1st qrt 2010 8 page final final

O UR YEAR END 2009 ISSUE OF VIEWPOINT generated a number of requests from readers for details of how our EQUITY INCOME portfo-

lio is expected to make money over the next decade. This interest was probably driven, at least in part, by the fact that we’ve added a number of new readers in the last year. For several reasons. Many of you folks have been kindly forwarding or sharing your VIEW-

POINT with others for their reading enjoyment and for that we thank you. We’re always happy to have more readers. We’ve also obviously added a number of new clients since Matt and Jason joined the firm and for that we are really thankful. And lastly, we’ve made a concerted effort to spread the word about VIEWPOINT, figuring, if we’re going to take the time to write and publish this quarterly diatribe, we might just as well promote it for the betterment of mankind.

In addition to discussing our investment strategy and process here each quarter, we direct inquires for additional information on our strategy, our investment philosophy and security selection process to our newly revised website at deschaineandcompany.com. As be-fore, the site includes all past issues of VIEWPOINT, along with a new section under “About Us,” entitled “How We Do It,” which briefly describes a few of the more pertinent steps in our security selection process. We encourage you to check out our new web site and give us your unvarnished opinion. We’re committed to making it a useful tool in providing information about our investment methodology and process and any feedback will be most helpful in the endeavor. Back to the questions about our magic formula for making money with the EQUITY INCOME Portfolio (EIP) strategy. As you know, our EIP focuses on creat-ing a diversified portfolio of high-yield stocks that have a history of growing their dividend. The primary ob-jective of the portfolio is to generate a growing stream of dividend (and some modest amount of interest) income that initially we can deploy to buy more shares of divi-dend stocks with the overall objective of building even more future income. Ultimately, the growing stream of

dividend income is available to provide ample income for a comfortable retirement. Veteran VIEWPOINT readers also know there’s one other major reason for our excessive enthusiasm for dividends, and growing dividends at that, and that’s the current economic and stock market environment. As we’ve droned on constantly in these pages since 2000, we believe future capital gains from stocks will be difficult to come by as the stock market continues to unwind the valuation excesses of the 1982 to 2000 bull market. And so far in the new millennium that has certainly been exactly the case. Consider that from January 1, 2001, through December 31, 2009, the S&P 500 index posted a negative return of 13.1% from capi-tal and a 16.0% positive return from dividends. That a total return of 2.9% for the S&P over the last nine years, which works out to a whopping 0.3% annualized total return for the “stock market.” We expect similar results for the stock market to continue. Compare those results to our cumulative 9.6%annual EIP results over the same nine year period. The annual returns for the EIP since 2001 are shown at the top of page 5, along with Vanguard’s S&P 500 Index fund. We use the Vanguard fund in this instance be-cause it’s a real alternative to investing in our EIP, as apposed to the S&P 500 index. The returns are broken down into their income and capital components. When we launched the EIP, our modest goals were to earn the portfolio’s expected dividend yield, which initially was about 5.5%, while trying to protect the portfolio from any significant capital losses in the event the stock market took a “post-bubble bath.” We did this primarily by holding extra amounts of cash. Our average cash position since in-ception has been about 18%. At the time, we certainly had no expectations that capital returns would be posi-tive. Had we known, we certainly would’ve been more aggressive in investing cash and reinvesting dividends to take advantage of a rising stock market in 2003 to 2007 and again last year. Instead, our large cash hold-

(Continued on page 4)

1st Quarter 2010

Volume 11 Issue 1

Helping You Navigate in an Uncertain Investment World

Inside this issue: Front Seat-When it comes to Investing-it’s all about the Price 2

How We Win the Game 4

EIP Annual Returns 5

Now for something com-pletely different 6

Doing Business With Us 6

EIP High and Low Historical Dividend Yields 7

Budget Deficit Bomb Shell 8

World Headquarters 128 South Fairway Drive

Belleville, Illinois 62223 Phone: (618) 397-1002

[email protected] [email protected]

Maryville Office Jason Loyd

(618) 288-2200 [email protected]

Highland Office Matt Powers

(618) 654-6262 [email protected]

We’re on the Web at: deschaineandcompany.com

Deschaine & Company, L.L.C. A REGISTERED INVESTMENT ADVISOR

High-Yield, Dividend Growth Investing—The Details Sweating the details is how you win at investing in a long-term bear market.

I NVESTORS ARE NOTORIOUS for undermining their own in-vesting efforts by buying high and selling low. This is par-

ticularly true when it comes to buying and selling stocks, but the maxim applies to just about any asset. There’s simply no argument about that. The historical evidence and countless studies have shown conclusively and repeatedly that investors are their own worst enemy when it comes to buying and selling stocks, stock mutual funds or, as I said, just about any financial asset. The fact that most folks aren’t rich after 20 or 30 years of investing is testament to the fact that most investors are inca-pable of emotionally handling the stock market’s often violent volatility to their own wealth creating detriment. What’s interesting about this quandary is that everyone understands the concept of a bargain and how to take advan-tage of one in just about every other aspect of their financial affairs--except, it seems, when it comes to investing. As an ex-ample, if I were to put a brand new Corvette ZR1 that I just won in a raffle on my front lawn and put a “For Sale” sign on it for say, $100,000, I might get interest from a few knowledge-able Corvette aficionados to grasp that my asking price is rela-tively cheap compared to $120,000 or more a dealer might charge for a similarly equipped car. Because of the low initial asking price, I’m sure to get interest in the car.(1) Just for the sake of the discussion, let’s say I don’t get any takers at my initial absurd $100,000 asking price so I lower my price to say $90,000. At the new lower price, I’m sure to get more interest from a growing pool of Corvette enthusiasts as well as possibly some offers from a few regular folks simply interested in buying a cool car at a more amenable price. The point is, the new lower price is certainly going to attract more potential buyers because of the growing disparity between my asking price and the actual market value of the car. This, of course, is the way pricing in an economic transaction is sup-posed to work. The lower the asking price, the more interested po-tential buyers become and the more potential buyers I attract. At this point, let’s pretend I’m suddenly desperate for cash and decide that $50,000 is what I need and I need it like yester-day. So I lower the Corvette’s asking price once again (remember this is a loaded, top of the line 2010 ZR1, which retails for anywhere between $120,000 and $130,000 depending on options etc.) Offering the car at the inconceivably low price of $50,000, I suspect will garner lots of buying interest and I’ll have the car sold about 10 minutes after I put the new sign out. The moral to this story is that the pool of potential buyers for my hypothetical Corvette grows each time I lower my ask-ing price because knowledgeable potential buyers understand the relationship between the value of the car (the asset) and the asking price relative to the “value” they’d get for their money. Each successive lower asking price attracts more potential buy-ers, rather than scare them away, because buyers are able to make rational price verses value tradeoffs when comparing the value of the car to my asking price.

