Thursday, January 6, 2011

Investment Report - January 2011: Net Payout Yields

This article focuses on the Net Payout Yields Model offered via Covestor.com where investors can subscribe to the trading data of Mark Holder. 


The Net Payout Yields model recently started up and spent most of November and the early part of December allocating cash in the model. The model is now basically fully invested and will typically remain that way. The goal of the model is not to time the market or follow economic conditions, but rather to invest in companies with the highest Net Payout Yields (buybacks + dividends).

The model struggled over the last couple of months of 2010. Hard to tell whether it was investors cashing out of dividend stocks fearing a tax increase in 2011 or large cap stocks with market caps above $10B struggling to keep up with a surging market.

For December, the model returned 6.08% though the relative performance was disappointing considering the 6.53% gain of the SP500.

The largest weightings are now CSX Cosp (CSX), Walt Disney (DIS), Home Depot (HD), Wells Fargo (WFC), and Chubb Corp (CB). The goal is to maintain a relatively equal weighting of roughly 20 stocks so weightings usually just reflect price movements since the portfolio start and any specific investment decision of a particular stock.

The only trades for the month were Medco Health Solutions (MHS) and Gilead Sciences (GILD). Both stocks that have had major buybacks in the recent year that will continue to support earnings and provide downside support as the buybacks likely continue.

A lot of investors aren't high on buybacks, but they do provide a more tax efficient use of corporation cash especially for investors not needing income. Also, buybacks by top management teams can signal ideal entry and exit points. When a company stops buying back stock, it can signal the stock has become expensive.

The model typically has a even split between dividend and buyback stocks, but no hard rule is used and hence it has the flexibility to adjust the market.

Going forward look for limited trading which helps reduce transactions costs and taxes.

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