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Sometimes I have mentioned stock screens on the Berkshire board, and somebody asked me about how they have done in the many years since.
Here is a slight edit of my reply, which some might find interesting.

The most interesting failure is a screen called YLDEARNYEAR, invented in 2003. (not by me)
It outperformed the market through thick and thin for a dozen years after it was published, the sort of thing that gives a lot of confidence that there is something "real" going on.
Then it promptly turned around and started underperforming the market for the next 5-6 years, by a lot.
So, what happened?

The YLDEARNYEAR screen seeks firms with both high earnings yields and high dividend yields.
That population of stocks itself seems to go in and out of fashion, not necessarily on a cycle matching bull and bear markets.
To summarize my current view:
With hindsight, it appears that the screen magnifies (very successfully) the degree to which the dividend population is in vogue.

Some numbers:
To get considered by the screen, a stock has to be profitable and have a dividend, so we can look at that universe as a baseline.
In the first 11 years after the screen was published, the set of ALL moderately profitable firms with dividends outperformed the broad market by about 4.4%/year.
(for that I looked at all stocks in the Value Line 1700 database with P/E < 33 and any dividend yield, equally weighted)
Consequently, during that period, it was a very fertile hunting ground for any yield screen: there was a tail wind.

The YLDEARNYEAR screen outperformed the market by about 14.1%/year in this stretch. (5 fresh stocks bought each month, each held two months, for a 10 stock "dozens" portfolio).
But in the next 6.1 years, the set of all profitable dividend earners underperformed the S&P by -5.6%/year, and the screen underperformed by -17.1%/year.
To overgeneralize, at some point we all noticed this bad streak and gave up on the screen as a fabulously overtuned beast that happened to have a pretty long lucky streak after publication.

But dividend payers have come back into fashion again, outperforming the S&P by +5.4%/year in the last 3.25 years.
And, as you might now expect, the screen has come back into its own: it has outperformed the S&P by 17.7%/year in that same period.
Revenge of the coupons, indeed.

During the stretch that dividend payers were out of fashion, almost all humans using this screen would have thrown in the towel.
Yet, had one stuck with it, it has still outperformed overall since its invention 20 years ago.
The S&P returned 10.1%/year, the set of passably profitable dividend payers returned 11.5%/year, and the screen returned 14.3%/year.

Maybe it shouldn't be thrown out entirely.
One could potentially check to see if dividend earners are in or out of fashion lately, and use the screen only when the omens are good--tie situation doesn't change often. But it's hard to know in advance how that attempt would do long term.
e.g, check to see if no-div stocks have outperformed or underperformed hi-div stocks in the last 2 months. If so, don't use YEY, use something that picks no-div stocks, e.g. a growth screen.
This is just a very crude approximation of Zee's old aggressive/conservative signal.

Jim

This is an interesting subject and I've wondered about other screens, particularly momentum.
Starting in 2018 many momentum screens really started doing poorly.
They have picked up some of late, but still compared to the "tuning period", results are not good.

For whatever reason, and probably wrongly, I'm not as willing to wave that off to over-tuning as quickly as some others.
After all some of the screens are rather simple so it's hard to conclude there was excessive over-tuning.
YLDEARNYEAR would be an example of that; there's hardly anything to the screen.

Rather, it seems to me that there's just something that has changed in the macro environment that has thrown the screen out of favor.
And therefore, the screen performance could improve if the conditions became favorable again.

As a momentum screen example, consider VG-Horse per this post http://www.datahelper.com/mi/search.phtml?nofool=y...
The screen has some constraints on institutional holdings and float, and looks for growth in EPS and Sales.
It also looks for low price and high free cash flow and has a typical momentum-based final sort.

At the time of the post above, the top 10 returned 34% CAGR from 19970902 through 20150918.
Since then, 20150918 through 20230310, top 10 only returned 6% - a clear failure. Did sales and EPS growth go out of style?
From pandemic lows, it looks somewhat better, top 10 returned a more respectable 17%, still half what it had been.
Sticking with it throughout 19970902 to 20230310 gives a CAGR of 25%, still nothing to complain about.
(Screen link: http://gtr1.net/2013/?~VG-Horse_V2:h21f0.4::FINwit...
The incd.s in original screen had to be removed to extend backtest date through 2023).

