Valuation Ratio Experiment: December Update

Which portfolio is beating the S&P 500 by nearly 20%?

In May of 2020, I set up a real-time competition between dividend yield and shareholder yield. My thesis was that shareholder yield was a far superior metric; however, most people are used to looking only at dividend yield. I knew people would be skeptical, so I started a real money challenge.

That evolved into more than just shareholder yield vs. dividend yield. We added four other valuation metrics to see which of them would be king.

The Methodology of the Study

To set up the study, I started with the same basic methodology. Each portfolio would be started d on the exact same date (May 4, 2020) and would have the following characteristics:

  • The initial screener would be the S&P 500 Index

  • 30 stocks; all equal-weighted (at the beginning)

  • Each portfolio owns the same number of stocks in each sector; these were matched to the weighting of that sector in the S&P 500.

  • Rebalanced annually (to reduce turnover and taxes) with the exception of 2020; will reset January 2021 to keep calendar years consistent.

The only thing that would be different about each portfolio is how the stocks were selected. There is a single ratio that dictates which stocks score the best. Those stocks are then added to the portfolio until that particular sector limit was reached.

For example, in the shareholder yield portfolio, AAPL was amongst the top 8 technology stocks for that specific metric. It would have made it into the portfolio. If there were 12 technology stocks in the top 30, only 8 would make it in (to keep the weightings as close to the S&P 500 as possible).

The objective of this is to isolate to the greatest extent possible which specific ratios do the best job of performing. Keeping everything the exact same (including sector weights) keeps things extremely tight to the S&P 500 equal weight and also allows us to more easily isolate why one strategy is doing better than another.

The 7 Portfolios

Here are the portfolios that we will examine in this study. I plan to update you periodically on how all of these are performing. NOTE: Remember, these portfolios are merely experiments. I have not done any fundamental analysis of these stocks. They were all chosen based on a preset methodology. I’m in no way recommending any of these for purchase. Do your own research before investing. :)

  • S&P 500 (market-cap-weighted) as represented by the ETF “SPY”

  • S&P 500 (equal-weighted) as represented by the ETF “RSP”1

  • Shareholder yield

  • Dividend yield

  • Buffett yield

  • EBIT/EV yield

  • P/E ratio

How has each of these portfolios performed through December 2, 2020?

#7: S&P 500 Index (as represented by SPY) +30.3% (2)

Last month: #3 This month: #7

What a turn of events. Last month, only two of the strategies outperformed the S&P 500. In November, the value ratios really started performing well; as a result, literally, every single ratio is now beating the market-cap-weighted S&P 500 since inception.

#6: Lowest Forward P/E Ratio +34.8% (3)

Methodology: Current price / Forward 12-month earnings per share estimates

Last month: #6
This month: #5

I’ve long been critical of the price-to-earnings (P/E) ratio. It’s simple to calculate, intuitive, and widely referenced. However, I think it contains virtually no useful value information. It only captures one moment in time, which can lead to value traps or for stocks to look “expensive” which really are not. That’s not even to mention the substantial issues with GAAP earnings per share.

The P/E ratio has been struggling to keep up with other, more robust methods of valuation capture. It has fallen to the worst-performing metric since the start of this experiment. It’s still up 34.8%, but remember that all investments should be measured against one another - so this metric has not provided impressive relative returns (even if absolute returns have been good; timing is to credit there).

#5: S&P 500 Equal Weight Index (as represented by RSP) +35.2% (4)

Last month: #2
This month: #5

The S&P 500 is a market-cap-weighted index. Since we are equal weighting all of our holdings at the start, the most representative benchmark is probably the equal-weight S&P 500. That index has actually performed more than 5% better than the S&P 500 since May 4th.

Therefore, we should consider this to be the more appropriate benchmarks for our strategies. It’s a tougher hill to climb, but it’s definitely a more fair way to compare how successful our little experimental funds are.

#4: High Buffett Yield +36.8% (5)

Methodology: 10-year average free cash flow / enterprise value (6)

Last month: #7
This month: #4

Moving up a spot is the Buffett Yield. So far, the strategy is up nearly 37% since the original investment in May 2020. There’s still a gap between it and #4, but it’s good to see this methodology pick up some slack. It is one of my most interesting custom variables for determining value.

What is “Buffet Yield”?

After studying Buffett for years, I’m convinced that he is not all about finding “cheap” stocks. He’s all about finding stocks that have a wide economic moat, compound their invested capital at high rates, and - ideally - grow without capital. When he can find that kind of company and get it at a good or even “fair” free cash flow yield (here I’ve called it the “Buffett Yield”), he gets interested in buying.

If the stock doesn’t meet both of those criteria, he’s content to pass on it until something comes to him that does. If that means waiting in cash for years (even decades), he’s willing to do it until he gets a fat pitch to swing at.

