Wednesday, April 6, 2011

Investment Report - April 2011: Net Payout Yields

March was another solid month for this model, as it beat the benchmark (up 1.95% versus 0.10 loss for the S&P 500). The model also wrapped up a solid first quarter with a 6.57% gain. For a Risk Score 1 model, the goal remains to outpace the benchmark by a slight amount eac month with greatly reduced volatility as opposed to models in higher risk scores.

Trades
For the month, the model sold Walt Disney (DIS) and United Parcel Service (UPS) as their net payout yields dropped below acceptable levels.

Those two stocks were replaced with Gap (GPS) and Entergy (ETR).

GPS maintains a modest dividend of 2%, but has made significant buybacks in the last few years. On February 24th, they announced the Board of Directors approved an additional $2 billing share repurchase authorization and a increase in the annual dividend to $.45 for 2011. For Q4 alone, they repurchased $598M of stock or an annualized rate of nearly 18% making them a top 4 net payout yield stock.

ETR is another top net payout yield stock having a solid dividend of nearly 5% plus regular stock repurchases. The stock was hit after the nuclear issues in Japan caused concerns overly their nuclear operations in northern United States providing for an ideal entry point.

Top Performer
Lorillard (LO) was the top performer with a 25.8% gain. After a weak few months, LO popped on numerous reports that their menthol cigarettes didn't propose greater risk. In fact according to a Bloomberg report, a Vanderbilt University study found that menthol cigarettes may pose a lower risk for lung cancer.

With all that said, this model doesn't research the fundamentals of the stocks it holds. Rather it lets the net payout yield speak for itself. Even after this run in the stock, the dividend yield is still 5.5% and the company has made significant stock repurchases in 2010.

Conclusion
This model continues to gain momentum as higher dividend stocks come into focus after a weak yearend when the dividend tax rate was in question. Many of the stocks in this model such as GPS, continue to have yields in excess of 10% making these stocks much more attractive then bonds or treasuries yielding significantly less in this low interest rate environment.



Disclosure: Long ETR, GPS, LO in client and personal accounts. Please review the disclosure page. 

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