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Sizemore Capital Allocation Change: Dividend Appreciation

Sizemore Capital is making a strategic allocation shift for all ETF portfolios with U.S. large cap exposure.  This affects the Tactical ETF Portfolio and the Strategic Growth Allocation.

To be consistent with Sizemore Capital’s focus on dividend growth, we are eliminating our long-term positions in the iShares S&P 500 Index (NYSE:$IVV) and replacing them with the Vanguard Dividend Appreciation ETF (NYSE:$VIG). 

The Vanguard Dividend Appreciation ETF tracks the performance of the Dividend Achievers Select Index, which consists of U.S. stocks that have long history of raising their dividends.  Every stock in the portfolio must have raised its dividend for a minimum of 10 consecutive years.

Much of our research and investment in recent years has focused on income and income growth, and for good reason.  Capital gains can be ephemeral, and the only way that investors can realize their returns is by selling shares.  Rather than enjoying the milk in the form of dividends, you end up slaughtering the cow. And continuing this analogy, once the cow is gone investors are left with nothing to eat.

I should note that both the Tactical ETF Portfolio and Strategic Growth Allocation are long-term growth models with current income as only a secondary objective. But even for growth-oriented investors with years or decades until retirement, a dividend-growth strategy makes sense, and the Vanguard Dividend Appreciation ETF is very consistent with a growth strategy.

Remember, the Vanguard Dividend Appreciation ETF does not have current income as its primary objective.   With a current dividend yield of 2.0%, it doesn’t pay significantly more than the S&P 500’s 1.9%.

Its focus on dividends is instead a focus on quality.  When a company raises its dividend, it sends a powerful message that management sees better days ahead. The discipline required to consistently pay a dividend also has a way of discouraging management from wasting shareholder money on quixotic empire building or on overpriced mergers that fail to deliver value.  It forces management to be efficient.  And importantly, it also helps to keep management honest.  Paper earnings can be manipulated, but dividends have to be paid in cold, hard cash.  Dividends don’t lie.

My good friend Albert Meyer of Bastiat Capital refers to his own strategy as “an index fund, but without all the rubbish.”  (It sounds classic in his professorial South African accent.)

This is how I like to think of the Vanguard Dividend Appreciation ETF.  With a portfolio turnover of only 14% per year and a management fee of only 0.13%, VIG enjoys the best aspects of an index fund—tax and fee efficiency—but without the baggage of the lower-quality companies that bog down most indices.

The Strategic Growth Allocation currently already has a position in the iShares Dow Jones Select Dividend ETF (NYSE:$DVY). It is fair to ask whether an additional position in the Vanguard Dividend Appreciation ETF is redundant.  But to this question, I would give an emphatic “no.”

DVY is primarily an income-focused ETF with a heavy allocation the utilities sector.  VIG is a growth-focused ETF with greater exposure to the consumer and industrial sectors.  Though they both have “dividend” in their titles, their strategies are vastly different (see “Dividend ETFs for Growth and Income”).

Disclosures: IVV, VIG and DVY are positions in Sizemore Capital accounts.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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5 Boring Stocks, 5 Sexy Yields

Investing is not all that different from choosing a spouse.  At some point in every man’s life, he has to make a choice.  Does he go for the alluring but volatile young vixen who will ultimately put him in an early grave, or does he take the more rational course of action and choose a mature, dependable companion to spend his life with?  (Women face similar choices themselves; to marry the handsome but unpredictable young buck or the more stable—if somewhat boring—workhorse?).

It’s nice if you can have it all, of course; romance and stability in a partner.

For investors, much the same can be said about stocks.   Sexy “glamour” stocks—and the heartburn they often bring—are best left to shorter-term traders.  Bonds offer stability but nothing in the way of excitement.   If you are looking for something in the middle—predictable, long-term wealth building—dividend-paying stocks are likely your best option.  They allow you reach your financial goals while still managing to sleep at night.

Today, I’m going to recommend five boring stocks with sexy yields.  We’ll start with that most mundane of American retailers Wal-Mart (NYSE: $WMT).

Wal-Mart is about as dull as it gets as a company; the world’s largest retailer of the basic “stuff” of modern life—everything from food to build-it-yourself furniture.

But Wal-Mart also  happens to be a dividend-growing dynamo.  In 2002, just 10 years ago, Wal-Mart paid $0.075 per quarter in dividends.  Today, it pays $0.398—an increase of more than five times.

With Wal-Mart’s domestic expansion slowing in the years ahead (and thus needing less cash for investment), I expect the company to continue aggressively raising its dividend.  The stock currently yields an attractive 2.7%, which is substantially more than what most bonds pay.

