return in Bogle’s terminology. But over the ages your return is dividends plus growth, Bogle’s "fundamental" return. The trick is to think like Samuelson, Sharpe and Bogle, not like the Three Stooges. Is 1.3% an adequate reward for favoring stocks over bonds? You be the judge."
Yeah. I was kind of thinking of dividend yield as another way to look at PE ratios. Since dividends are relatively stable from yer to year, if the speculative price of equities goes down, the dividend yields would go up. Historically, markets that have higher dividend yields perform better. In the Credit Suisse Yearbook 2011 the authors found that a "rebalancing" strategy that kept the invested funds in the countries with the highest diviend yields consistently produced significant excess returns (see page 21). Bernstein suggests in his book that a strategy of tilting toward whichever regions have highest yields might be a profitable strategy.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 3:33 am

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:19 am
You are the one that said that it makes sense to look at Berkshire's dividend yield and growth in that yield while there was and is none. Since they don't have one, I thought you were conjuring one up.
I never said such a thing. You are welcome to review my posts.

zmaqoptyxbglp
Posts: 117
Joined: Wed May 16, 2018 10:17 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by zmaqoptyxbglp » Tue Jul 10, 2018 3:42 am

danielc wrote:
Tue Jul 10, 2018 3:33 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:19 am
You are the one that said that it makes sense to look at Berkshire's dividend yield and growth in that yield while there was and is none. Since they don't have one, I thought you were conjuring one up.
I never said such a thing. You are welcome to review my posts.
The Gordon equation claims that you can evaluate future total return by adding trailing dividend yield (not some zombie dividend yield that you're talking about that exists but doesn't exist) with the growth in that yield. Berkshire's current yield is 0. And any growth into a non-zero figure is extremely speculative given the culture of the company that has never issued a dividend in half a century. [OT comment removed by admin LadyGeek]

jbranx
Posts: 264
Joined: Thu Feb 09, 2017 6:57 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by jbranx » Tue Jul 10, 2018 4:00 am

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:42 am
danielc wrote:
Tue Jul 10, 2018 3:33 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:19 am
You are the one that said that it makes sense to look at Berkshire's dividend yield and growth in that yield while there was and is none. Since they don't have one, I thought you were conjuring one up.
I never said such a thing. You are welcome to review my posts.
The Gordon equation claims that you can evaluate future total return by adding3.5 trailing dividend yield (not some zombie dividend yield that you're talking about that exists but doesn't exist) with the growth in that yield. Berkshire's current yield is 0. And any growth into a non-zero figure is extremely speculative given the culture of the company that has never issued a dividend in half a century. [OT comment removed by admin LadyGeek]
In cases where no dividend is paid, pretty simple to estimate what the div. paying capacity is from available cash flow. Berkshire has genormous capacity in that regard and offers to buy back it's stock when it hits 120% of book value. Berkshire's book value growth the last ten years has trailed the 500's, but it's still a healthy number, and the firm is setting on $110 billion in cash. At a payout ratio of say 40%, it's dividend would probably be in the neighborhood of 3.5-4% by paper napkin accounting, growing faster than the 500's. So, Gordon would give you an estimate that BRKA would likely have a higher return over the next decade than Vanguard estimates for the market. Ain't science, but nothing in investing is.

zmaqoptyxbglp
Posts: 117
Joined: Wed May 16, 2018 10:17 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by zmaqoptyxbglp » Tue Jul 10, 2018 4:04 am

jbranx wrote:
Tue Jul 10, 2018 4:00 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:42 am
danielc wrote:
Tue Jul 10, 2018 3:33 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:19 am
You are the one that said that it makes sense to look at Berkshire's dividend yield and growth in that yield while there was and is none. Since they don't have one, I thought you were conjuring one up.
I never said such a thing. You are welcome to review my posts.
The Gordon equation claims that you can evaluate future total return by adding3.5 trailing dividend yield (not some zombie dividend yield that you're talking about that exists but doesn't exist) with the growth in that yield. Berkshire's current yield is 0. And any growth into a non-zero figure is extremely speculative given the culture of the company that has never issued a dividend in half a century. [OT comment removed by admin LadyGeek]
In cases where no dividend is paid, pretty simple to estimate what the div. paying capacity is from available cash flow. Berkshire has genormous capacity in that regard and offers to buy back it's stock when it hits 120% of book value. Berkshire's book value growth the last ten years has trailed the 500's, but it's still a healthy number, and the firm is setting on $110 billion in cash. At a payout ratio of say 40%, it's dividend would probably be in the neighborhood of 3.5-4% by paper napkin accounting, growing faster than the 500's. So, Gordon would give you an estimate that BRKA would likely have a higher return over the next decade than Vanguard estimates for the market. Ain't science, but nothing in investing is.
Since you're making an adjustment for Berkshire which has 0 dividends, would you make it for a company that has a 0.05% yield? Or no? Or are you saying you should look at the free cash flow, and not the dividends? Why set a payout ratio of 40%? Because that's the market average? Would you adjust that for every company? The buyback yield is greater than 60% of earnings for the S&P 500. That's mathematically no different from issuing a dividend. Why not also count the buybacks? It seems fairly nonsensical to me to look at dividends instead of long run earnings, for even the most mature of companies.