Not So When it comes to Pricing Stocks? Just the opposite often occurs when it comes to the stock market. When stock prices drop, investors see (or is it feel) the price drop and it’s obvious from their usual reaction that they don’t have a sense of what the business underlying the stock is worth. If they did they probably wouldn’t sell the stock. Typically, about all most investors know about the stocks they own is the market price (notice I didn’t say market “value,”) has dropped and that tends to cause them to panic. As a result, they usually do the only thing they feel they can do to prevent any further erosion of their portfolio, they sell. Compounding their mistake, they often sell well after most of the price decline has already occurred; turning what is often a temporary market price hiccup into a permanent capital loss. Back to my Corvette analogy,(2) if a hypothetical stock mar-ket for Corvettes dropped the price of my Corvette to $90,000 or even $50,000 and I know the car’s worth over $120,000 (and I didn’t need the cash really bad) then I’d be an idiot to sell the car at either price because I know it’s really worth a lot more than the prevailing price. So I’m not inclined to sell. All that Matters: Dividends and Prices So what’s the point of this talk about the price of a hypothetical Corvette? There are two actually. One, is the role dividends play in owing stocks. When one of our stocks gets clobbered—and they all do at one time or another—the dividend acts to reassure us of the stock’s value. Because there is a tangible dol-lar value in the dividend to us, we’re less likely to panic and sell a good stock after a price drop as long as we’re collecting a growing dividend every quarter. We figure as long as the com-pany can continue to pay the dividend, we’ll own the stock re-gardless of how badly the stock market beats up the stock price. In fact, as we note endlessly in these pages, we’re inclined to take advantage of any unusually steep price drop to try to cap-ture uncommonly high yields by adding to our position—again as long as we believe the dividend is secure. Now, About Prices As for prices, one way to deal with the ever present price vola-tility is to ask yourself this question: “Over the next ten years, are you a net buyer or are you a net seller of assets?” In other words, are you looking to buy as many shares of stocks as you can over the next decade or are you more likely to be a net-seller of stocks to fund your retirement needs? Given that the life expectancy of the average American is now well into their 80s, most of us should probably consider ourselves net buyers. If you’re going to be buying stocks over the next ten years the next question you should ask yourself is: “Do you want stock prices to go up, stay flat, or go down?” Now, ask yourself the question in the context of my Corvette price analogy.


1st Quarter 2010 Viewpoint

1) This is before eBay, don’t you know. 2) Hey, I’ve got so much invested in the “Corvette analogy” I’ve got to play it out to its logical conclusion.

VIEW FROM THE FRONT SEAT by Mark J. Deschaine

When it Comes to Investing, It’s all About the Price

To be a successful investor requires that you fully embrace price volatility and use it to your advantage. Think of it this way: what choice do you have? The reality is that stock prices fluctuate, so rather than cower in the corner in fear, why not embrace volatility and try to capture high yields when the stock market goes through one of its many crazy periods. This next statement is so obvious to me that I’m almost embarrassed to note it, but here goes anyway: Lower stock prices help us achieve our investment objective that much quicker. Higher stock prices only really matter when we’re looking to sell assets—not when buying them. Short of a stock market plunge which scares the pants off all investors, professionals and amateur alike, investors should wish for periodic and orderly selloffs in stock prices so we can systematically buy as many shares as possible. If you really have to measure some-thing, why not measure how many shares, or in the case of your mutual fund, how many units you own. Success in invest-ing is really about accumulating as many shares or units for as little money as possible. The table below demonstrates the benefits of price volatility. The example shows three stock price options of the

same hypothetical stock. In each case the initial price is $25 per share. The stock pays an annual dividend of $1.00 per share for a 4% dividend yield. Over the next ten years the dividend grows at a nice healthy, but doable, rate of 10% a year. In our first example the stock price fluctuates while it drops in half over a ten year period. The second example the stock fluctuates 20% up or down each alternat-ing year but ends up even after ten years. And the last example the stock doubles over the initial ten year period while, like the other two examples, fluctuating up and down along the way. The Winner Is? As the table shows, when it comes to building a portfolio for dividend income, a steadily declining stock price helps build dividend income significantly compared to the other two alternatives. Annual divi-dend income in year ten in the declining stock price example grows to $29,638, compared to $21,819 in the flat stock price example and $17,148 in the stock price doubling example. Our declining stock price is the win-ner when it comes to generating dividend income because, obviously, we’re able to buy a sizable number of additional shares compared to the other two options, espe-cially the stock doubling option.

Of course, the astute members of our readership, which is most of you, will note that the respective portfolio values at the end of the first ten year period more than makes up for less annual dividend income. Ah, but that’s just in the first ten years. If we assume going forward each stock performs the same, or as in our ex-ample, they each double over the second ten years, guess which stock wins then? The stock that declined over the first ten years runs away from the other two in both dividend income and market value by the end of the second ten year period. That shouldn’t come as any surprise given that we were able to buy a whooping 71,827 shares in the first example com-pared to 26,387 and 11,903 respectfully for the other two. There you have it, price volatility at it most constructive. The next time the stock market drops try to look at it like an neighbor putting a 2010 Corvette ZR1 for sale on his lawn at a ridiculously low price relative to its true value, and use the op-portunity to take advantage of his “mispricing” to snap up a bargain. If you really must buy high and sell low, buy stocks when their dividend yields are high and sell them when their dividend yields are low. That is, after all, what we’re try to do here at Deschaine & Company.

