{"id":38813,"date":"2013-06-06T11:24:47","date_gmt":"2013-06-06T15:24:47","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38813"},"modified":"2013-06-06T11:24:47","modified_gmt":"2013-06-06T15:24:47","slug":"sizemore-capital-june-2013-model-commentary","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/06\/06\/sizemore-capital-june-2013-model-commentary\/","title":{"rendered":"Sizemore Capital June 2013 Model Commentary"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

What now?<\/p>\n

This is the question on every income investor\u2019s mind.\u00a0 After a five-month start to the year in which income-focused investments went nearly parabolic, concerns that the Fed might\u2014just might<\/i>\u2014start winding down its quantitative easing sent the share prices of REITs, MLPs, utilities, and other popular investments into a tailspin.<\/p>\n

The JP Morgan Alerian MLP ETN ($<\/span>AMJ<\/a>)<\/b> and the Vanguard REIT ETF ($<\/span>VNQ<\/a>)<\/b>\u2014both holdings in the Strategic Growth Allocation<\/a><\/strong>\u2014dropped by 6% and 10%, respectively, from their May 21 highs through June 4, at time of writing.<\/p>\n

Some of Sizemore Capital\u2019s favorite income securities held in the Dividend Growth Portfolio<\/a><\/strong>\u2014such as Realty Income ($<\/span>O<\/a>), National Retail Properties ($<\/span>NNN<\/a>), <\/b>and Martin Midstream ($<\/span>MMLP<\/a>)<\/b> were down by 20%, 17%, and 10%, respectively.<\/p>\n

After dramatic reversals like these, it\u2019s easy to panic.\u00a0 But let\u2019s put them in perspective.\u00a0 Even after the May bloodletting, all of these securities are positive for the year<\/b>, and after including dividends all are up by over 10%.\u00a0 The price correction we saw was simply a shakeout.\u00a0 The hot money had run the prices of these securities up, and when the hot money abandoned them they simply wiped away the speculative froth.<\/p>\n

Interestingly, REITs and utilities took a harder hit than MLPs.\u00a0 Though I have no hard evidence to support this, my theory as to why this happened was that MLPs tend to have greater ownership by individual income investors and tend to be less affected by the hot money\u2019s changing moods.<\/p>\n

So, back to the original question, what now?\u00a0 In an environment of rising rates, does a dividend growth strategy still make sense?<\/p>\n

It does, but only if you do it right.<\/b> \u00a0Sizemore Capital has very little exposure to bonds and no exposure at all to slow-growth income investments such as utilities.\u00a0 In this environment\u2014and in any environment of non-zero inflation\u2014future dividend growth is more important than the current payout.<\/strong><\/em><\/p>\n

This is why we are overweight in the sectors with what we consider the right mix of decent current income and excellent potential growth in income\u2014sectors such as retail REITs, mid-stream MLPs, and \u201cBig Tech\u201d companies such as Microsoft ($<\/span>MSFT<\/a>), Intel ($<\/span>INTC<\/a>), <\/b>and Cisco Systems ($<\/span>CSCO<\/a>)<\/b>.<\/p>\n

And to be clear, I am by no means certain that the rise in interest rates will go much higher than it already has in the near term.\u00a0 As the experience of Japan proved, market yields can stay low for much longer than anyone expects during a prolonged period of debt deflation and aging demographics.<\/p>\n

But to the extent that rates do rise, you want to own assets that stand to benefit from an improving economy and that have room to raise their cash payouts at a rate that will keep pace with rising market yields.\u00a0 On this count, midstream pipeline MLPs and most categories of REITs easily qualify.\u00a0 Rising interest rates raise their borrowing costs and cut growth prospects at the margin.\u00a0 And because these securities have become bond substitutes of late, falling bond prices (i.e. rising yields) mean falling stock prices.<\/p>\n

But given that the 10-year Treasury still only yields 2.1%, a 4%+ dividend yield an a high-quality real estate and infrastructure portfolio still makes them vastly superior investments for income investors.\u00a0 The dividend payout can be expected to grow over time with only modest risk of loss, whereas Treasuries are only \u201crisk free\u201d if you ignore inflation.<\/p>\n

We may see more turbulence in dividend-focused investments as institutional investors rotate into more aggressive sectors.\u00a0 I\u2019m ok with that, and I intend to use any further weakness as a buying opportunity.<\/p>\n

Disclosures: All securities mentioned are held in Sizemore Capital portfolios.\u00a0<\/i><\/p>\n

Charles Sizemore is the manager of the\u00a0Strategic Growth Allocation<\/a>, <\/strong>the\u00a0Dividend Growth Portfolio<\/a>\u00a0<\/strong><\/strong>and two other models on Covestor.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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