jbranx
Posts: 264
Joined: Thu Feb 09, 2017 6:57 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by jbranx » Tue Jul 10, 2018 4:10 am

zmaqoptyxbglp wrote:
Tue Jul 10, 2018 4:04 am
jbranx wrote:
Tue Jul 10, 2018 4:00 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:42 am
danielc wrote:
Tue Jul 10, 2018 3:33 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:19 am
You are the one that said that it makes sense to look at Berkshire's dividend yield and growth in that yield while there was and is none. Since they don't have one, I thought you were conjuring one up.
I never said such a thing. You are welcome to review my posts.
The Gordon equation claims that you can evaluate future total return by adding3.5 trailing dividend yield (not some zombie dividend yield that you're talking about that exists but doesn't exist) with the growth in that yield. Berkshire's current yield is 0. And any growth into a non-zero figure is extremely speculative given the culture of the company that has never issued a dividend in half a century. [OT comment removed by admin LadyGeek]
In cases where no dividend is paid, pretty simple to estimate what the div. paying capacity is from available cash flow. Berkshire has genormous capacity in that regard and offers to buy back it's stock when it hits 120% of book value. Berkshire's book value growth the last ten years has trailed the 500's, but it's still a healthy number, and the firm is setting on $110 billion in cash. At a payout ratio of say 40%, it's dividend would probably be in the neighborhood of 3.5-4% by paper napkin accounting, growing faster than the 500's. So, Gordon would give you an estimate that BRKA would likely have a higher return over the next decade than Vanguard estimates for the market. Ain't science, but nothing in investing is.
Since you're making an adjustment for Berkshire which has 0 dividends, would you make it for a company that has a 0.05% yield? Or no? Or are you saying you should look at the free cash flow, and not the dividends? Why set a payout ratio of 40%? Because that's the market average? Would you adjust that for every company? The buyback yield is greater than 60% for the S&P 500. That's mathematically no different from issuing a dividend. Why not also count the buybacks?
If you read the threads above carefully, I linked to a thread on what the buyback+div. yield=total investor return is: about 4%. Yes, the payout ratio has risen a bit from the mid-thirties over the past few years. The payout ratio is computed and reported for the 500 by S&P; no need to do anything except accept the number from the folks who know the index best. If you want to eliminate the complexity, just use Bernstein's One Step above; pretty clever in my estimation.

zmaqoptyxbglp
Posts: 117
Joined: Wed May 16, 2018 10:17 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by zmaqoptyxbglp » Tue Jul 10, 2018 4:16 am

jbranx wrote:
Tue Jul 10, 2018 4:10 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 4:04 am
jbranx wrote:
Tue Jul 10, 2018 4:00 am
zmaqoptyxbglp wrote:
Tue Jul 10, 2018 3:42 am
danielc wrote:
Tue Jul 10, 2018 3:33 am


