Friday, October 7, 2011

Investment Report - October 2011: Net Payout Yields

September was another decent month for the Net Payout Yields model with a return vs. benchmark of 3.46% - the portfolio was down 3.72% while the S&P500 fell 7.18%. Naturally on an absolute basis the results are disappointing, but this model is not designed to time the markets. The goal remains to outperform on the way down and remain even on the way up, in the effort to produce superior returns over time. For 2011, the model remains roughly 7.0% higher than the benchmark. As of the end of September, year to date the model was down 2.92% while the S&P500 fell 10.04%.

Trades
The model was inactive for the second month during September as the weak market increased the yields and hence the valuation attractiveness of most of the equities in the model. A few stocks though have recently reached new 52 weeks highs causing the yields to decline. For example, Bristol-Myers Squibb (BMY) has seen the dividend yield drop to 4% and without a buyback the Net Payout Yield (NPY) has reached below normal yields in the model. 

Top Performers
The best performing stocks in such a weak stock market were naturally the healthcare, consumer staples, and utility stocks. As mentioned, BMY hit 52 week highs during the month with a 5% gain. Other big gainers included WellPoint (WLP) up 3.5%, Entergy (ETR) up 3%, FirstEnergy (FE) up 2.8%, and Campbell Soup (CPB) up 1.6%. 

Bottom Performers
Naturally in such a weak market the bottom performers were stocks tied to global growth. The five worst performers had declines of over 13%. Vale (VALE) had the largest drop at over 17% while Hartford Financial (HIG), CSX (CSX), Capital One Financial (COF), and Itau Unibanco Holding (ITUB) all had losses between 13 and 15%. 

Conclusion
The market has seen significant weakness over the summer, but this model has held up well leaving investors in a good position to rebound with any fall rally. Also since a few sectors held up well, the model has the ability to rotate into weaker sectors that are now yielding more. 

Dividend paying stocks have held up much better during this market selloff than during 2008. Whether it's due to stronger balance sheets this time or that investors have been rotating to dividend paying stocks  that yield more than government bonds, these stocks still remain very attractive. Large companies continue to  announce large buybacks and increased dividend yields as opposed to the cutbacks during 2008 and 2009 suggesting an economic outcome better than most think. Regardless, this model solely focuses on the highest yielding large caps and will continue looking for opportunities to rotate into even higher yielding stocks than what the model currently owns. 




Disclosure: Long all stocks mentioned. Please review the disclaimer page for more details. 



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