Great Value Sectors for Dividend Growth Investors
My firm's Dividend Growth portfolio combines solid dividend-paying stocks with unique value opportunities slightly out of the mainstream. Have a look.
After the recent spate of market volatility, I thought it might be a good time to do a quick review of our strategies and how the volatility affects us.
To start, I would say that the best way to defend against a bear market is to simply buy stocks at good prices. The market will fluctuate, and there is nothing we can do about that. But in buying quality stocks at good prices, we dramatically reduce our risk of long-term or permanent losses. And along those lines, remember that every stock in our firm's Dividend Growth model pays a strong and growing dividend. And the large majority have continuously raised their dividends every year for more than 10 years, including the crisis years of 2008-2009.
My ideal holding period is one to two years, but I also take Warren Buffett’s advice seriously. Mr. Buffett says that any stock we own is one that we’d be comfortable holding if they were to close the market for five years. Again, I don’t necessarily plan to hold any stock in our portfolio that long. But I like to think that the stocks I buy are suitable to be held for five years or even longer.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Currently, our portfolio is allocated to sectors of the market that I believe have the best value pricing. A little more than a third of the portfolio is allocated to real estate investment trusts (REITs) and midstream master limited partnerships (MLPs), essentially “toll roads” that transport oil and gas with very little sensitivity to oil or gas prices. These sectors performed poorly from February through July, as worries over the Federal Reserve’s pending rate hike led investors to reduce their exposure to income-focused assets.
Yet I believe these fears are vastly overdone. My research has shown that REIT and MLP prices often move independently of the Federal Reserve’s actions, and in any event the coming Fed tightening cycle will likely be the mildest in decades. With much of the broader market looking very expensive today, I consider both sectors to be excellent values at today’s prices.
I also have about 20% of the portfolio allocated to what I consider “special situations,” or unique value opportunities that might be slightly out of the mainstream. These would include mortgage REITs, closed-end bond funds and business development companies.
All of these “special situation” sectors have several attributes in common. All pay very high dividends at today’s prices, all are trading cheaply by historical standards, and across all three asset classes it is very common today to find stocks trading at deep discounts to net asset value (NAV).
I tend to discount NAV, or book value, when looking at traditional common stocks as I believe it tends to get distorted by inflation and by accounting conventions. Yet in the case of mortgage REITs, closed-end bond funds, and business development companies, the discount or premium to NAV is generally a very good barometer of value. Because the underlying portfolios are revalued at least quarterly, book value is a good measure of the real, market value of the assets. And buying these securities at discounts to NAV is the equivalent of buying a dollar for 75 cents.
The remainder of the Dividend Growth portfolio is invested in solid, dividend-paying stocks that might be considered more mainstream. And in every case, I am buying stocks with improving fundamentals and a strong recent history of dividend growth.
There are never guarantees when it comes to the market. But I’m confident that the Dividend Growth portfolio is diversified and well-built for the road in front of us.
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 MCD, O and UL.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.
-
Why Spotify Stock Is Soaring After Q1 Earnings
Spotify beat expectations for the first quarter and its stock is notably higher following the report. Here's why.
By Joey Solitro Published
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
Now Could Be Time for Private Investors to Make Their Mark
The venture capital crunch may be easing, but it isn't over yet. That means there could be direct investment opportunities for private deal investors.
By Thomas Ruggie, ChFC®, CFP® Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Hot Tips for Home Buyers and Sellers Right Now
Real estate looks to be especially hopping this spring, thanks to pent-up demand and buyers adjusting to higher mortgage rates. Here’s how you can prepare.
By Pam Krueger Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published