The times are a-changin’ in the stock market, says Charles Sizemore, founder of Sizemore Capital and a portfolio manager on the Covestor platform – and so is his personal approach to making dividend-paying stock picks.
“The market as we know it is sort of upside down,” Sizemore said in his latest Google Hangout interview. “The defensive stocks that are normally quite conservative led most of the year and behaved like growth stocks, whereas growth stocks languished. But now we are seeing a bit of rotation, and dividend-focused things are underperforming.”
One reason, Sizemore says, is that interest rates are starting to rise. As The New York Times Dealbook reports, investors and banks have been demanding higher payments for their loans in recent months, pushing up both interest rates and bond yields.
According to Sizemore, a 30-year bull market for bonds may soon be ending. He joins JP Morgan Chase CEO Jamie Dimon among the voices warning that interest rates are heading up, and so, too, are the yields on bonds – another way of saying that bond prices are now falling.
Falling bond prices have the potential to make many dividend-paying stocks less attractive to investors, Sizemore says. One reason is that companies that were able to borrow at very low rates in order to increase their dividends may no longer be able to do so.
“When (bond) yields were going lower and lower every year, it made sense to buy yield-focused investments that behaved similar to bonds,” he said. “But in a rising rate environment, that does not work as well.”
Sizemore notes that there are technical warning signals for the markets including a weak transportation sector relative to industrials.
That alone does not spell doom, although he says it’s among the reasons that the stock market may see additional churn in coming months.
And in a rising interest rate environment, he thinks that traditionally defensive stock sectors including utilities may not be the best hiding place. Rising rates could translate to higher borrowing costs — and ultimately a higher cost of doing business for industry groups, such as utilities, that routinely use debt to finance infrastructure purchases
Sizemore says that his strategy now involves adding dividend-paying companies to his portfolio that have little debt, and have an earnings stream that he believes will allow those companies to raise dividends going forward. It helps, he says, if he can buy those stocks at historically low price-to-earnings ratios.
One of the industry sectors to find those stocks, he says, is technology. A few of the many dividend-paying stocks he is now holding in his Dividend Growth portfolio are Microsoft (MSFT), Cisco (CSCO), and Intel (INTC).
“The old tech stocks are the sweet spot right now,” Sizemore says. “The dividend payouts are surprisingly good. And the growth in dividend rates is hopefully there.”
This replay represents statements made live on June 12, 2013. All opinions included in this material are as of June 12, 2013 and are subject to change. The opinions and views expressed herein are of the portfolio managers and may differ from other managers, or the firm as a whole. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance does not guarantee future results.
