sustaining a 6% dividend yield v1
TRANSCRIPT
Sustainable Dividend Investing –Finding income in a yield starved environment
Mark Painter, CFASenior Portfolio Manager
Overview
The search for yield is becoming increasingly difficult
Understanding and balancing risk is necessary as RISK continually shifts
Opportunities exist outside of “traditional” income asset classes
Focus on fundamental drivers of company performance is essential
A disciplined approach will lead to outperformance of benchmarks
2
Current Asset Class Yields3
INCOME ASSETS
REALESTATE3.78%
CASH.15%
10 YR 2.65%
INV. GRADE3.48%
HIGH YIELD5.82%
INV. GRADE7.19%
SOURCE: BLOOMBERG
MUNI Bonds2.94%
Current yields are as of 4/30/2014 and from the following sources. ETF’s representing VNQ for real estate, JNK for High Yield, MUB for Muni Bonds, LQD for Inv. Grade, 6 mo current CD rate available on Schwab institutional for cash, and 10 yr treasury for bonds
Why Investors use Traditional “Income” Assets
• Low perceived risk
• Low perceived volatility
• Known income stream
• Low perceived correlation with the market
• Understood by the general population
4
Myths about risks
• Low perceived risk Interest Rate Risk?
5
0
2
4
6
8
10
12
14
16
18
5/6/
1980
5/6/
1981
5/6/
1982
5/6/
1983
5/6/
1984
5/6/
1985
5/6/
1986
5/6/
1987
5/6/
1988
5/6/
1989
5/6/
1990
5/6/
1991
5/6/
1992
5/6/
1993
5/6/
1994
5/6/
1995
5/6/
1996
5/6/
1997
5/6/
1998
5/6/
1999
5/6/
2000
5/6/
2001
5/6/
2002
5/6/
2003
5/6/
2004
5/6/
2005
5/6/
2006
5/6/
2007
5/6/
2008
5/6/
2009
5/6/
2010
5/6/
2011
5/6/
2012
5/6/
2013
5/6/
2014
!0 y
r. yi
eld
10 Yr. Treasury Yield
SOURCE: BLOOMBERG
Myths about Volatility
• Low perceived volatility Spread Risk?
6
SOURCE: FRED St. Louis Federal Reserve
Current Spread is 44bps away from all time low set in 2007
Where does that leave us – Equities?
Investors are afraid of the market Volatility drives bad decisions
(buy high – sell low)
• Headline news drives fear and greed• Dividends are less predictable than traditional income assets
7
Components of Shareholder Equity Return Fundamental Underlying Earnings of company
Dividends
Share Buy-Backs
8
0
5
10
15
20
25
30
35
3/1/
1954
12/1
/195
59/
1/19
576/
1/19
593/
1/19
6112
/1/1
962
9/1/
1964
6/1/
1966
3/1/
1968
12/1
/196
99/
1/19
716/
1/19
733/
1/19
7512
/1/1
976
9/1/
1978
6/1/
1980
3/1/
1982
12/1
/198
39/
1/19
856/
1/19
873/
1/19
8912
/1/1
990
9/1/
1992
6/1/
1994
3/1/
1996
12/1
/199
79/
1/19
996/
1/20
013/
1/20
0312
/1/2
004
9/1/
2006
6/1/
2008
3/1/
2010
12/1
/201
19/
1/20
13
Historical S&P 500 P/E Ratio
SPX Index - Price Earnings Ratio (P/E) Average +1 SD -1 SD
Psychological Multiple Expansion and Contraction
SOURCE: BLOOMBERG
Our View: FOCUS ON THE FUNDAMENTALS
From 1930-2011 DIVIDENDS accounted for 50% of total return in S&P 500 – ISI group
9
Why stocks pay high yields? – Market Believes Unsustainable
10
TICKER NAMEDIV YLD1 YR AGO DIVIDEND CUT
CMO CAPSTEAD MORTGAG 12.99 √
WIN WINDSTREAM HOLDI 12.08
RRD RR DONNELLEY & S 11.57
CEQP CRESTWOOD EQUITY 11.27 √
APO APOLLO GLOBAL 11.18
CWH COMMONWEALTH REI 11.05 √
FSC FIFTH STREET FIN 10.75
SCCO SOUTHERN COPPER 10.72 √
PSEC PROSPECT CAPITAL 10.71
FGP FERRELLGAS-LP 10.04
BBEP BREITBURN ENERGY 9.91
MMLP MARTIN MIDSTREAM 9.85
SOURCE: BLOOMBERG
What We Learned
Markets Often Take Broad Stroke Views - Mark Down Sectors, Categories and Industries
Market Generalizations Offer Opportunity
Each Company is a Unique Story - Buy Companies, Not Markets
Find the Companies Who can Support, and Grow Dividends
Income Durability through Diversification - Own all Sectors S&P 500 Sectors
Identify companies through AD-STAR that Pay Unusually (Above Market) High Dividends
Generate Consistent Returns on Invested Capital to Support and Grow Dividends
History of Utilizing Capital Efficiently through Shareholder Returns
Record of Consistent Cash Generation
11
AD-STAR
Continual Revaluation& AssessmentPortfolio
Valuation(Level 3)
600+ Financial Screens (Level 2)
All Listed Companies
(Level 1)
12
Qualitative Overlay
Qualitative Review After Passing AD-STAR: Competitors/Competitive Advantages
Market Potential/Market Share
Product Mix
Business Model
Governance
Risk
13
Company Attributes
14
SLG High Dividend and Value Performance
15
All statistics calculated from Stanley Laman Group, Ltd. High Dividend and Value Composite as of 03/31/2014 (the “Composite”). You should not consider this performance data as a prediction or an indication of future. The Composite represents fully discretionary advisory accounts that are managed in accordance with the SLG Dividend and Value investment strategy. The performance results above are prepared in accordance with Global Investment Performance Standards (“GIPS”). The returns of the accounts presented were calculated on a total return basis and include all dividends and interest and realized and unrealized gains and losses. All returns are presented after the deduction of a hypothetical 1.00% fee. Inception date of the Composite was February 1, 2010.
■ Beta: .91 (inception)■ Alpha: 3.03% (inception)■ R2: .87 ■ Turnover: 37.45% (3yr avg.)