Meb Faber’s Radical Dividend Investing Strategy: Avoid Dividend Stocks

We think it's low.

Tell me about your provocative paper, "What You Don't Want to Hear About Dividend Stocks."

Historically, dividend stocks have outperformed the broad market any way you look at it. But what most people don't know is that "dividend" is just a substitute for "value" – and not a very good substitute, at that. Dividend is simply another way of doing value investing. And if you're going to do value investing, there are better ways to do it. You can come up with a basic value strategy that will do similarly or even better than dividend stocks.

What's the biggest benefit?

The really important thing [to remember] is that dividend stocks are highly tax inefficient. So if you do a value approach and completely avoid them, you can add another 50 to 100 basis points to after-tax returns.

Is this a good time to use that strategy?

Yes. Right now dividend stocks are expensive – more expensive than the broad market. So you're getting a sort of triple-whammy by investing in individual stocks. It's particularly timely for people to avoid them.

Talk about the argument you present in your paper, "Finding Yield in a 2% World." You examined a global value approach to sovereign bonds in 30 countries going back to 1950.

Most U.S. investors have no exposure to the largest asset class in the world, which is foreign bonds. If they do have exposure, they have it through a market cap-weighted index, which allocates more to countries that issue more debt. Something like 70% of the global bond indexes are invested in just five countries: the U.S., France, Germany, the U.K. and Japan.

So, what, specifically, do you propose?

A value approach to bonds, which is similar to a value approach to stocks. Bond yields in the U.S. are under 2%, and a lot of Europe is flat to negative. So you can get a basket of, say, the top 25% of the highest yielders, and the yield will be closer to 7% or 8%, which is a lot better position than being in the very low-yielding U.S. 

At the end of 2014, you told me, in an interview, that your forecast for the coming decade was for stocks to do about 3% a year in the U.S., based on long-term valuations. Are you sticking with that?

Yes, the same low digits – maybe 5% now. Long-term valuations haven't changed that much. The U.S. market is up some but not too much.

Your new book, "Global Asset Allocation," tracks 13 assets and their returns since 1973. You found that, with a few exceptions, the allocations have similar exposures.

That's right. This goes beyond a limited stock-and-bond portfolio to consider a more global allocation that also takes into account real assets. The book is a simple route to following star stock-pickers and their investing ideas. It takes you through [the strategies of] a lot of famous star managers, like Warren Buffett, Ray Dalio, Rob Arnott and Marc Faber [no relation]. It's a fun read.

How are the Cambria funds performing?

Fine. [But] we don't like to get into the game of talking about performance because all funds go through cycles of outperformance and underperformance, and all our funds are less than three years old. So we'd be talking about the performance of this year or the last six months. That's usually not too helpful.

On your blog, you publish your personal holdings and allocation. This year's article is titled: "Take Lots of Risk, or None At All? My Portfolio Allocation for 2016." You wrote, "I think it's important to have skin in the game."

Right. All of my [liquid assets] are in funds that I manage.

— Check out Meb Faber: Should Investors Buy, Hold or Hedge? on ThinkAdvisor.