I think momentum, at least as defined in many SiPro screens, has suffered for some years now, and the recent focus on mega-caps hasn't helped either.
Might momentum ever return?


Mark

Similar to the unfashionability of dividends affecting YEY, look at the relative unfashionable state of small caps vs large (& mega caps) caps the last few-several years. SIPro stock picks are generally small caps; very few of those screens have *consistently* beaten 'the market'. Market conditions and styles have changed, constantly do - and we've lost the capability to track these screens' performance vs benchmarks as a group.

I have for several years linked momentum screening with some sort of timing signal, and I think that keeps the screening healthy. Recently Jim talked about why it is hard to arbitrage the momentum tools - i.e. front running just creates more momentum (if I got that right.
Jim, I am medical and not financial in my education/experience so I have appreciated all your shared thoughts over the years. What tools do you suggest to determine whether dividends are becoming popular or not?

Thanks,

Smufty

What tools do you suggest to determine whether dividends are becoming popular or not?

The best indicators are along the lines of Zeelotes' old posts on building a speculative/defensive signal.
The essence is to look at a lot of metrics of style, to see which end of that spectrum is doing well.
In this thread I've mentioned dividends, but the Value Line "Safety Rank" is another indicator. There are many possible choices of "flavour".
His signal checked several such indicators to see which population was doing better lately, and build a consensus.
Here are some of his impressive posts on that subject
http://www.datahelper.com/mi/search.phtml?nofool=y...
http://www.datahelper.com/mi/search.phtml?nofool=y...
I think his starting point was to divide time into 3 states: speculative/defensive/normal based on the relative performance of different groups in the last couple of weeks. "Normal" times were about 70% of days.

For simplicity, I just look at dividends.
I look at three equally weighted portfolios of Value Line stocks, divided into three categories
* All stocks without any dividend
* Dividend payers, highest 50% of dividend yields
* Dividend payers, lowest 50% of dividend yields

Compare the relative recent performance of these three groups, and how each of the three groups does in the next month, and you'll see some very non random results.
(there are actually six different possible states based on the rank order of those three groups if you want to get dangerously overtuned)

Alas, this signal isn't easy to calculate without a backtester / stock database handy that lets you test various lookback time frames.
But you could probably learn something simply looking at the average "Total Return X-Week" field in the VL database for the three groups. 4 week, 13 week, or 26 week.
Or some sum/average combination of those.

Here is a simple example that any VL subscriber could do with Excel:
For each of the three groups, calculate the average 13-week and average 26-week returns for the group, and sum the two averages.
If the no-dividend group was the best performing of the three groups on that sum, go long the no-dividend group the next month.
In backtest this simple test is bullish only around 43% of the time. It seems better than random for identifying the minority of the time that speculative / high growth / momentum slate of equities do their best.
For most things you might go long, the CAGR during the 40% of months this is bullish seems to be about twice the CAGR in months it's bearish.
A long/cash switch won't outperform all-long-all-the-time of the same portfolio, but might beat S&P buy and hold, as the S&P returns during the bearish stretches aren't much.

Jim

I always strive to find the most efficient approach to achieve my goals. When it comes to determining the prevailing trends, I believe analyzing the performance of dividend ETFs offers valuable insights into what is currently in vogue.

Mark

I believe analyzing the performance of dividend ETFs offers valuable insights into what is currently in vogue.

That makes sense.
Especially if you look at the relative performance of a dividend ETF versus an equal weight ETF: it tells you whether the coupon folks are ahead or lagging.
(even better would be an equal-weight no-dividend ETF as the baseline, but I'm pretty sure there aren't any)

Though offhand I can't find a suitable ETF that's all dividends and not concentrated (not cap weight), but I'm sure there is one.

The weighting is not just a quibble.
Compare these two graphs
First one is ratio of VIG (a slightly concentrated dividend ETF) to RSP (equal weight S&P 500, no concentration).
https://stockcharts.com/h-sc/ui?s=VIG%3ARSP&p=D&yr...

Second one is ratio of VIG to SPY (cap weight the same 500 stocks).
https://stockcharts.com/h-sc/ui?s=VIG%3ASPY&p=D&yr...

The two graphs aren't even remotely the same shape.

Jim

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