Author: Mark Holder, Stone Fox Capital
Covestor model: Net Payout Yields
August was a decent month for the Net Payout Yields model with a return vs. benchmark of 1.02% – the portfolio was down 4.66% while the S&P500 fell 5.68%. Naturally on an absolute basis the results are disappointing, but this model is not designed to time the markets. The goal remains to outperform on the way down and remain even on the way up, in the effort to produce superior returns over time.
Trades
After several semi active months of trading especially in May and July, August saw no trades executed. Typically the model trades more in uptrending markets as companies outgrow yields, making them less attractive to hold. Down markets normally lead to higher yields and a improvement in the decision for holding a security in the model.
Largest Weights
As of early September, Lorillard (LO) remains the largest weighted allocation in the model, as the tobacco stock was able to post a strong gain in the month.
CSX Corp (CSX) remained a top weight even though the stock plunged in August. The railroad operator remains tied to a cyclical business and was a big contributor to the portfolio loss in August.
FirstEnergy (FE) remains one of the largest weights as the utility company ended August close to 52 week highs.
Accenture (ACN) had the 4th largest weight in August, but it saw significant losses in the month over fears the technology consulting company would be hit hard from a global recession.
Campbell Soup (CPB) was another top weighted stock for August – it saw a small drop as well.
Conclusion
The market has seen significant losses this summer due to fears of a global recession. As the market got weaker, the net payout yields got more attractive in most stocks in this model. 3% dividend yields turned into 4% dividend yields. 10% net payout yields turned into 12% net payout yields.
Not only do these stocks gain in appeal when the market drops, but I can sleep at night knowing that weakness is an advantage for the typical stock in the model, characterized by very strong income and liquidity. This financial flexibility can be used to buy more stock, increase the dividend yield, or to take advantage of a weaker competitor or new market.