I never said such a thing. You are welcome to review my posts.
The Gordon equation claims that you can evaluate future total return by adding3.5 trailing dividend yield (not some zombie dividend yield that you're talking about that exists but doesn't exist) with the growth in that yield. Berkshire's current yield is 0. And any growth into a non-zero figure is extremely speculative given the culture of the company that has never issued a dividend in half a century. [OT comment removed by admin LadyGeek]
In cases where no dividend is paid, pretty simple to estimate what the div. paying capacity is from available cash flow. Berkshire has genormous capacity in that regard and offers to buy back it's stock when it hits 120% of book value. Berkshire's book value growth the last ten years has trailed the 500's, but it's still a healthy number, and the firm is setting on $110 billion in cash. At a payout ratio of say 40%, it's dividend would probably be in the neighborhood of 3.5-4% by paper napkin accounting, growing faster than the 500's. So, Gordon would give you an estimate that BRKA would likely have a higher return over the next decade than Vanguard estimates for the market. Ain't science, but nothing in investing is.
Since you're making an adjustment for Berkshire which has 0 dividends, would you make it for a company that has a 0.05% yield? Or no? Or are you saying you should look at the free cash flow, and not the dividends? Why set a payout ratio of 40%? Because that's the market average? Would you adjust that for every company? The buyback yield is greater than 60% for the S&P 500. That's mathematically no different from issuing a dividend. Why not also count the buybacks?
If you read the threads above carefully, I linked to a thread on what the buyback+div. yield=total investor return is: about 4%. Yes, the payout ratio has risen a bit from the mid-thirties over the past few years.
Buyback + dividend yield? [OT comment removed by admin LadyGeek] Now you've changed to something closer to what the earnings yield is.

If you say that long run real return was long run earnings yield plus long run earnings growth, I would buy that. In fact, I do think that is the most reasonable model. Why the fixture on dividends then?
The payout ratio is computed and reported for the 500 by S&P; no need to do anything except accept the number from the folks who know the index best.
I never contested any statistical information and this is unwarranted.

jbranx
Posts: 264
Joined: Thu Feb 09, 2017 6:57 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by jbranx » Tue Jul 10, 2018 4:28 am

See above where I suggested the Modified Gordon Model using EPS growth would likely be a more useful tool than div. growth. EPS is reported after the dividend is paid, so you use the div. to get a complete investor potential return. I was answering the OP's query; not here to defend John Burr William's div. discount model, Gordon's, or anyone else's. Might give one an anchor point for thinking about where best to allocate capital; might not, since as Bernstein's quote said the pesky, unknown P/E ratio is highly dependent upon animal spirits.

User avatar
Phineas J. Whoopee
Posts: 7682
Joined: Sun Dec 18, 2011 6:18 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by Phineas J. Whoopee » Tue Jul 10, 2018 6:50 pm

With respect to US stocks and all, or nearly all, US stock funds, and the F in ETF stands for Fund, yield is irrelevant. If a stock or an ETF pays out, say, $1 per share, it's share price immediately drops by that amount because a share of stock plus one dollar is worth one dollar more than the very same share of stock without the one dollar.

It's a forced sale, nothing else. Your wealth neither increases nor decreases, except in a taxable account where the dividend creates a tax liability you wouldn't have had otherwise.

The effect can be hard to see because of course the share price is also affected by everything else that happens that day.

From our wiki: Stock dividends

I'm not claiming anything about you personally, danielc, but many people have an emotional reaction against the fundamental mathematics.

PJW

User avatar
LadyGeek
Site Admin
Posts: 49120
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by LadyGeek » Tue Jul 10, 2018 7:26 pm

The discussion is getting a bit contentious. I removed some off-topic comments and one post.

Our experienced investors should understand that answers may not be obvious to those asking a question. Keep this perspective in mind when composing an answer and state your reply in a civil, respectful member. Explain why your answer supports your point of view. Also, practical examples go a long way. Show the math, if it's relevant.

As a reminder, here is some excellent guidance. From: Please Do Not Bite the Newcomers

LadyGeek wrote:
Fri Dec 19, 2014 9:33 pm
...Here's the link: Wikipedia:Please do not bite the newcomers. I've taken the liberty to paraphrase it for this forum.
  • Understand that newcomers are both necessary for and valuable to the community. By empowering newcomers, we can improve the diversity of knowledge, perspectives, and ideas on this forum, thereby preserving its integrity as a resource and ultimately increasing its value.
  • If a newcomer seems to have made a small mistake, try to correct it yourself: do not slam the newcomer. Remember, this is a place where anyone may comment and therefore it is each person's responsibility to complement, rather than to criticize or supervise others. If you use bad manners or curse at newcomers, they may decide not to contribute to the forum again.
  • When giving advice, tone down the rhetoric a few notches from the usual mellow discourse that dominates this forum. Make the newcomer feel genuinely welcome, not as though they must win your approval in order to be granted membership into an exclusive club. Any new domain of concentrated, special-purpose human activity has its own specialized structures, which take time to learn (and which benefit from periodic re-examination and revision).
  • Assume good faith on the part of newcomers. They most likely want to help out. Give them a chance!
  • Remember Hanlon's Razor. Behavior that appears malicious to experienced Bogleheads is more likely caused by ignorance of our expectations and rules. Even if you are 100% sure that someone is a worthless, no-good Internet troll, vandal, or worse, conduct yourself as if they are not. Remember that today's vandals might be tomorrow's experts. By giving a polite, honest and unsuspecting answer to newcomers, whether vandals or not, you teach them Bogleheads investment philosophy. By being calm, interested, and respectful, you do credit to your dignity, and to the forum.
  • Remember that you too were once a newcomer. Treat others as you were treated (or, perhaps, wish you had been treated) when you first arrived.
  • Remember: "Don't bite, do what's right. Being a friend is all right."
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 8:18 pm

