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.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
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.
-
3M Leads Dow Stocks After Massive Earnings Beat
3M stock is headed toward its best day ever after the industrial conglomerate's impressive earnings report. Here's what you need to know.
By Joey Solitro Published
-
Social Security Login Changes Taking Effect Soon
my Social Security accounts created before 2021, are transitioning to the Login.gov platform.
By Donna LeValley Published
-
Want to Earn $1 Million More Over Your Lifetime? Do This
It's simple: Go to college or a trade school. It's an investment that will pay huge dividends for the rest of your life. And the benefits go far beyond money.
By Brian Evans, CPA, PFS Published
-
What Impact Does Politics Have on Insurance?
Some governors choose their state's insurance commissioner, while other states elect theirs, and that person has power over insurance issues, including rates.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Stock Market Today: Dow Outperforms After IBM Earnings
Investors also parsed a strong reading on second-quarter GDP and a dismal decline in durable goods.
By Karee Venema Published
-
If You're the Millionaire Next Door, You May Be a Terrible Spender
Good job on all that great saving. Now you need to start spending some of that hard-earned retirement savings on the things you love.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Who Will Be the Beneficiaries of Your Wealth?
Deciding who you want to inherit your wealth, as well as when and how, is a crucial first step in estate planning. Here are the four beneficiaries to keep in mind.
By Adam Frank Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
Stock Market Today: Stocks Tumble on Disappointing Big Tech Earnings
Poorly received quarterly results from Alphabet and Tesla sparked a steep selloff in equities.
By Dan Burrows Last updated