(Continued from page 2)

Deschaine & Company, L.L.C.

PUBLISHER: MARK J. DESCHAINE EDITOR: JOHN H. DESCHAINE CONTRIBUTING EDITOR: TOM O’HARA STAFF CONTRIBUTORS: MATT POWERS, JASON LOYD COPY EDITOR: MARNIE E. DESCHAINE TECHNICAL ADVISOR: Joseph M. Deschaine. VIEWPOINT is a complementary publication of Deschaine & Company, L.L.C. a registered investment advisor in Belleville, Illinois. This information has been prepared from sources deemed reliable, but its accuracy is not guaranteed. It should not be assumed that any securities discussed will be profitable or will equal past performance, or is it an offer to buy or sell any security mentioned. Deschaine & Company and/or one or more of its clients, employees, family or friends may have a position in the securities dis-cussed herein. © 2010. All rights reserved. Reproduction of this publication is strictly forbidden without written consent from Deschaine & Company. This issue was published on April 20, 2009. If you would like to receive a complementary copy each quarterly, simply send us your address and the preferred method of delivery: snail-mail or email, to: 128 South Fairway Drive, Belleville, IL 62223 Or email us at [email protected] and we would be happy to add you to one of our mailing lists.

Share price drops in half over first 10 years Share price is flat over first 10 years

Year Share Price

Annual Income

Market Value

Share Price

Annual Income

Market Value

Share Price

Annual Income

Market Value

1 $ 18.75 $ 4,658 $ 79,400 $ 20.00 $ 4,642 $ 84,400 $ 22.50 $ 4,615 $ 94,400

2 23.44 5,388 104,373 26.00 5,343 114,826 28.13 5,295 123,076

3 17.58 6,376 84,207 20.80 6,254 97,739 25.31 6,130 116,593

4 24.61 7,431 124,904 27.04 7,252 133,940 31.64 7,055 152,485

5 14.77 9,065 83,116 20.28 8,611 108,433 28.48 8,200 144,998

6 20.67 10,826 126,335 26.36 10,108 150,435 37.02 9,452 197,518

7 12.40 13,780 87,711 19.77 12,215 123,945 33.32 11,005 188,164

8 17.36 17,030 137,954 25.70 14,557 174,566 43.31 12,705 256,719

9 10.42 22,972 101,505 19.28 17,971 146,938 38.98 14,821 245,023

10 15.00 29,638 171,438 25.00 21,819 210,347 50.01 17,148 330,668

11 16.05 38,397 216,041 26.75 26,561 249,073 53.51 19,869 372,679

12 17.18 49,954 273,401 28.63 32,420 295,726 57.26 23,054 420,623

13 18.38 65,271 347,489 30.63 39,681 352,089 61.27 26,788 475,426

14 19.67 85,663 443,612 32.78 48,707 420,385 65.56 31,174 538,173

15 21.04 112,935 568,894 35.07 59,959 503,390 70.15 36,334 610,137

16 22.52 149,582 732,946 37.52 74,032 604,583 75.06 42,414 692,815

17 24.09 199,061 948,793 40.15 91,686 728,339 80.31 49,592 787,967

18 25.78 266,196 1,234,176 42.96 113,907 880,178 85.93 58,080 897,676

19 27.58 357,743 1,613,385 45.97 141,968 1,067,089 91.95 68,138 1,024,402

20 29.51 483,221 2,119,840 49.19 177,523 1,297,950 98.38 80,077 1,171,063

Share price doubles over first 10 Years

# Of Shares

4,234

4,453

4,790

5,075

5,629

6,111

7,071

7,944

9,742

11,427

13,458

15,917

18,906

22,557

27,035

32,553

39,383

47,877

58,493

71,827

# Of Shares

4,220

4,416

4,699

4,953

5,346

5,706

6,268

6,791

7,621

8,412

9,309

10,330

11,494

12,826

14,353

16,111

18,139

20,487

23,212

26,387

# Of Shares

4,195

4,376

4,606

4,819

5,091

5,335

5,647

5,927

6,285

6,611

6,964

7,345

7,759

8,209

8,698

9,230

9,811

10,446

11,141

11,903


5) At least we hope it does. Then again, maybe not.

HOW WE WIN THE STOCK MARKET GAME Over The Next Decade

Our Strategy Compared to the S&P 500 Index As of 2/28/2010 D&C EIP Strategy

S&P 500 Index

1) Own high yield stocks: Current Dividend Yield 6.20% 1.80%

2) With a history of dividend growth: 9-Year Annualized Dividend Growth Rate (1) 15.04% 1.96%

3) Capture higher yields as stock prices decline: Expected Dividend Yield over the next decade (2) 6.20% — 10.00% 2.10% — 6.00%

4) Buy high yield stocks when their current yield > their 5-year average yield:

Take advantage of price volatility to capture exceptional dividend yields.

5) Match the S&P in capital returns: Zero Returns from Capital 0.0% 0.0%

6) Reinvest all dividend and interest income in a timely manner to build future income:

Maximize the power of money to compound.