Phineas J. Whoopee wrote:
Tue Jul 10, 2018 6:50 pm
With respect to US stocks and all, or nearly all, US stock funds, and the F in ETF stands for Fund, yield is irrelevant. If a stock or an ETF pays out, say, $1 per share, it's share price immediately drops by that amount because a share of stock plus one dollar is worth one dollar more than the very same share of stock without the one dollar.
Thank you for the help. I understand that dividends just come out of capital gains. If anything, dividends are worse because of taxes. In the past I've normally thought of the PE ratio as the main way to judge whether equities are expensive. Last weekend I was reading a book by Bernstein and he mentioned a result in the Credit Suisse 2011 Yearbook that caught my attention. Long story short, equities with high dividend yields seem have higher return, and Bernstein suggeested that tilting a portfolio toward high-yield regions could improve returns. That's what's motivating my question about dividend yields.

User avatar
vineviz
Posts: 2273
Joined: Tue May 15, 2018 1:55 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by vineviz » Tue Jul 10, 2018 8:45 pm

danielc wrote:
Tue Jul 10, 2018 8:18 pm
.Last weekend I was reading a book by Bernstein and he mentioned a result in the Credit Suisse 2011 Yearbook that caught my attention. Long story short, equities with high dividend yields seem have higher return, and Bernstein suggeested that tilting a portfolio toward high-yield regions could improve returns. That's what's motivating my question about dividend yields.
I think you’ll find that once you control for other factors (eg size and value) that dividend yield had almost no explanatory power in the past and even less today.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

MotoTrojan
Posts: 2582
Joined: Wed Feb 01, 2017 8:39 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by MotoTrojan » Tue Jul 10, 2018 8:55 pm

vineviz wrote:
Tue Jul 10, 2018 8:45 pm
danielc wrote:
Tue Jul 10, 2018 8:18 pm
.Last weekend I was reading a book by Bernstein and he mentioned a result in the Credit Suisse 2011 Yearbook that caught my attention. Long story short, equities with high dividend yields seem have higher return, and Bernstein suggeested that tilting a portfolio toward high-yield regions could improve returns. That's what's motivating my question about dividend yields.
I think you’ll find that once you control for other factors (eg size and value) that dividend yield had almost no explanatory power in the past and even less today.
OP, this post is important.

I wager there will be a small-value post in your future :).

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by danielc » Tue Jul 10, 2018 9:02 pm

MotoTrojan wrote:
Tue Jul 10, 2018 8:55 pm
OP, this post is important.

I wager there will be a small-value post in your future :).
:-) I already tilt toward small value, but I'm sure I will post about that again in the future.

alex_686
Posts: 4014
Joined: Mon Feb 09, 2015 2:39 pm

Re: Stock ETFs -- Should I look at the SEC yield, Distribution Yield, or TTM yield?

Post by alex_686 » Tue Jul 10, 2018 9:38 pm

You will want to use the forward P/E ratio. I think you are using trailing P/E. SEC yield is inappropriate for a equity fund. The others have low to no predictive powers.

The blessing and the curse of the Gordon Growth Model is its simplicity. Let me throw out some observations.

As some have mentioned, some companies don't distribute dividends. Using the P/E ratio is a reasonable approximation that gets around the issue. Next you need to figure out the "Growth Rate" and "Required Return". The problem here is that these move about.

Which takes me to my last point. The differences you see between the various ETF represent different opinions on the growth and risk of those returns. The information in isolation is not going to get you very far.

Post Reply