Disclaimer: James owns NEM, CCNE and FTR in his Covestor Dividend Growth model.
September 7, 2010: This is my August investment letter regarding my dividend value model (J:HDGB). As you know the models goal is to seek and attain above average dividend yield with some capital appreciation while minimizing market risk. I must admit that beating the index was not the intended goal of this model. However I am proud to point out that the model is still beating the S&P 500 as of September 3, 2010, which remains remarkably encouraging.
Market Outlook
The overall equity market has been rough this summer. On a valuation basis with continued weakening economic data the move downward may be justified. From a technical standpoint the indexes are trading below their 200-day moving averages, which represent a market that is trending bearish. With downward spiraling home sales combined poor unemployment numbers, it is easy to make the bear case. Despite the negative macro theme, I do feel that there are some rays of hope. After several years of cost cutting corporate balance sheets are strong as ever, so I do expect solid earnings this fall. This no growth macro economic environment combined with strong corporate balance sheets actually plays well for dividend and value investors. This environment is the exact environment my dividend value model was designed to perform well in.
Portfolio Outlook
I am optimistic about the positive performance of this model and the great entry points it has been achieving. I wanted to review the 3 of the portfolios positions in this letter. One is the 4% allocation in (NEM) Newmont Mining Corp. Gold is in a solid uptrend. I expect that trend to continue and NEM offers great exposure to that at a value price with a dividend. This is a true golden nugget. Some great performance has come from (CCNE) CNB Financial Corp, a small Pennsylvania bank that I grabbed at a great price point. This small bank is great on valuation in nearly all categories, but I really like its low PE around 12 and its solid dividend yield of around 5% as of September 7, 2010. I also believe management will grow this company, which is not priced in to the stock. Lastly, I want to talk about (FTR) Frontier Communications. Currently, it is making up 9% of the model and for good reason. FTR has strong cash flows, a safe dividend, and growth in its future with the successful acquisition of the Verizon assets. Buying FTR with its 9% dividend as of September 7, 2010 is a rare opportunity and one I fully plan to exploit. I believe FTR’s management is on the top of their game and this stock is going higher. I expect this company to be the model’s largest holding for some time. This model will be overweight telecoms, utilities, energy, and pharmaceuticals for the foreseeable future. Overall, I am very bullish on this model despite the weak market and economy.
