Author: James Hofmann
Model: Dividend Growth
Disclosure: Long LO, MSFT, HCBK
March was a grand month for the Dividend Growth model as we outperformed the benchmark S&P 500 by 1.84% while taking on less risk.
This model had positive performance for the month of March while the market had slightly negative performance. The model’s defensive nature through less cyclical companies is evident in its performance. When the market started losing ground, our model did not follow to the same degree and on the recovery later in the month we almost matched it on the upside. All of this can be seen in the chart on the model page. This is precisely how I designed this model to perform in a downward move, by using dividends and a below-market beta to protect our wealth.
Lorillard (NYSE: LO) had a great run this month. It began the month trading in the high $70s and went all the way up to the mid $90s. I knew the stock was beaten down by fear and thus we increased our position in February. With the run up, I thought it would only be sensible to trim back the position to prior levels and not get greedy. I still believe this company is the best firm in the sector with its high margins, strong cash flows, and popular growing brands like Newport.
Weaker performers this month were Microsoft (Nasdaq: MSFT) and Hudson City Bancorp (Nasdaq: HCBK).
Market Outlook
The bull market has been racing to the upside for nearly two years, with few signs of a pull back. The S&P 500 is not only sitting just slightly below its 52 week high as April begins, but it also has made up the majority of the credit crisis losses and is now down only about 20% from its 2007 peak (Yahoo Finance).
At these current levels and with the summer fast approaching with its lower trading volume, I am beginning to exercise some caution. I will be raising the portfolio’s cash position to 10% to take advantage of any opportunities the summer may afford us with a slight pullback. Do not get me wrong – I am more bullish then bearish because of the billions waiting on the sidelines to get in at good entry points, but I do feel it is prudent at this time to be a little more defensive.