This “Buffett Yield” ratio is simply attempting to incorporate one of the two variables Buffett looks for. It’s not an attempt to beat Buffett or find an easy formulaic way to invest like him; that’s impossible. It’s just a quick shortcut to identifying stocks that are throwing off huge cash flows relative to the value of the entire business (including if you were to pay off debt).

#3: Highest Dividend Yield +44.9% (7)

Methodology: Trailing 12-month dividends per share / Price per share

Last month: #5
This month: #3

How has the highest dividend yield portfolio performed since May? Not bad, but it doesn’t look very impressive compared to some of the other portfolios.

As I said in my video when I started this list, dividend yield does not include as much information as you might think. Companies can do all kinds of things to pay big dividends while funding them in questionable ways (issuing equity, borrowing money, reducing future investment, etc.) so it’s not a great way to pick your stocks. You need to, at a minimum, consider other variables.

#2 High EBIT/EV Yield +45.1% (8)

Methodology: Highest operating income (EBIT) / enterprise value (EV)

Last month: #4
This month: #2

Research has shown impressive results for the EBIT/EV ratio. It’s one of my favorite single valuation metrics. It’s far better than the P/E ratio because it also incorporates the balance sheet into the ratio. For example, two stocks could have identical P/E ratios of 20. Yet, one company has 100% of its market cap in debt. The other has 0% in debt. Which is more attractive? The latter is obviously better.

The EBIT/EV ratio for these two companies would be wildly different. All else being equal, the highly indebted company would likely show an EV/EBIT ratio of 40; the other would show a ratio of 20. Now the lower debt company appears cheaper, which it should.

That’s why EBIT/EV is superior to P/E (and why I think it will show better long-term performance).

#1 High Shareholder Yield +49.1% (9)

Methodology: Highest shareholder yield (total dividends + buybacks (equity issuance) / market cap)

Last month: #1
This month: #1

See the difference between shareholder yield and dividend yield? So far, it’s nearly 12% better since May. Of course, that doesn’t necessarily mean shareholder yield will always do better. The evidence both historically and in real-time suggests shareholder yield is the far superior metric.

Why Shareholder Yield is Better Than Dividend Yield

If you’ve been watching my YouTube channel, you know that I’m not a huge fan of dividend yield. It’s deceptive and alluring, which leads to a lot of investors into trouble. I’ve dedicated the last few months to combat this common myth amongst dividend investors.

However, there are certain cases where a high dividend yield is legitimate. Those situations are when a companies stock price has declined substantially, but they are still able to pay the dividend out of organic free cash flows. Even better is when that company can pay a dividend and buyback shares; that’s a double whammy. It’s like you getting both a $20 bill and a $20 gift card to Amazon. Jackpot! 😃

Unfortunately, there are other cases where the company is borrowing money or, worse, issuing new equity to keep paying the dividend. This creates an illusion of a high dividend yield, but it is being offset by bloating the balance sheet or diluting shareholders. It’s essentially like paying you $20 in cash, but then requiring that you give them a $20 gift card to Amazon. Technically, they paid you $20; really, it wasn’t much different than $0.


We’re basically creating our own index fund with these strategies. So far, everything has been going quite well. The portfolios are nearly all beating the S&P 500, shareholder yield is trouncing dividend yield, and the stock market analysts and their precious P/E ratio is lagging. Life is good. 🏝


P.S. - This month, I removed the Whale Fund from the scoring system. Its dates were off, so I thought it was a bit confusing to add that in. All of the rankings have been adjusted for that.

DISCLAIMER: This is for educational purposes only and is not investment advice. It is not a recommendation to buy or sell any security. The author owns every stock mentioned above. All opinions are my own.

  1. Since all of the portfolios are equal-weighted, this represents the most “fair” benchmark relative to these accounts.  ↩

  2. Morningstar “SPY” Total Return interactive chart. Calculated as $11,456 today / $8,789 on May 4, 2020 minus 1.  ↩

  3. “M1 Finance - Free Automated Investing.” M1 Finance, Accessed 3 Dec. 2020.  ↩

  4. Morningstar “SPY” Total Return interactive chart. Calculated as $10,924 today / $8,078 on May 4, 2020 minus 1.  ↩

  5. “M1 Finance - Free Automated Investing.” M1 Finance, Accessed 3 Dec. 2020.  ↩

  6. Calculated as total debt + market cap, which generally gives a more complete picture of a company. In essence, this is what the company would cost if you bought the entire thing and paid off all debts.  ↩

  7. “M1 Finance - Free Automated Investing.” M1 Finance, Accessed 3 Dec. 2020.  ↩

  8. “M1 Finance - Free Automated Investing.” M1 Finance, Accessed 3 Dec. 2020.  ↩

  9. “M1 Finance - Free Automated Investing.” M1 Finance, Accessed 3 Dec. 2020.  ↩