1) The history of the Equity Income Portfolio Strategy. *2) As stock prices decline over the next decade as we anticipate, we expect yields on the S&P to rise to 6.0% or better. As that happens we expect the dividend yield on our universe of stocks to rise from 6.2% to 10.0% or better over the same period locking in annual dividend yields of 10% or better on an all stock portfolio.

ings was not warranted by our equity returns to the detriment of the EIP’s total returns. But anticipating short-term moves in the stock mar-ket have never been our forte, (nor anyone else’s that we know of, for the matter) and such moves are only blatantly obvious with the exacting focus of 20/20 hindsight. At the same time, we should point out that cash returns over the last nine years have handily beat the S&P 500 so, all in all, cash was not such a bad place to be. Then again, in our defense, at least our “error” was one of omission and that about all holding too much cash really did was shave a few percentage points off the EIP’s otherwise good performance—as opposed to actually in-curring real capital losses. Not that we’re happy leaving extra returns on the table, mind you. Being the greedy capitalists that we are, it pains us too because we made the very same mistakes with our own personal portfolios. Since we man-age our own money the same as we do for cli-ents using the EIP strategy we feel the error of our ways directly and right along with you. We like to think our personal commitment to the EIP strategy buys us some street “cred” with clients and has to count for something, right?(5) The table at the top of this page is a break-down of the EIP’s 10-year return objectives. As you can see, there’s more to the EIP strategy than simply buying high-yield stocks and wait-ing for the mailman to drop off our quarterly dividend checks. Let’s examine each component

of the EIP strategy for their potential contribu-tion to the portfolio’s total return and then as-sess the probability of actually earning the re-turns we expect over the coming decade. 1) Own high yield stocks: This, of course, is the biggie, contributing 6% (or better) annually to our total and accounting for more than 60% of our total expected return over the next ten years. At today’s prices, we can construct a port-folio of income stocks with a current dividend yield of about 6.0%. (The portfolio shown on page 7.) We believe the likelihood of actually earning more than 6% from the dividend yield over the next ten years is excellent. Why? Because the majority of the stocks in our portfolio will not only pay us their current dividend, but they’re likely to raise their dividends over the next ten years at close to double digit annual rates. That being the case, we’re about as certain as we can be that we’ll earn at least 6% from the dividend component over the next ten years. 2) History of dividend growth: After dividend yield, this is the most important variable to our ultimate success. We expect to add an additional 2.5% in annual return from dividend increases over the next decade. To achieve this objective, we estimate the EI portfolio will need to raise its dividend at least 7.5% a year. We’re comfortable the EIP can achieve that level of annual dividend growth, particularly when we consider that since inception the portfolio’s dividends have grown more than 15% a year. If anything, our expectations here are somewhat conservative regarding dividend growth for reasons we’ll

discuss in a moment. 3) Capture higher yields as prices decline: As we discussed at length in last quarter, we believe the current bear market cycle remains firmly intact and we expect stock prices to worm their way lower (and conversely, dividend yields to wiggle their way higher) over the next ten years. That’s the bad news. The good news is this will allow us to capture higher dividend yields until yields for the market reach or exceed 6%. Since our EI portfolio has a current yield that’s three times the market to begin with, (6.2% compared to 1.8% for the S&P 500) we expect to add stocks to the portfolio with dividend yields of 7, 8, 9, and yes even 10% by the time the market’s dividend yield reaches 6%. How can we be so certain? Because that’s been the case at the bottom of every previous bear market in history. We see no reason this time will be any different. 4) Be disciplined when buying. Using our tried an true buying criteria we expect to add an additional 1% to our annual returns over time. 5) Match the S&P in capital returns: Had we known when we launched the EIP strategy in December 2000, that capital returns for the stock market the coming decade would, in fact, be flat, that would’ve been just fine with us. At the time, we were anticipating a much worse possible outcome for capital returns than break-even—and through the market bottom in 2003, it certainly looked that way. As we now know, capital returns have been almost exactly flat




since 2000, with a couple of significant dips and rebounds along the way. While the overall mar-ket’s capital returns are flat, the EIP has provided annual capital returns of 3.4% over its first nine years. For that we are both grateful and frankly a little flabbergasted. 6) Dividend Reinvestment: Through the process of reinvesting dividends, we expect to add an extra .50% to 1.0% to the bottom line return (a half of a percent a year in additional an-nual return) from timing dividend re-investments when the market swoons and when individual stocks are priced at particularly attractive yields. With discipline, we think this goal could also prove to be conservative. Looking at Our Ten Year Outlook Looking ahead over the next ten years, our out-look for capital returns for the stock market re-mains negative. We alert readers that they should remain cautious regarding stock prices in general and be prepared to see significant price volatility. Basically, we’re anticipating a replay of the last ten years. So what’s our plan to deal with all this un-certainty? Our plan, of course, is to do what we’ve been doing since 2000, which is to manage client equity portfolios to maximize compound-ing through stocks with a high dividend yield, exceptional dividend growth, and do all we can to take advantage of the many dips to reinvest dividends. And like the last ten years, we’ll let the capital return chips fall where they may. At the same time however, we have reason to believe that if the EI portfolio’s dividends do, in fact, grow 10% a year at some point the stock market will recognize that and reward our stocks with

higher stock prices. Why do we think that? Be-cause it eventually always does. Here’s a couple of additional obvious, but never the less, powerful reminders on the subject of growing your money: Keep fees, commissions and taxes low: As Ben Franklin said, “A penny saved, is a penny earned.” That timeless advice applies in these tough economic times more than ever. By watch-ing expenses and minimizing portfolio turnover, we expect to keep total portfolio expenses below one and a half percent annually (excluding taxes). Boost compounding by reinvesting as much investment income as possible: For clients that don’t need income and are able to re-invest all of the portfolio’s investment income you can expect will earn an additional one to two percent annu-ally from the miracle of compounding by rein-vesting all your dividend income. How much additional return depends on how much of the income you’re able to sock away and re-invest. The more the better. Additional Savings: Socking extra money away each year, even in modest amounts, can have a huge impact on your long-term returns. During these tough times, scrimping and saving every extra dollar can help enormously, particu-larly when you keep in mind that the extra money can be used to capture nice dividend yields in our EIP over the next decade. Our sug-gestion for the next decade is simple: save, save, and save some more. There you have it. A detailed account of our plan to make money in a declining stock market (or, if you prefer, a rising dividend yield market) over the next ten years. When it comes to investing, paying meticulous attention to the details can mean the difference between eating steak or ham-

