Index Funds More Your Style? “Divi-X” Can Help You There Too

Ticker: IWD

Company: iShares Russell 1000 Value ETF

 

INVESTMENT OBJECTIVE

The iShares Russell 1000 Value ETF seeks to track the investment results of an index composed of large- and mid-capitalization U.S. equities that exhibit value characteristics.

https://www.ishares.com/us/products/239708/IWD

 

Word on the Street (Pros and Cons):

 

Not everyone is comfortable, nor has the time to go through numerous SEC filings, financial statements and the like of many companies before they settle on one stock pick.  On the other hand, many know that they cannot just place their hard-earned money in savings accounts that earn them interests yields similar to The First National Bank of Sealy Posturepedic.  As a result, many have found comfort in placing their funds into mutual funds, closed-end funds, and the like.

 

One type of fund that has gained tremendous popularity over the years are ETF’s (electronically traded funds) that try to mirror certain index’s such as the Dow Jones Industrial Average or the S&P 500.  These ETF’s have been popping up all over the place over recent years and there seems to be no limit as to what an individual can invest in through these funds.  There’s utilities, transportation, commodities, foreign markets, and the list goes on and on.

 

I intended this to be a three-part series of articles on three such ETF’s, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), the SPDR S&P Dividend (ETF) (NYSEARCA:SDY), and the iShares Russell 1000 Value Index (ETF) (NYSEARCA:IWD).  However, going over the past five year performances of the three, I determined that their performance wasn’t dissimilar enough to justify an article on each one.  Instead, the only one I will be focusing on for this article will be the last;

iShares Russell 1000 Value Index (ETF) (NYSEARCA:IWD)
 

Incidentally, if you’re curious how I chose between these three; they simply were the first three ETF’s that came back in my search.

 

Remember, this is not a recommendation of any sort and it is strongly suggested that you do your own due diligence before committing any funds to any investment you see on this site.

 

Regarding the Pros and Cons of ETF’s, I’ve researched a handful of articles and basically it appears that ETF’s aren’t much different than mutual funds.  A complete overview of ETF’s is way beyond the scope of this article and you are always encouraged to do your own due diligence.  Some of the most notable Pros and Cons seem to be:

 

Pros:

  1. Lower annual expenses due to lower turnover when compared to actively managed funds.
  2. Investing in a wide array of different investment indices and asset classes as I pointed out before.

 

Cons:

  1. They generally do not outperform the market or index you’re invested in
  2. There could be liquidity issues

 

Why Now?

 

Even though this is not an investment advisory website, I honestly would not feel comfortable putting out articles on securities that I personally do not feel very good about (we will consider reader requests with the full disclosure that it is a readers request).  In today’s market environment, there isn’t too much I feel very good about which is the reason why I am not posting regular “Divi-X” Play of the Week articles.  Even this particular security, The iShares Russell 1000 Value ETF (IWD), is currently down over -9% YTD.  But hey!  You gotta put your money somewhere, right?

 

This is not a stock-picking strategy guide but, as mentioned in “The Dividend Times,” an investment enhancement strategy. You are strongly encouraged to do your own due diligence on any security you consider investing in.

 

The Last Five Years

 

Five years ago, a “Leverage Projection Sheet” would have looked like this:

 

IWD 012411 66.28 Yld 1.86 PE NA Lev Proj

 

And below is a five year chart of those results:

 

IWD 012411 66.28 Yld 1.86 PE NA Rtrn Scen

 

A few things to note about this chart:

  1. We leveraged at 23.85%.
  2. This particular security has a history of increasing dividends every year, but the dividend amounts  are different every quarter.  The trend seems to follow that the lowest dividend amount is paid in the first quarter of the year, which is when this position would have been initiated and what our ‘Leverage Projection’ would have been based on.  However, knowing the trend of the lowest dividend payout is paid in the first quarter, had this position been initiated in, let’s say, the third quarter; we would’ve used the lowest dividend payout for the year which would’ve been the first quarter’s dividend payout.  The reason being, that after a whole year of increased dividend payouts, the first quarter dividend in the following year fell considerably ($ .31, $ .37, $ .33, $ .44, and back to $ .36 the first quarter of the following year).
  3. Because we based our ‘Leverage Projection’ on the lowest dividend payout of the year, we gave ourselves a decent safety cushion by allowing the additional dividend payouts to contribute to our net “Divi-X” returns.
  4. You can see that after the first year, your “Divi-X” returns fell below the ‘Without “Divi-X” returns by a modest amount, but once it recovered, “Divi-X” maintained a lead throughout the remainder of the five year term.  Even after the -9% YTD (over -16% from its all-time high reached in Feb. 2015) decline at the end.