Next on the list is consumer products giant Kimberly-Clark (NYSE:$KMB).  If you thought it was impossible for a company to be more boring than Wal-Mart, then you failed to consider Kimberly-Clark.  The company manufactures and sells diapers, Kleenex, and other basic products you might find in your bathroom.

But like Wal-Mart, Kimberly-Clark is a dividend-raising dynamo.  Over the past decade, its quarterly dividend has risen from $0.30 to $0.74; not too shabby when you consider what a volatile decade it has been.  Kimberly-Clark currently yields 3.7%.

I can’t mention Kimberly-Clark without mentioning its much larger rival Procter & Gamble (NYSE: $PG).  Chances are good that half or more of the products in your bathroom and laundry room were made by Procter & Gamble, at least if you are an American (overseas, rival Unilever (NYSE:$UL) tends to dominate).  They make Crest toothpaste, Gillette razors, Charmin toilet paper, and Pampers diapers, among many, many other brands.  This is a company that Warren Buffett has dabbled in for years, and it’s easy to understand why.  Demand for its products is stable, and its brands have incredible intangible value.

Over the past decade, P&G has raised its quarterly dividend from $0.19 to $0.562; again, not a bad run.  The stock currently yields 3.5%.

Moving on, let’s take a look at the oh-so-boring world of natural gas transportation.   On this front, I recommend Williams Companies (NYSE: WMB).

Stop for a minute and think.  Can you think of anything more boring than natural gas transportation?  Yeah, me neither.

But William’s dullness is its strength.  Natural gas pipelines are stable, predictable businesses, regardless of what happens to the price of gas.  And if anything, the current glut in natural gas supplies should bode well for pipeline companies like Williams.  Cheaper prices encourage higher consumption.

Williams Companies is an IRA-friendly way to get access to the master limited partnership Williams Partners (NYSE:$WPZ).  For tax reasons that go beyond the scope of this article, master limited partnerships cannot be held in IRA accounts.  But as a corporation with a large ownership interest in a partnership, WMB can.

Williams Companies  currently yields 3.1%, and I expect this to rise substantially over time.

Finally, I want to put out one recommendation that is likely to get your pulse racing a little more than the rest: Spanish telecom juggernaut Telefonica (NYSE: $TEF).

There is little more boring than a telecom utility.  While you may “ooh and ah” over your latest iPhone, you generally spend very little time thinking about the company that provides cellular service to it.

Telefonica would have to be considered “riskier” than the rest of these recommendations by virtue of being domiciled in Spain.  But with a yield of over 11% at current prices, I consider it a risk worth taking.

Telefonica gets nearly half of its revenues from the fast-growing markets of Latin America, so continued recessionary conditions in Spain do not present an undue risk to Telefonica’s business.  Disruptions to the European financial system could result in the company cutting its dividend to preserve cash, but I consider this unlikely and, again, a risk worth taking for the potential rewards.

Disclosures: All securities mentioned are holdings of the Sizemore Capital Dividend Growth Portfolio.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Investing in Switzerland

Switzerland will always have a special place in the hearts of doom mongers.   For decades its franc has been the “go to” safe haven currency when the world got dicey.   The meticulous Swiss gnomes have always had a well-deserved reputation as prudent stewards of wealth—and a well-deserved reputation for discretion and privacy.  And importantly, their policymakers had little tolerance for inflation.

Investors with long memories will recall that the Swiss franc was the currency of choice in the 1970s for Americans looking to escape rampant inflation (and perhaps leisure suits and disco as well).  Outside of gold Krugerrands, few other asset classes offered much in the way of protection.

Like shag carpet and other novelties from the 1970s, Switzerland is popular again.  It’s easy enough to understand why.  With the world—and particularly Switzerland’s backyard of Europe—in a prolonged period of on-again / off-again crisis, the Alpine country is viewed as a refuge.

Consider the strength in recent years of the CurrencyShares Swiss Franc Trust (NYSE:$FXF).  As the European sovereign debt crisis really started to heat up last year, the franc almost went parabolic vs. the and euro.  Unfortunately, the strength of the currency was killing exports and destabilizing the Swiss financial system.  To the detriment of investors and traders who had been piling into the franc as a haven, the Swiss National Bank came down like a hammer to weaken the value of the franc.  Yet even after the move, many trust a devalued franc over a fragile euro or dollar.   I can’t say I that don’t understand.

There is a lot to like about Switzerland as an investment haven.  It is home to some of the world’s finest multinational companies, including Sizemore Investment Letter favorite Nestle (Pink:$NSRGY), pharmaceutical heavyweights Roche(Pink:$RHHBY) and Novartis (NYSE:$NVS) and engineering juggernaut ABB Ltd (NYSE:$ABB), which is the major competitor to Sizemore Investment Letter recommendation Siemens (NYSE:$SI).