burger-helper in retirement. What if Dividends Don’t Grow? Given our less then optimistic outlook for the economy, how likely are companies to raise their dividends in the coming decade? That’s a reason-able question to ask, so we’ll make a reasonable effort to answer it. Our snapshot answer—pretty likely, actually. Even though we expect the econ-omy to make a slow and laborious recovery by historical standards, significantly underperform-ing past recoveries in the process, we do expect better than average growth in dividend payouts and consistent increases across the board for several reasons. First, we have to concede, most companies have done a pretty good job of lowering their overhead and operating expenses and, as a result, their profits and discretionary cash flows are up significantly in the last year or so (partly justifying the stock market’s recent performance). Corporate managers did a good job of getting ahead of their cost curve entering the economic downturn. The silver lining in the painful decision to lay off more than six million workers is that most of the cost savings go directly to the bottom line and show up almost immediately in higher discretionary cash flows. So while the top line for many indus-tries are not growing and we don’t expected them to grow much over the next few years, we do expect cash flows to continue to improve with companies generating extra free cash that’ll be available to boost dividends. Second, through the cost cutting process, and because there are few viable investment op-portunities for most companies to invest their



OUR EQUITY INCOME Portfolio: Gross Annual by Capital and Income Returns 2000-2009

EQUITY INCOME PORTFOLIO 2009 2008 2007 2006 2005 2004 2003 2002 2001 Annualized

Capital Return 10.5 - 32.4 - 6.1 16.3 - 1.2 20.2 29.1 1.5 14.6 3.4%

Income Return 6.2 7.5 6.4 6.0 5.8 4.6 5.2 6.5 7.1 6.1%

Equity “Only” Total Return* 18.2 - 23.7 0.3 22.3 4.6 24.8 34.3 8.0 21.7 9.6%

EIP Total Portfolio Return** 10.2 - 17.5 1.1 19.6 3.9 19.7 19.8 7.2 16.3 8.1%

VANGUARD S&P 500 INDEX FUND 2009 2008 2007 2006 2005 2004 2003 2002 2001 Annualized

Capital Return 23.6 - 38.5 3.5 13.6 2.9 8.7 26.5 - 23.4 - 13.1 - 2.6%

Income Return 2.9 1.5 1.9 2.0 1.8 2.0 2.0 1.2 1.1 1.9%

Total Vanguard S&P Index Return 26.5 - 37.0 5.4 15.6 4.7 10.7 28.5 - 22.2 - 12.0 - 0.6%

*Represents Equity “Only” returns for periods shown. ** Equity Income Total Return included cash holdings.

excess cash in the slow economy, companies have accumulated record amounts of cash on their balance sheets. Managers have done a good job of hoarding cash in these tough times which is exactly the right thing to do. Among the stats to support this argument is the percentage of corpo-rate cash to total assets for the non-financial S&P 500. The ratio has surged in the past 12 months to a 35-year high of 9.7%. The increase is broad-based and includes all industry sectors with the exception, as noted of the financial sector. So far the extra cash hasn’t caused manag-ers to do any of the foolish things managers tend to do when they find themselves with too much cash: like buy back stock at over-inflated prices like they did in 2006 and 2007, make ill-conceived and over-priced acquisition, invest in new businesses or projects that do not generate a high enough internal rate of return to justify the investment. Given our outlook for the economy, we don’t expect companies to have any compel-ling reasons to expand their businesses, so we see above average growth in dividend payouts as one way to placate investors during a period of un-derperforming stock prices. For all of the aforementioned reasons, we expect dividend payments to rebound and grow at acceptable annual rates over the next decade. If the economy grows faster than we now expect, that’s only likely to improve the outlook for divi-

dends as companies generate higher revenues and higher cash flows giving a boost to the pros-pects for future dividend payments. Now for Something Completely Different Creating a 20th Century Health Care System Now that the monumental monstrosity known as “Obama-care” has been shoved down our collec-tive throats, we’d be remiss if we didn’t devote at least a paragraph or two of commentary on its passage and some of the possible economic and social implications. After much thought, and deep political and economic analysis, about all we can say for sure is this; we have no idea what the impact this massive meddling into one sixth of the U.S. economy will have on the availability, quality or cost of health care or the health insur-ance that pays for most of it. And don’t kid your-self, no one else does either. There’s not a person on the planet who can tell you, with any degree of certainty what the eventual effect this piece of dreadful legislation will have on the health care system, our economy overall, or society at large. But we do know this: it’s not likely to be good. How do we know that? Oh, a couple of thousand years of government meddling tells us so. What we can also say, with a high degree of certainty is that the ever-present “unintended consequences” of government meddling go up exponentially with each additional line of verbi-age in any legislation. That being the case, the

fact that Obama-care, at 2,407 pages and count-ing, was one of the largest bills ever shuttled through Congress guarantees that the unin-tended consequences, whatever they eventually turn out to be, will be huge and will likely come from straight out of left field. Yet, of all the possible negative ramifica-tions of this hideous bill that we could conjure up, probably the most devastating is the fact that essentially what Obama and the Democrats in Congress have done is permanently relegate our health care system to the inefficiencies of govern-ment bureaucrats and in the process effectively kill any possibilities for future advancement in health care treatments. And at a time when we believe we’re on the verge of many extraordinary new discoveries in health sciences. It’s a shame, but we’re likely to never know what amazing new discoveries and cures this ill-advised bill forever derailed, stifled, killed. If you’re a supporter of the bill, you’d point to its benefits: poor adults will get Medicaid; low-income families will get federal subsidies to buy insurance; small businesses may get tax credits; young adults will get to stay on their parent’s health plan until they’re 26, seniors will get addi-tional prescription drug coverage; and people with pre-existing medical conditions can’t be denied or dropped from coverage.




