Thursday, December 22, 2011

Investment Report - December 2011: Net Payout Yields

This report is very behind schedule this month, but I thought it was worth writing anyway. This model continues to work well and the word needs to get out more about the advantage of net payout yields over just focusing on dividends.

November was yet another solid month, with a 0.05% gain for this portfolio, on both a relative and absolute basis, as the benchmark S&P 500 lost 0.51%. When the market has down months this model continues to shine and overtime the results become much more evident. For the last 12 months, the portfolio was up 12.72% versus the 5.63% for the benchmark. Despite all the volatility in the markets, the Net Payout Yields Model has had a great absolute and relative performance.

Trades
The model had only one trade in November. Lowes (LOW) was purchased on November 1st as the net payout yield (NPY) surpassed 16% at the end of October. While LOW only paid a dividend of 2.6% at the time, 2.3% now, the company bought back a significant amount of stock in the first half of the year.

Combine a 52 week low on the stock price with a solid dividend yield and a recent significant buyback program and the recipe for higher stock prices is usually present.This also highlights how investors solely focusing on dividend yields can miss out on solid gains.


Noteworthy
Lowes was the top performer for the portfolio during November with a 15% gain. The stock produced a 0.65% contribution for the month and more than accounted for the 0.55% active return. This highlights why actively managing this concept has numerous advantages over just handling it similar to the Dogs of the Dow Theory where investors pick the 10 highest yielding stocks on January 1st each year or any preset date.

Not surprising but Home Deport (HD) was another strong performer up 9.5% for the month as all homebuilding related stocks rose for the month. Not many investors caught these moves, even though NPYs were highlighting the undervalued position.

Bristol-Myers Squibb (BMY) and Raytheon (RTN) also has good gains for the month as defensive sectors shined.

Hartford Financial (HIG) and Activision Blizzard (ATVI) lead the bottom performers for the month as growth related and financial stocks got hit from more European debt woes.

Conclusion
The first full 12 months managing this model on Covestor produced good results. Active management has been shown to help, but it doesn't mean wild trading. Rather it's buying and selling positions when they hit extreme yields. No reason to time a decision only based on the calendar.


Disclosure: Long LOW, HD, BMY, RTN, HIG, ATVI. Please review the disclaimer page for more details.

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