 

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Yields

Next, we examine a chart of the “20YR Yield Projection,” with the first five years reflecting actual data.

 

IWD 012411 66.28 Yld 1.86 PE NA 20YR

 

A few things to note about this chart:

  1. The ‘Cash Yield’ did not manage to surpass the ‘Stock Yield’ during our five year time period but it did manage to close the gap quite a bit. As you can see from the chart above, if there weren’t any further dividend increases, the ‘Cash Yield’ would surpass the ‘Stock Yield’ by a mere 0.04% in 2021 and continue to widen its spread every year after that.
  2. Even though our “Divi-X” Yields did not surpass the ‘Without “Divi-X” yields within the last five years, you can see that the “Divi-X” dividend trend line is on a sharper incline than the ‘Without “Divi-X” dividend trend line.  So, if (IWD) continues to raise it’s annual dividends about the same rate every year it is quite possible that the “Divi-X” yield will surpass the ‘Without “Divi-X” yield within the next two to three years.

 

Dollar$ and PerCents – The Numbers Behind the Charts

 

So, after everything we looked at, how did we actually do?

 

 

IWD 012411 66.28 Yld 1.86 PE NA Lev Summ

(Returns are cumulative)

You can see that in the first year, “Divi-X” showed a modest negative of -0.33% compared to the first year returns of ‘Without “Divi-X” which managed an unimpressive 1.54%.  In the second year, “Divi-X” managed to pull a slight 2.19% lead over ‘Without “Divi-X” with a continued widening lead in years three (7.31%) and year 4 (10.88%) and just recently pulling back in year 5 (4.76%), as of January 25, 2016, after the recent (-16%+) decline from it’s all-time high reached in Feb. 2015.

All in all, not a spectacular performance, but a positive one.  The performance would have been much greater had it not been for the -16%+ decline, but that decline is one of the very reasons why I chose this ETF.  Markets will trend up and down and I have no intention of just showing you rainbows and unicorns just to make my system look good and make no mistake, using the “Divi-X” system will not exempt you from loss.  Choose your investments wisely.

 

Taking a New Position

 

IWD 012516 88.72 Yld 2.30 PE 10.77

 

 

Here are the numbers for our new ‘Leverage Projection Worksheet.’ When we initiated a position on (IWD) in 2011, we used a “Multiplier Pick” of 154 because the yield was below 2%.  As of today, (IWD)’s yield is listed at 2.73% but because of the inconsistent dividend payouts, we opted for a yield based on the lowest dividend payout over the last four quarters, which would be $ .51.  This brings our yield rate down to 2.30% annually.  Since the yield now exceeds 2%, we opt to use a “Multiplier Pick” of 80 instead of the previously used 154.  Our new position now has us levered at only 15.33%.

Additionally, instead of my usual ‘Rtrn Rate?’ of 9%, I’ve decided to lower that to 5% because of:

  1. An uncertain interest rate environment
  2. Overall market uncertainty
  3. (IWD)’s shortfall of my ‘Expected Return’ from the previous five years.

You can choose any ‘Rtrn Rate?’ you like.  I just listed some of my reasons above, but you might have your own reasons for lowering or raising your expectations.

 

Following below are the projections that our new ‘Leverage Projection Worksheet’ has provided for us. It’s important that you understand that your leverage projection is not a prediction but a projection of what you want your security to do. If it continually fails to meet your ‘Expected Return’ rate, you may want to consider other investment options.

 

First is the projected ‘Return Scenarios’ Chart

 

IWD 012516 88.72 Yld 2.30 PE 10.77 Ret Scen

 

As you can see, we aren’t expecting anywhere close to doubling our money after five years.

 

 

The projected ‘Leverage Summary.’

 

1YR 2YR 3YR 4YR 5YR
Projected Total Returns Using “Divi-X”
$ Return $517.24 $ 1101.58 $ 1716.88 $ 2363.91 $ 3043.55
“Divi-X” Rtrn 6.89% 14.66% 22.86% 31.47% 40.52%
Ttl Rtrn 5.83% 12.42% 19.35% 26.64% 34.31%
Without “Divi-X” 6.98% 14.63% 22.56% 30.78% 39.30%

 

 

And Finally, the 20Yr Yield Projection Chart

 

 

IWD 012516 88.72 Yld 2.30 PE 10.77 20YR

 

Keep in mind that we based our projections on the smallest quarterly dividend payout over the last four quarters.  If (IWD) continues to pay dividends in the same fashion over the next five years, these predictions are extremely conservative.

Conclusion

 

We’ll check in on this one a year from now and I’m hoping in five years, we’ll see much better than ‘Expected Returns’ in light of todays current share price. Until then, many happy returns!

 

Authored by Lee Carroll Wentker

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The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

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