Pretty regularly I show my readers how much better dividend stocks within the MFI universe do compared with all MFI stocks. The differential (this is basic math, so trust me) is even greater when you compare MFI Dividend stocks versus non-dividend stocks.
I have done numerous studies look at two variables, dividend yield and market cap. And that, of course was the derivation of my MFI Formula approach, which filters official list based on market cap and dividend yield.
But sometimes I think my saying it, is not as telling as my drawing it. So I thought I would create a series of graphs illustrating the power of combining MFI with dividend paying stocks. Now for this example, the only criteria I will use is very simple: forward dividend yield > 2.6% (and I include special dividends in that mix). Yes, you can do this at home.
If you just pick stocks on official MFI screen with dividend yields >= 2.6%, I believe you will do well. I know that seems too simple. As humans we like more complicated rules. For whatever reason. Let me illustrate the power. I will use the stretch from Oct 2014 forward as that is when I started my MFI Formula approach.
First graph, a bar chart of MFI results by stock-month/year. Each of these bars show the MFI return for the 50 stocks >100m from the official list bought in a month and held for a year. Note the ones dated March 2017 and more recent are not yet a year old, so are still active.
Before I go further, everyone should understand this chart. Each point represents the annual gain on loss on a portfolio of 50 MFI stocks bought as of the date on the X (horizontal) axis. You can see there was some tough sledding for portfolios started around Dec 2014 through June 2015. In total this represents 42 portfolios and the average annual gain is 6.6%. As you might expect, that frankly is not very good. The Russell 3000 benchmark is a solid 4 points per year higher at 10.6%.
Everyone with me? Ok, now let us look at a subset of the 50 stocks in each stock-month. We will simply just use stocks with a dividend under 2.6%, including stocks with no dividend. I will keep the line chart of all MFI stocks as a benchmark.
Now, I will grant you. I expected the differential to be greater. It is a bit hard to tell from the graph due to scale, but the red bar (yields 0 to 2.5%) average returns of 5% (versus 6.6% for all). Let me see if I can change scale to make more clear.
Ok, perhaps a bit more clear. You can see the blue line (all MFI) is generally above the red line. It is on average just up by 1.6 points, so that can be difficult to see on a graph with a 50 point swing on Y axis.
Now let us add a line for stocks with dividend 2.6% or greater.
Of course the green line has been added to previous chart and it is clear to the casual observer that the green line is generally better that red and blue. Again, the green line is simply subset of overall MFI universe, being those with a 2.6% yield or greater. To summarize averages:
- Red 5.0%
- Blue 6.6%
- Green 10.4%.
So by one simple factor, the MFI annual returns for 50 stocks > 100m market cap from 6.6% to 10.4%. And I promise you, that holds back through time. For all my portfolios back to 2006:
- Blue 9.1%
- Green 17.5%
Again, this is one simple factor. If you use two factors: dividend yield and market cap it is even a greater differential.
Now those of you might say: "so what? You said earlier Russell 3000 over this stretch was 10.6% and the green line is 10.4%. So screw MFI, just go with index."
You would be right from 2014 to current date. But I'd argue this is a stretch where Value stocks have been out of favor. Now maybe that is the new reality with disruptors and everything. But I just can't hold my nose and buy some of these disruptors at their very high valuations. My view is that the differential will narrow over time and value stocks will gain back on growth.
Perhaps I am wrong. And if you truly believe that, I'd suggest MFI is not the place for you.
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