Remember the insightful quote by Steve Jobs, “People don’t know what they want until you show it to them.” More than 250 articles penned on the Seeking Alpha platform and countless engaging discussions on the Seeking Alpha Investing Experts podcast may have pegged me as an ETF enthusiast. And indeed, I am an ETF geek – no surprise there! But don’t go thinking I don’t have a soft spot for stocks. There’s a particular breed of stock that has been sitting idly on the shelf, waiting for the perfect moment to shine. This neglected strategy, christened “Yield At a Reasonable Price,” or simply, YARP, is about to make a grand re-entry.
Unveiling YARP: A fresh take on dividend stock selection
Conventional dividend investing methodologies often fall short in addressing the paramount need for defense in income investing. Shielding the portfolio from market downturns is not merely about outperforming the broader stock market. It comes down to safeguarding our hard-earned dollars, preserving our retirement dreams from being shattered by the tempestuous financial markets. A 3-5% dividend yield doesn’t offer much consolation when your principal is hemorrhaging multiples of that amount.
The primary objective? Yield and total return, but with the highest priority placed on risk management. This often-overlooked facet of investment reality is crucial, especially in today’s landscape dominated by indexing, algorithms, and a surge in speculative retail investor interest.
Promoting a defense-first approach
Emotions run high when markets turn volatile, and the notion that “dividend equals safe” crumbles in the face of adversity. In severe market downturns, almost all equities fall in unison. The scarcity of stocks meeting the stringent YARP criteria during the 2008 and early 2020 downturns comes as no surprise – in a bear market or a severe market crash, very few stocks escape unscathed.
So, how should dividend investors confront this harsh reality? The answer is to play defense – not just offense. It’s about having a robust process and a mechanism that alerts when the risk of a market freefall is uncharacteristically high.
Red flags with covered calls
Covered call ETFs have their allure, but they carry a significant risk. Emphasizing the steady receipt of the call premium leaves them exposed to swift market declines. Earning 1% per month sounds enticing until a 10% downturn over three months throws a wrench in the works, steering the ETF into a disheartening downtrend.
Market conditions wax and wane, and covered call writing can turn troublesome. My investment mantra has always been to “Avoid Big Loss (ABL).” Whether it’s SPY, a dividend yield ETF, or a covered call ETF, they are all susceptible to “the big loss” when the market takes a turn for the worse.
Shedding all my covered call ETFs in favor of a strategy I crafted years ago was a bold move, especially amidst persistent relative underperformance of dividend stocks. While I remain a staunch advocate of ETF-focused investment, this reinvigorated approach has found a firm place in my investment process and can even be applied to dividend ETFs.
The YARP saga and its methodology
A few summers back, I tasked my then 19-year-old son, an aspiring investment professional, to critique my investment decisions. Amidst this enriching collaboration, the YARP strategy took root, amalgamating rigorous stock screening and dividend stock selection with my 40+ years of technical analysis experience.
The objective was to curate a watchlist of financially robust stocks and meticulously track their ex-dividend dates each quarter. The heart of YARP is to unearth stocks that offer a yield at a reasonable price – a thoughtful fusion of income and risk management.
