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Two different ideas
Japan and high-yielders
Today we’ll be looking at two unique ideas.
Among global regions, one area that sticks out is Japan.
DXJ, HEWJ, and the Nikkei itself are all at the top of the global leadership board. All of these represent a basket of Japanese stocks without JPY:USD exposure.
NIKK:SPX Quarterly. This ratio chart is another way to show the relative outperformance in Japan. Earlier this year, this ratio retested the prior 2012 lows as support, before a strong bounce.
DXJ Weekly. Looking directly at the price chart of Japan, we see the beautiful long setup forming.
If we get a breakout in the DXJ, the Nikkei index could possibly make a run towards the 1989 highs. Although that is a big 40% rally from here and can take years.
What’s behind Japan’s relative strength?
As trend followers, we don’t need to concern ourselves with why something is trending. But if you want a reason, this makes some sense:
The Bank of Japan has been defying the global rate hike wave by keeping interest rates at rock bottom (link). This keeps Japan’s asset valuations propped up, but it also means a weak yen. A lot of the biggest companies in the Nikkei have significant revenues coming outside of Japan (eg. Toyota, Honda, Nintendo, Canon, etc.). A weaker yen boosts their overall profits.
ZPR Monthly. This Canadian preferred share ETF is retesting a major base, like the XDV (Canadian dividend ETF) chart I shared in a recent post.
Preferred shares are equity but have many similarities to bonds. Their dividends can be fixed for a period, based on some amount above a benchmark rate. For example, Enbridge Series-B preferred shares pay a fixed dividend that is reset every 5 years to the 5-year Canada bond yield plus 2.4%.
Currently ZPR has a 5.4% dividend yield. You can hear David LePoidevin talk about why he loves preferred shares so much in this market environment: video.
SYLD Weekly. A potential failed breakdown in the Cambria Shareholder Yield ETF.
Why look at high-yielders?
In the 90’s, Jim O'Shaughnessy published “What Works on Wall Street” – a book that back-tested strategies based on momentum, valuation, size, and style. Jim found that buying stocks with high shareholder yield (dividend + buybacks) had significantly outperformed the S&P 500 over the long run.
From 1964-2017, the top 10% of companies by shareholder yield outperformed the broad market by 3.5% annually, while the bottom 10% underperformed by 7.5% annually.
Basically, you want to favor companies that return capital to their shareholders, rather than serial diluters (hint: gold miners). If you want to learn more:
Often, we see segments of the market that few are talking about delivering nice returns. Last year we saw that with farmland. It’s not a stretch to see Japan provide some alpha over the US. In fact, during the 70s and 80s, the Nikkei outperformed SPX by over 3x.
And if this remains a choppy market for years as I alluded to in my previous post, the idea of holding assets paying out large distributions makes sense.
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.
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