If I could sum up the year-to-date with one line, it would be “long live boring!”
The Dividend Growth Model, which is designed to be a stable, long-term producer of income, is one of the top-performing portfolios on the Covestor platform, with year-to-date returns 23.7%, vs. 13.2% for the S&P 500 (returns through May 3, 2013).
And remarkably, those returns were generated with less volatility (beta of only 0.7% and lower maximum drawdown than the S&P 500).
I would love to say that the investing process is as simple as buying a basket of income-producing stocks and watching them run circles around the market averages. It has been that simple in recent years, but this is a result of a handful of conditions that we can’t expect to endure forever.
To start, two major bear markets in less than a decade massively shook investor confidence in growth and has led to a very narrow focus on cash dividends. With years’ worth of capital gains able to evaporate in a matter of days, investors have come to see the wisdom in the old Wall Street saw that a bird in hand in worth two in the bush.
Secondly, with bonds and traditional savings accounts and CDs yielding next to nothing these days, investors have flocked to dividend-paying stocks as bond substitutes. For long-term investors, I believe this is the right thing to do. If bought well, a portfolio of dividend-paying stocks will produce an income stream that grows faster than the rate of inflation, meaning your standard of living has the possibility of improving in retirement. The exact opposite is true of a bond portfolio; even with the modest inflation we have today, your real bond income gets a little smaller each year.
And finally, demographics have played a role here. The market turbulence notwithstanding, the Baby Boomers—America’s largest and wealthiest generation—are starting to retire, and their focus is on the generation of income. And companies are responding to their tastes by upping their dividend payouts.
Sizemore Capital believes that each of these trends has further to run and that the outlook for dividend-paying securities continues to be strong. Additionally, with its heavy allocation to midstream master limited partnerships, the Dividend Growth Portfolio is well positioned to take advantage of another major macro trend, America’s domestic energy renaissance.
Will Dividend Growth’s outperformance relative to the market continue at its blistering pace? We have no way of knowing, of course, but frankly I hope the answer is “no.”
I consider the securities in the portfolio attractive because, as a group, they pay a strong current dividend that I expect to grow over time. But if the prices of dividend-paying stocks rise to the point that they are no longer attractively-priced and no longer pay what I consider to be a high current stream of income, then it might be time to explore other strategy options.
We are not there yet, and I consider current market conditions to be very favorable for a dividend growth strategy. But I encourage investors to view this strategy the way I intend it to be viewed—as a way of building long-term retirement income irrespective of the market’s direction. This portfolio was never intended to generate market-crushing returns—though we certainly shouldn’t complain during those times when it does!
Disclaimer: All portfolio returns figures are calculated by Covestor, and Sizemore Capital Management believes them to be accurate. Past performance is no guarantee of future results.
Charles Sizemore is the manager of the Dividend Growth portfolio and three other models on the Covestor platform.