Doing Business With Us Simply Put By Matt Powers Vice President & Portfolio Manager

J ASON AND I'VE HAD THE OPPORTUNITY TO work on several differ-ent sides of the investment industry including a large wire-house, regional brokerage firm, independent investment firm, and our cur-

rent home: Deschaine & Company. As you know Deschaine & Company was originally founded as a Registered Investment Advisor (RIA) and operates in that same manner today. What is a Registered Investment Advisor and why should you hire one to manage your money? Those are two of the more common questions we hear when talking to prospective clients. Let’s start by defining what exactly is a Registered Investment Advi-sor. In many ways, an RIA is the equivalent of an you managing your own account (Schwab, TD Ameritrade, Scottrade, etc.), and then you come to realize that it takes a great deal of time and significant effort to research and successfully oversee a growing pool of investments, so you decide it’s probably better to look to someone who has the time do it right. In a very real sense hiring an RIA is really nothing more than giving Deschaine & Company the authority over your accounts allowing us to man-age your investments for you. We set up your account at a broker/custodian, like the ones listed above. Once we assume management of your

portfolios you are free to go about your daily life no longer having to sweat the day to day management and monitoring of your investment portfolio. Our fee is a percentage of the market value of your account and not commission driven so we’re not pushed to get you to buy or sell securities as with a broker. So there’s no incentive on our part to do or recommend any action that’s not in your best interest to grow your account or that is expected to meet your long-term investment objectives. The benefit of a fee based arrangement is that if we succeed at growing your portfolio, both you and our firm benefit. Of course, the flip side is also true that if our per-formance isn’t good, our fee adjusts accordingly. But either way, the firm and you are on the same side of the issue. We’re not compensated in any other way, so the only way we’re able to make more as an advisor is if the client’s portfolio value grows. It’s as simple and straightforward and as mutually beneficial as it could possibly be. Now that you've gained a better understanding of how an RIA oper-ates, why should you choose our firm? Well, that’s easy. We have a well defined investment process which has a track record of documented supe-rior historical performance. Our firm delivers an institutional style (pension funds, Foundations, etc.) process of money management to individual inves-tors. Furthermore, clients meet with the people directly responsible for daily management of their accounts—the portfolio managers. Last, all client portfolios are managed by our team of portfolio manag-ers to ensure there’s always someone available to meet with to discuss your account. Just one more reason to engage a registered investment advisor, oh and Deschaine & Company at that. MTP

Year End 2009 Viewpoint

Annual Returns 1st Qrt

US MARKETS 5.84

GLOBAL EX-US 1.77

DEV MRKTS EX-US 1.08

EMERGING MRKTS 0.73

CORE BONDS 1.50

LT COMMODITY -4.38 Source: Morningstar Q4 2009 Market Com-mentary

Market Summary 1st Qrt 10

EQUITY INCOME Portfolio 5, 10, & 20 Year End High and Low Dividend Yields Company Name Ticker Price $ Dividend Div Yield 5-Yr High 5-Yr Low 10-Yr High 10-Yr Low 20-Yr High 20-Yr Low

Abbott Laboratories ABT 52.91 1.76 3.33% 2.89% 2.26% 2.89% 1.47% 2.89% 1.20%

Alliance Bernstein Global High Inc AWF 14.45 1.20 8.30% 18.70% 7.11% 18.70% 7.11% 24.98% 4.73%

Altria Group Inc MO 20.93 1.40 6.69% 5.63% 3.87% 6.02% 3.87% 8.00% 1.87%

Aqua America Inc WTR 18.00 0.58 3.22% 3.14% 1.46% 3.14% 1.46% 8.27% 1.46%

Arthur J Gallagher & Co. AJG 25.40 1.28 5.04% 5.69% 3.53% 5.69% 1.40% 5.69% 1.40%

AT&T Inc. T 26.38 1.68 6.37% 5.85% 3.42% 5.85% 2.10% 5.85% 0.85%

B&G Foods, Inc. Class A BGS 10.18 0.68 6.68% 15.70% 6.25% 15.70% 6.25% 15.70% 6.25%

Black Hills Corporation BKH 31.30 1.44 4.60% 5.33% 3.11% 5.33% 2.41% 6.18% 2.41%

BP PLC ADS BP 59.48 3.36 5.65% 7.25% 3.26% 7.25% 2.10% 9.27% 0.00%

Bristol-Myers Squibb Co. BMY 25.81 1.28 4.96% 5.33% 4.22% 5.33% 1.33% 5.33% 1.17%

CenturyTel Inc. CTL 36.20 2.90 8.01% 6.00% 3.39% 6.00% 3.39% 10.10% 2.22%

Chevron Corp CVX 81.32 2.72 3.34% 3.45% 2.42% 4.21% 2.42% 4.75% 2.42%

Clorox Company CLX 64.81 2.00 3.09% 3.15% 1.81% 3.15% 1.81% 3.68% 1.16%

Coca-Cola Company KO 55.32 1.76 3.18% 3.36% 2.22% 3.36% 1.12% 3.36% 0.84%

Colgate-Palmolive Co CL 84.15 2.12 2.52% 2.28% 1.80% 2.28% 0.98% 2.44% 0.91%

Computer Programs & Systems CPSI 39.67 1.44 3.63% 6.33% 2.12% 6.33% 0.00% 6.33% 0.00%

ConocoPhillips COP 56.64 2.20 3.88% 3.74% 1.86% 3.74% 1.86% 4.67% 1.86%

Consolidated Edison, Inc. ED 44.63 2.38 5.33% 6.01% 4.75% 6.01% 4.75% 7.77% 4.01%

