Deep Value Dividend Growth Index Week 17 Update: Rising Rates Yield Big Surprises

Posted On March 19, 2017 11:46 pm

Click here to read up on the intro to this portfolio, the theory behind it, and its methodology.

Well in a completely expected Fed meeting Yellen and friends raised rates by another 0.25% and rate sensitive investments such as REITs, (which had been hammered for two weeks) had their best day in months. This was likely due to the Fed’s updated guidance which showed just two more planned rate increases this year, instead of the three that had been rumored on Wall Street due to rising inflation rates.

Interestingly enough the 10 year Treasury yield dropped nearly 10 basis points the day of the hike, and is now pretty much unchanged from the 2.5% it was prior to the Fed’s December hike. This kind of spread compression (short-term rates rising but long-term rates standing still) could indicate that the market doesn’t yet buy into the story that the US economy has finally achieved take off velocity. In fact, the Atlanta and New York Fed’s real time GDP predictors were both revised downwards this week, to just 0.9%, and 2.8%, respectively, with even slower growth expected in Q2.

That contradicts the solid jobs report we had, that showed strong job creation, rising labor force participation, and decent wage growth. We’ll just have to wait which of these indicators is correct. But if Congress doesn’t manage to get tax reform passed this year, (which is looking increasingly likely) then the “animal spirits” that have sent markets to such lofty levels might finally give ground and we could get that market wide correction that is now so much overdue. Of course such an event would be great for us, since it means many, MANY more buying opportunities.

Portfolio Stats:

Portfolio Holdings: 200

Yield: 3.62% (S&P yield 1.92%)
Yield on Cost: 3.74%

Lowest Yielding Holdings:
MercadoLibre (MELI): 0.28%
Shire PLC (SHPG): 0.51%
NVIDIA (NVDA): 0.53%
MarketAccess Holdings (MKTX): 0.58%
Ball Corp (BLL): 0.69%
Dr. Reddy’s Laboratories (RDY): 0.72%
Charles Schwab (SCHD): 0.75%
McKesson Corp (MKC): 0.76%
Fedex (FDX): 0.82%
Cintas (CTAS): 0.84%

Highest Yielding Holdings:
Icahn Enterprises (IEP): 11.44%
New Residential Investment Corp (NRZ): 11.24%
Golar LNG Partners (GMLP): 10.59%
Dynagas LNG Partners (DLNG): 9.76%
KNOT Offshore Partners (KNOT): 9.50%
Sunoco Logistics Partners (SXL): 8.72%
Starwood Property Trust (STWD): 8.55%
Ladder Capital (LADR): 8.24%
Sprague Resources (SRLP): 8.24%
PennantPark Floating Rate Capital (PFLT): 8.20%

Valuation Metrics

PE: 15.20 (22% below S&P 500)

Price/Fair Value: 0.90

FCF Margin: 16.42% (vs S&P 500’s 12.32%)

Return on Assets: 7.53% (5% above S&P 500 average)

Return on Equity: 25.44% (19% above S&P 500 average)

Market Cap: $13.6 billion (84% below S&P 500 average)

Smallest Market Cap Holdings:
Jernigan Capital (JCAP): $209.2  million
Farmland Partners (FPI): $347.7 million
Medequities Realty Trust (MRT): $356.8 million
City Office REIT (CIO): $361.2 million
PennantPark Floating Rate Capital (PFLT): $373.7 million
Westwood Holdings Group (WHG): $478.7 million
Sprague Resources (SRLP): $620.5 million
Dynagas LNG Partners (DLNG): $623.3 million
Easterly Government Properties (DEA): $727.6 million
KNOT Offshore Partners (KNOP): $785.0 million

Largest Market Cap Holdings:
Apple (AAPL): $730.8 billion
JPMorgan Chase (JPM): $320.5 billion
Wells Fargo (WFC): $290.4 billion
AT&T (T): $262.7 billion
Bank Of America (BAC): $245.3 billion
Procter & Gamble (PG): $231.5 billion
Anheuser-Bush InBev (BUD): $217.9 billion
Verizon Communications (VZ): $206.9 billion
Pfizer (PFE): $203.7 billion
Oracle (ORCL): 187.0 billion

