Friday, April 13, 2012

Investment Report - April 2012: Net Payout Yields


This model gained a solid 4.3% in March versus 3.1% for the benchmark S&P 500. The model remained strong all month even as the SP500 struggled toward the end of the month.  

Trade
March was a normal trading month for this model with only 1 trade initiated in order to reduce the cash balance.

Time Warner (TWX) was bought as the stock flashed one of the highest Net Payout Yields in the over $10B market cap group with a huge buyback. The stock also maintains a strong 2.9% dividend providing for that investor class as well. For more details on why Time Warner was selected, please read this article.

Top Performers
The largest gains came from Lowes (LOW), WellPoint (WLP), Gap (GPS), and Goldman Sachs (GS) along with several other stocks that had solid gains. Most of those stocks saw gains that exceeded 10%.

Typical of a model that allows for trading signals based on an indicator such as the Net Payout Yield, a stock like Goldman Sachs was purchased back in January at a time when most investors were ignoring it. Then by March, the stock was producing major gains as most other investors were just catching on.

Conclusion
The market in general remains in a uptrend that likely will lead to multi year highs and possibly eventually to all time highs in the S&P 500. This model will remain fully invested to capture as much upside as possible while protecting against any major downside from owning solid large cap stocks with outsized yields.

Our biggest concern to this model remains that end of year tax hikes to dividends  will hurt these stocks in the short term. This appeared to happen during the last quarter of 2010 when the Bush tax cuts were on threat of expiring. Naturally 2011 was a strong year for dividend stocks as the fears subsided. This might not happen in 2013 if the taxes are hiked.

The other concern is that most dividend stocks have reached lofty levels after a very strong Q1. This model has rotated out of several stocks where the dividend yield had declined below acceptable levels and expects to add a few more in the coming weeks and months. Considering this, we don’t expect a huge impact on the model from such a tax hike as the buyback stocks in the model could excel as investors rotate to the more favorable tax treatment.


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