CPFL Energy Inc. CPL 61.58 4.58 7.44% 12.83% 4.31% 12.83% 0.00% 12.83% 0.00%

Dominion Resources Inc. D 41.28 1.83 4.43% 4.50% 3.08% 4.70% 3.08% 7.08% 1.56%

DuPont de Nemours & Co. DD 39.37 1.64 4.17% 6.48% 3.04% 6.48% 2.85% 6.48% 1.59%

Elbit Systems Ltd. ESLT 63.89 1.44 2.25% 2.80% 1.09% 7.73% 0.43% 7.73% 0.43%

Energy Transfer Partners LP ETP 48.83 3.58 7.32% 11.12% 3.55% 11.12% 3.55% 11.12% 3.55%

ENI S.p.A. E 47.08 2.00 4.26% 7.60% 4.51% 7.60% 1.83% 7.60% 1.83%

EV Energy Partners, Units EVEP 32.37 3.02 9.33% 18.20% 0.00% 18.20% 0.00% 18.20% 0.00%

Federated Investors Inc FII 26.76 0.96 3.59% 21.76% 1.55% 21.76% 0.48% 21.76% 0.42%

General Mills Inc. GIS 70.31 1.96 2.79% 2.72% 2.40% 2.72% 2.11% 3.98% 1.57%

Genuine Parts Company GPC 42.92 1.64 3.82% 4.19% 2.79% 4.19% 2.71% 4.19% 1.41%

Gladstone Capital GLAD 7.38 0.84 11.38% 19.04% 6.92% 19.04% 4.92% 19.04% 4.92%

Glaxo Smithkline ADS GSK 39.38 2.29 5.83% 5.90% 3.05% 5.90% 2.21% 5.90% 0.00%

H.J. Heinz Company HNZ 46.31 1.68 3.63% 4.23% 2.89% 4.93% 2.85% 4.93% 1.69%

HCP HCP 28.35 1.84 6.49% 6.57% 4.62% 9.84% 4.52% 11.64% 4.52%

Health Care REIT Inc HCN 43.25 2.72 6.29% 7.26% 5.10% 14.37% 5.10% 14.37% 5.10%

Hershey Co. HSY 36.43 1.19 3.27% 3.43% 1.68% 3.43% 1.50% 3.43% 0.55%

Integrys Energy Group TEG 48.34 2.72 5.63% 6.48% 4.05% 6.48% 4.05% 7.96% 4.05%

Johnson & Johnson JNJ 66.03 1.96 2.97% 3.00% 2.12% 3.00% 1.18% 3.00% 1.16%

Kimberly-Clark Corp. KMB 62.15 2.64 4.25% 4.30% 2.83% 4.30% 1.51% 4.30% 1.51%

Kraft Foods Inc KFT 30.79 1.16 3.77% 4.27% 2.63% 4.27% 0.38% 4.27% 0.38%

Main Street Capital Corp MAIN 16.01 1.50 9.37% 14.59% 2.36% 14.59% 2.36% 14.59% 2.36%

Maxim Integrated Products MXIM 20.58 0.80 3.89% 6.79% 1.17% 6.79% 0.06% 6.79% 0.06%

Mercury General MCY 38.22 2.36 6.17% 5.93% 2.95% 5.93% 2.19% 5.93% 1.05%

Microchip Technology Inc MCHP 29.88 1.36 4.56% 6.79% 1.40% 6.79% 0.08% 6.79% 0.08%

Middlesex Water Co. MSEX 17.50 0.72 4.11% 4.08% 2.74% 4.08% 2.73% 8.14% 2.73%

MLP & Strategic Equity Fund MTP 17.70 0.84 4.75% 25.89% 5.78% 25.89% 5.78% 25.89% 5.78%

Norfolk Southern Corp NSC 59.39 1.36 2.29% 2.59% 1.07% 6.01% 0.99% 6.01% 0.99%

Paychex, Inc. PAYX 31.08 1.24 3.99% 4.64% 1.44% 4.64% 0.56% 4.64% 0.53%

PepsiCo, Inc. PEP 66.12 1.80 2.72% 2.92% 1.66% 2.92% 1.11% 2.92% 0.64%

Philip Morris Intl PM 51.35 2.32 4.52% 4.60% 4.57% 4.60% 4.57% 4.60% 4.57%

Pinnacle West Capital PNW 37.49 2.10 5.60% 6.54% 3.99% 6.54% 2.99% 6.54% 0.89%

Pitney Bowes Inc. PBI 24.94 1.46 5.85% 6.33% 2.77% 6.33% 2.64% 6.33% 0.64%

Plum Creek Timber Co. PCL 40.23 1.68 4.18% 4.84% 3.65% 10.05% 3.65% 14.53% 3.65%

Procter & Gamble Co. PG 63.22 1.76 2.78% 2.84% 1.85% 2.84% 1.72% 2.84% 1.11%

Progress Energy Inc PGN 39.02 2.48 6.36% 6.17% 4.93% 6.17% 4.19% 6.57% 4.12%

QWest Communications Q 5.32 0.32 6.02% 8.79% 7.60% 8.79% 7.60% 8.79% 7.60%

Realty Income Corp O 31.51 1.72 5.46% 7.18% 5.19% 8.78% 4.91% 12.85% 4.91%

Reynolds American Inc RAI 54.17 3.60 6.65% 8.43% 4.01% 8.43% 4.01% 8.43% 4.01%

Southern Company SO 34.09 1.75 5.13% 5.20% 4.12% 5.29% 4.12% 12.55% 4.12%

UIL Holdings Corp UIL 29.21 1.73 5.92% 6.26% 4.10% 8.26% 4.10% 9.27% 4.10%

Unilever PLC ADR UL 29.70 1.09 3.66% 5.63% 2.64% 5.63% 2.33% 5.63% 1.49%

Verizon Communications, Inc. VZ 29.73 1.90 6.39% 2.41% 2.36% 2.41% 2.36% 2.41% 2.36%

Wayside Technology Group WSTG 9.01 0.60 6.66% 8.57% 3.51% 8.57% 2.84% 8.57% 2.84%

