By The Sizemore Letter<\/u><\/p>\n
Note to Chairman Bernanke: Taper or don\u2019t taper, but whatever you\u2019re going to do, do it already so we can get on with our lives.<\/p>\n
The Fed\u2019s indecision regarding its plans for its quantitative easing program has affected our portfolios in different ways.\u00a0 The Dividend Growth<\/a> <\/strong>portfolio had a rough summer, giving up a fair bit of its outperformance from the first four months of the year.\u00a0 As of August 30, the portfolio was up 16.2% year to date vs. 14.5% for the S&P 500.\u00a0 But over the past 90 days, in which the S&P 500 has been flat, the portfolio was down a little over 4%.<\/p>\n Yet our Sizemore Investment Letter<\/a> portfolio has had a great summer.\u00a0 Since late June, the portfolio has rallied by about 9%, roughly double the S&P 500\u2019s return for the period.<\/p>\n Why the reversal of fortune?<\/p>\n It\u2019s all about Europe.<\/p>\n In the Sizemore Investment Letter portfolio, I had overweighted Europe\u2014and I was two quarters too early.\u00a0 After trailing their American counterparts for all of 2013, European stocks took the lead in the third quarter.\u00a0 Since bottoming in late June, European stocks\u2014as measured by the Vanguard FTSE Europe ETF (<\/span>VGK<\/a>)<\/span><\/strong>\u2014have had returns double those of the S&P 500.<\/p>\n What gives?\u00a0 After months of dismal economic news, the European economy is improving. \u00a0Furthermore, while the Fed has indicated that tapering is a matter of \u201cwhen\u201d and not \u201cif,\u201d the European Central Bank had gone to great lengths to convince the investing public that it would not be following suit.\u00a0 ECB President Mario Draghi said in July that rates would be at current or even lower levels for an \u201cextended period<\/a>.\u201d<\/p>\n My bullish arguments for Europe remain intact.\u00a0 European stocks are cheaper than their American rivals and tend to pay better dividends.\u00a0 They are also broadly hated by the investing public and very underowned.\u00a0 If you believe\u2014as I do\u2014that the Eurozone with muddle through, having the occasional mini-crisis but avoiding a major blow-up, then overweighting Europe makes sense.<\/p>\n What about American income stocks?\u00a0 I noted last month that income sectors, and REITs in particular, had stopped reacting to rising bond yields<\/a>.\u00a0 That is a good sign that we might have seen a bottom in the income-stock sell-off that started in May.\u00a0 We probably won\u2019t see a major rally in dividend stocks until we get clarity from the Fed about what tapering might look like and when it will start.\u00a0 I expect tapering\u2014whenever it starts\u2014to be modest, and I expect bond yields to drift lower.\u00a0 At time of writing, the 10-year Treasury yields 2.85%.\u00a0 I expect to see something more along the lines of 2.3%-2.5% by year end.<\/p>\n Meanwhile, I continue to see a lot of value in high-quality triple-net retail REITs and in select master-limited partnerships and dividend-paying stocks.\u00a0 An ideal investment for the Dividend Growth portfolio is one that pays 3%-4% in dividends or 5%-7% in the case of REITs and MLPs.<\/p>\n Importantly, I need to have a reasonable belief that the company will raise that payout in the years ahead.\u00a0 While I expect bond yields to fall, I\u2019m fully aware that I could be wrong.\u00a0 And if I am <\/i>wrong\u2014and yields continue to march higher\u2014I expect a high-dividend-growth<\/i> portfolio to outperform a pure high-dividend portfolio.<\/strong><\/p>\n Note: All returns information for Sizemore Capital portfolios are from Covestor.com.\u00a0 Past performance is no guarantee of future results.<\/p>\n Charles Lewis Sizemore, CFA, is the editor of the\u00a0Sizemore Investment Letter<\/a>\u00a0and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no position in any stock mentioned.\u00a0Click here<\/a>\u00a0to learn about his top 5 global investing trends and get your copy of \u201cThe Top 5 Million Dollar Trends of 2013.\u201d<\/em><\/p>\n This article first appeared on Sizemore Insights as Covestor Manager Comments September 2013<\/a><\/p>\n