Projected 5 Year Dividend Growth: 7.6% (29% above S&P 500 average)

Projected Annual Total Return: 11.3% (25% above the market’s historic CAGR since 1871)

Portfolio Composition: 

Consumer Cyclical:         25.62%
Healthcare:                         16.19%
REIT:                                     10.53%
Consumer Defensive:      9.83%
Industrials:                           9.41%
Energy:                                   9.22%
Finance:                                 7.24%
Tech:                                        4.32%
Basic Materials:                   4.13%
Utilities:                                  2.13%
Telecom:                                 1.40%

Smallest Holdings
Delta Airlines (DAL): 0.15%
Prologis (PLD): 0.17%
New Residential Investment Corp (NRZ): 0.17%
Marathon Petroleum (MPC): 0.17%
Spirit Realty (SRC): 0.17%
Brookfield Property Partners (BPY): 0.18%
City Office REIT (CIO): 0.18%
Anheuser-Bush InBev (BUD): 0.18%
Host Hotel & Resorts (HST): 0.18%
Toyota Motor Corp (TM): 0.18%

Smallest 10 Holdings: 1.73%

Largest Holdings:
DineEquity (DIN): 5.42%
L Brands (LB): 3.37%
Teva Pharmaceuticals (TEVA): 2.89%
Perrigo (PRGO): 2.86%
HollyFrontier (HFC): 2.28%
Gilead Sciences (GILD): 1.83%
CVS Health (CVS): 1.81%
VF Corp (VFC): 1.79%
B&G Foods (BGS): 1.69%
Terra Nitrogen (TNH): 1.59%

Top 10 Holdings: 25.53%

Worst Performers:
Target (TGT): -7.90%
Delta Airlines (DAL): -7.64%
Toyota (TM): -7.41%
Perrigo (PRGO): -7.25%
Golar LNG Partners (GMLP): -7.11%
Simon Property Group (SPG): -7.08%
Macerich (MAC): -6.85%
Air Products & Chemicals (APD): –6.24%
Dine Equity (DIN): -6.19%
Icahn Enterprises (IEP): -6.11%
Compass Minerals International (CMP): -6.09%

Best Performers:

MercadoLibre (MELI): 33.88%
NetEase (NTES): 33.83%
NextEra Energy Partners (NEP): 32.85%
Broadcom (AVGO): 29.70%
Delphi (DLPH): 27.89%
Skyworks Solutions (SWKS): 27.43%
Philip Morris International (PM): 26.81%
Apple (AAPL): 25.21%
KLA-Tencor (KLAC): 24.59%
Hasbro (HAS): 24.28%

Portfolio Performance:

Portfolio Annualized Total Return: 10.75%
S&P 500: 9.75%
Outperformance (Alpha): 1.0% (17 straight weeks of beating market,  by 10% so far)

What I’m Watching Next Week

In terms of economic reports durable goods will hopefully give us a clearer picture of which of the competing economic stories (slowing or accelerating growth) is true. Also out is existing and new home sales, which will hopefully improve. If not it could either mean that supply remains constrained, resulting in high prices that are squeezing out new buyers, (as might higher interest rates), which would be bad for economic growth prospects. New jobless claims will be the first sign of trouble in case yield compression is indeed pointing to slowing economic growth and a potential recession.

In terms of earnings, not much, though Fedex (FDX) does report on Tuesday. Not just will that potentially also serve as an economic indicator, but may give us another buying opportunity if the market is disappointed.



About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I currently write for both Seeking Alpha, Simply Safe Dividends, and DividendSensei.com My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives. With 22 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams. I'm currently on an epic quest to build a broadly diversified, high-quality, high-yield dividend growth portfolio that: 1. Pays a 5% yield 2. Offers 7% annual dividend growth 3. Pays dividends AT LEAST on a weekly, but preferably, daily basis

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