Zenith National Insurance ZNT 38.37 2.00 5.21% 8.06% 1.90% 8.06% 1.90% 8.06% 1.90%

6.98% 3.21% 7.46% 2.59% 8.30% 2.15%

EQUITY INCOME Portfolio

1st Quarter 2010 Update

T HE EQUITY INCOME Portfolio current holdings

as of March 31, 2010 are shown on the table to the left. Also shown is the 5, 10, and 20 year average high and low dividend yield for each of the holdings. We’re showing the high and low yields because we thought that it was interesting and informative. While most investors con-sider the average dividend yield to be relatively modest as well as relatively stable, the data on the table suggests otherwise. Thanks to the ever present market volatility, even the most stable and modest dividend yields can see a significant move-ment between their high and low yield over time. Consider Do-minion Resources for example, a large, conservative electric util-ity. Its dividend yield over the last 20 years ranged from a low of 1.56% to a high of 7.08%. The difference in total return between buying Domin-ion when it’s yield exceeded 7% and when it’s dividend yield is below 2%, over the last 20 years over the last 20 years, needless to say, is huge. Our job is to buy when yields are closer to their highs and refrain from buying when they’re closer to their lows. It’s not rocket science, its just re-quires patience and discipline. The EIP was up 3.74% in total return while the equity holdings were up 5.03%, com-pared to the S&P 500 up 5.39%.


While no one is against any of these things, the 800 pound gorilla in the room is how are we, the taxpayer, going to pay for all of this? Here’s how: the “wealthy” will pay higher income taxes, busi-nesses with 50 or more employees will have to insure them or pay a penalty. Individuals will have to get insurance or pay a fine. Insurance premiums will rise for anyone who already has health insurance, and seniors with Medicare Advantage could lose those plans or pay more to keep them. Throw in the fact that the Bush tax cuts expire at the end of the year which will push the Medicare tax on capital gains to 23.8% in 2010. Dividends currently taxed at 15% will be taxed at ordinary income tax-rates, with the top rate scheduled to rise to 39.6% (from 35%). This means that the tax on dividends could go as high as 43% when the new Medicare tax jumps in 2013. Obama has proposed a top dividend tax rate of 20% (is he capitulating to economic reality?), so if Congress goes along, the top rate on divi-dends would only rise to 23.8% in 2012. So, regardless of how you feel about the bill, the fact is that taxes, fees and insurance rates are going to go up, and in most cases, by a lot. Does any of that sound like it’ll be good for job crea-tion at a time when the economy is struggling to recover from the deepest recession in post Great Depression history? Does any of that sound like it’ll give the stock market reason to move higher over the next five, ten years? We wish we had some reason to believe the claims made by the supporters of this govern-ment takeover of the healthcare industry. That the federal government will bring operating efficiencies, innovation and cost containment to the health care system, as one example. But the overwhelming historical evidence tells us other-

wise. From where we sit, about all government has ever done to anything it touches is suck the life out of it. We see no reason to believe a gov-ernment run healthcare system will be any differ-ent. Now that the health care fiasco has been let loose upon the land, what’s next: “Cap and Tax, immigration reform, financial market reform, a Value Added Tax? The list goes on and on. Budget Deficit Bomb Shell

“Government is the problem.” — Ronald Reagan For more than 20 years, the political left and the antiquated media types assailed President Reagan for running federal budget deficits “as far as the eye can see,” during his presidency. Well, after February’s Federal budget report from the White House, we’re confident Reagan’s critics can now move on and put the new label of budget “buster” where it squarely belongs, on Obama and the Democratic controlled Congress. The White House quietly announced, and by that we mean very quietly late on a Friday afternoon, that the budget deficit for the month of February was a record $221 billion dollars. Again, in case you missed it—the budget deficit for the MONTH of February was a record $221 billion. That’s more red ink than Reagan man-aged to accumulate in the whole year of 1986, the worst deficit year of his administration. To put the respective deficit numbers into perspective, it took our country 169 years to accumulate $221 billion in total debt from run-ning deficits, Reagan took a whole year while the Obama administration managed to do it in the shortest month of the year. Now that’s a deficit and budget record to be proud of—sort of. As always, thanks for reading. MJD


Yep, We’re Open for Business Jason Loyd Vice President & Portfolio Manager

F INDING AND HIRING an investment advisor can be more excruciating than going in for a

root-canal. After all, you’re turning over control of your hard earned money to someone who isn’t you. And let’s be honest, no matter how little experience or time you have to manage your money, you’re still the only one you really trust to handle your money. Right? We understand that. That’s one of the founding tenets of the firm, to manage money as if it were our own money—because, well, it is. We think that’s what makes us unique. Unlike most businesses ,where getting big is the primary objective, ours is to focus on doing one thing well—managing the money. We figure that if we do that well, our clients will win, we’ll win, and the business will take care of itself. So everything we do here at Deschaine & Company starts and ends with the process of managing money. That’s also why we are so obsessed with minimizing fees, commissions, and taxes. We don’t like paying them any more than you do. Besides, a penny saved is a penny earned, as someone famously once said. At the same time, we’ll be the first to admit that a firm our size is probably not for everybody. Some people are just more comfortable with a large behemoth. And hey, that’s okay with us. But we know there are plenty of folks out there that are looking for a little more than the status quo. And guess what? We think that’s us! Our door is always open; and we will be delighted to help you in any way we can. We start by doing a comprehensive review of your current portfolio. In the review, we’ll examine your invest-ment holdings, overall asset allocation and as-sess whether they’re consistent with your goals and objectives. We’ll also review fees and other costs as well as the historical performance of your investments. When we’re done we’ll provide you with a detailed report including specific recom-mendations. And, you can rest assured, we won’t pull any punches. When you think we can help, feel free give us a call at (618) 397-1002. JML


A REGISTERED INVESTMENT ADVISOR 128 South Fairway Drive Belleville, IL 62223 deschaineandcompany.com