The philosophy of “buy-and-hold” investing is either holy writ or deviant heresy, depending on who you ask.
My view here is a little more nuanced. You have to balance the benefits of a buy-and-hold approach — such as lower taxes and transaction costs, the historical upward bias of the market and the peace of mind that comes from removing yourself psychologically from active investing — against the possibility of a major drawdown or a permanent loss of capital.
Buy-and-hold investing looks great in a bull market. But it’s a lot harder to defend during a major market rout like the 2008 meltdown.
For most investors, a blended approach will probably make the most sense. You can buy and hold with a portion of your portfolio and take a more tactical approach with the rest.
Today I’m going to give you a solid ETF recommendation for the buy-and-hold portion of your portfolio: Cambria Shareholder Yield ETF (SYLD).
SYLD is the brainchild of quant guru Meb Faber, one of my favorite analysts. Ironically, perhaps, given that I am touting it as an ETF to buy and hold, SYLD is actively managed based on Faber’s screening. SYLD invests in 100 stocks with market caps greater than $200 million that rank among the highest in “shareholder yield.” Shareholder yield has been defined differently by different analysts, but Faber defines it as a combination of (a) cash dividends, (b) net share repurchases and (c) debt repayment.
All in all, these are three great measures of shareholder friendliness. SYLD has a bulletproof collection of stocks that will survive Armageddon. And its active management ensures that you’re not left holding a portfolio of dogs the next time a bear market hits.
Let’s dig into Faber’s investment criteria.
There is no stronger signal a company can send to the investing public than a dividend hike. When you commit yourself to parting with a significant chunk of your cash, you had better be certain that your business prospects are good. Because nothing is more devastating to investor morale than seeing a dividend cut.
A high dividend also forces management to be disciplined. It can’t throw cash at risky, questionable projects when it knows it needs that cash on hand to pay its shareholders.
Share repurchases also send a powerful message, and they can be thought of as tax-efficient dividends. A shrinking share count boosts earnings per share and, coincidentally, makes continued dividend hikes more likely.
But the key here is that share repurchases must actually reduce share count. If they simply “mop up” new shares created to satisfy employee and executive stock options, they’re not worth a whole lot.
And naturally, it’s easy to understand why debt repayment is attractive. Lower debt levels mean less potential for financial distress during the next crisis. And starting with a low debt load gives you flexibility. Should an opportunity arise, a low-debt company can always borrow new funds to take advantage of it.
We’ve seen plenty of that recently from the likes of Apple Inc. (AAPL), which — at Carl Icahn’s prodding — has borrowed cheaply to snap up its underpriced shares in the market. But a debt-laden company will generally lack the means to borrow at exactly the time that doing so would be most attractive.
This is why I consider SYLD a solid buy-and-hold choice. I think of SYLD as the ultimate quality index, and its margin of safety comes from the fact that its constituent holdings are financially strong enough to survive a financial apocalypse — and even profit from one.
SYLD tries to keep its holdings equally weighted, but naturally there is portfolio drift between rebalancings. Today its biggest holdings include Frontier Communications Corp (FTR),Lowe’s Companies, Inc. (LOW), Legg Mason Inc (LM), Apple, Chemed Corporation (CHE), CVS Health Corp (CVS) and Western Digital Corp (WDC).
Several of these — including Apple and CVS — are companies I might be tempted to buy and hold on an individual level. But others — such as Frontier Communications and Western Digital — are stocks that I’d probably avoid putting in a long-term portfolio.
That’s the beauty of SYLD. You’re not buying and holding a stock so much as you are buying and holding a strategy. The individual holdings change over time, but the methodology for choosing them does not.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing he was long AAPL and SYLD.
[…] By Charles Sizemore, Sizemore Capital Management […]