This week I’m going to outline some of the portfolio moves I’ve made recently in my Dividend Growth Portfolio. But first, let’s take a quick look at the news that caused the market to jump on Wednesday. The S&P 500 jumped 1.7% in its biggest daily move of the year.
The cause?
The newly-released Fed meeting minutes said exactly what I’ve been saying for most of 2014: Rates are going to be exceptionally low for a long time to come. I touched on this last week in “Ignore the Jobs Report: The Fed Won’t Be Tightening Any Time Soon,” and I recommend you give that article a read if you haven’t already.
In a nutshell, the Fed is worried on several fronts. Yes, the unemployment rate is coming down, but it’s not being accompanied by wage growth and much of the improvement in the rate is due to Americans dropping out of the workforce altogether. Also, inflation remains below the Fed’s target, and the Fed is worried that a sharply rising dollar–which is a consequence of expectations of rising rates–will kill America’s competitiveness in exports.
Adding to all of this the fact that Japanese and European investors are fleeing their own record-low yields for the comparably higher yields in America, and you have a recipe for lower yields on this side of the Pond for the foreseeable future.
The Fed will not invert the yield curve by raising short-term rates above long-term rates; doing so would risk triggering a recession.
All of this is fantastic news for yield-sensitive investments…which brings us to the Dividend Growth Portfolio.
Dividend Growth Portfolio
The Dividend Growth Portfolio’s primary mandate is to generate a growing stream of income that will outpace the rate of inflation while providing a competitive yield today. As a secondary objective, I expect to meet or exceed the total returns of the S&P 500 over time.
Today, the Dividend Growth Portfolio has a large, overweighted position in equity REITs, along with significant allocations to Master Limited Partnerships and smaller allocations to mortgage REITs and business development companies. All of these asset classes are sensitive to changes in bond yields–which is why it is so critically important that we get the macro story on bond yields correct.
The “mini” yield scare we had following the Fed’s September press conference hit the Dividend Growth Portfolio hard, though we’re still sitting on good returns for the year. Through through October 7, the strategy had returned 10.8% year to date vs. the 6.3% year to date returned by the S&P 500 [Note: All Returns data reported by Covestor. Past performance is no guarantee of future results.]
I made several portfolio moves in Dividend Growth over the past month. To start, I sold long-time holding National Retail Properties (NYSE:NNN), which may raise a few eyebrows. I’ve written repeatedly that I personally own shares of NNN that I hope to never sell–I hope to gift them to my children and future grandchildren someday.
Well, my sentiment here hasn’t changed, and I do in fact still own shares of NNN in an IRA account that are set to automatically reinvest my dividends. I still consider it an excellent long-term “buy and forget” stock. But given its current premium valuation relative to its peers, I don’t see the shares performing particularly well over the next few years, and I see better opportunities elsewhere. But should we see a correction in NNN’s stock price, don’t be surprised to Dividend Growth snapping up a few shares. I still consider it to be one of the best long-term dividend-compounding machines on the planet.
I also sold shares of Select Income REIT (NYSE:SIR) and Hospitality Properties Trust (NYSE:HPT). SIR and HPT have not performed particularly well this year, and while I consider their businesses sound, I believe we have better opportunities elsewhere. Likewise, I decided to take profits in Cisco Systems (NASDAQ:CSCO), Kinder Morgan Management (NYSE:KMR) and Nestle (OTC:NSRGY). I should note that I am still bullish on the Kinder Morgan companies and continue to have a position in KMI.
New additions this month included Apple (NASDAQ:AAPL), BP (NYSE:BP), Prospect Capital (NASDAQ:PSEC), Senior Housing Trust (NYSE:SNH) and Telenor (OTC:TELNY).
I’ll go into deeper detail on each of these new positions next week, particularly Prospect Capital. I see very strong returns coming from that position. But I will tell you today that my view of Apple Inc (NASDAQ:AAPL) is very close to that of Carl Icahn, who today published an open letter saying that Apple was undervalued by half and prodding Tim Cook to launch yet another large share repurchase plan.
I don’t share Icahn’s enthusiasm for the Apple Watch. In fact, I expect the product to be something of a bomb. I also think Ichan is completely unrealistic in assuming that Apple Pay will capture a 30% market share of all U.S. credit and debt card spending by 2017. I don’t see Apple capturing that kind of market share ever, let alone in the next three year. But frankly, it doesn’t matter. If all of Apple’s other business lines stagnated, Apple would be an attractive stock based on its iPhone sales alone. That gives us a nice margin of safety buying Apple at current prices.
Apple stock trades at a significant discount to the broader market, and Apple has been an aggressive dividend hiker in recent years. It’s a fine addition to Dividend Growth.
Disclosure: Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.