Perhaps unfortunately, it is also home to two of the largest international banks in the world, UBS AG (NYSE:$UBS) and Credit Suisse (NYSE:$CS), two institutions that gave country quite a bit of heartburn during the 2008-2009 meltdown.

Investors looking for blanket exposure to Swiss stocks could consider the iShares MSCI Switzerland ETF (NYSE:$EWL).  It is a basket of Switzerland’s biggest and most influential companies.

A note of warning on this ETF, however.  If you buy EWL, you had better like Nestle, as the food and consumer products company makes up nearly a quarter of the portfolio.  Health care stocks collectively chip in 30 percent as well.  So, well over half of the ETF is investing in defensive (if not outright boring) sectors.    This is not necessarily bad, of course.  It’s just something to consider.

Nestle has been hit in recent years by rising commodity costs and the trend of consumers trading down to generic food products.  Even so, the company has a fantastic foothold in virtually every major emerging market country, and I consider Nestle about the closest thing to a “buy and forget” company available today.  It helps that the company pays a solid dividend of 3.5 percent.

Nestle recently made a splash by announcing that it would buy Pfizer’s (NYSE:$PFE) baby food business for $12 billion.  The purchase fits well with Nestle’s existing product lines, and it further strengthens its position in emerging markets.   Roughly 85 percent of the unit’s revenues come from emerging markets, and I would expect that number to only increase with rising incomes and livings standards.

On April 19, management announced that the company would be raising the dividend by CHF 1.95.  Expect to see more of this in the years ahead.  Nestle is not a “home run” stock, but it should be a steady producer for decades to come.

ABB also announced earnings in April, with mixed results.   Revenues grew by 8 percent  for the quarter , but new orders from China—one of ABB’s key markets—were down 35 percent.   ABB, like Siemens, is a fine company with great long-term prospects in building out the infrastructure that emerging markets need to rise to developed-world status.  But with budgets tight and markets jittery, the next year may prove to be challenging.

The Swiss banks, like their American and European counterparts, also face a rocky road ahead.  Regulators are squeezing risk out of the system and banks are shrinking their balance sheets and reducing leverage—all of which is good for long-term stability.  But it’s not good at all for bank profits.

Credit Suisse revealed late the month that earnings had improved over the last quarter but were down substantially from the first quarter of last year.  Profits were 44 million Swiss francs, down from 1.1 billion the first quarter of 2011.

Overall, I continue to like Swiss stocks in general and Nestle in particular.   But given the nonexistent yields and the SNB’s recent tendencies to aggressively lower its value, I’d stay away from currency positions in the franc.

Disclosures: Charles Sizemore is long Nestle.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Time to go Bargain Hunting

With volatility erupting out of Europe again, investors are left to wonder: Is this an opportunity to buy at attractive prices all of those great stocks that “got away from you” in the first quarter run-up, or is it portent of nasty things to come?

It would appear to be a little of both.

Even before the five-day selling spree, stocks were reasonably priced compared to historical measures, and they were downright cheap when compared to bonds and other common asset classes.  When you combine this with the generally gloomy sentiment towards stocks that has persisted for much of the past year, your risk of significant loss in a high-quality stock portfolio is almost nil.

Can stocks go from cheap to cheaper?  Absolutely.  It happens all the time.  But the conditions for a real bear market are simply not in place.  Fed policy remains loose, inflation remains largely tame, and stocks are cheap and underowned by individual investors and professionals alike.  These would be the conditions I would look for in a new bull market, not a bear market.

Still, after rising 28 percent from the 2011 Euro-crisis lows, stocks were due for a breather.  After returning 12 percent in the first quarter, the S&P 500 had already exceeded the returns that most analysts expected for the entire year.

This is where that “nasty portent of things to come” comes into play.  To borrow a quote from Lord Byron, it appears that the equity markets have “squandered their whole summer while ’twas May,” or more accurately April in this case.    As a result, I expect the major indices to move sideways in a choppy, range-bound market for most of the second quarter or until the latest scare coming out of Europe subsides.

Given this, how are investors to position their portfolios?

In a range-bound market, you can make money in one of two ways.   You either actively trade, attempting to buy at short-term lows and sell at short-term highs.  Or, you can orient your portfolio towards dividend-paying sectors and simply collect your checks while waiting for prices to firm up.   For the bulk of your nest egg, it is this second course of action I would recommend.   This is the approach I have taken in my Tactical ETF Portfolio in holding the Wisdom Tree Large Cap Growth ETF (NYSE: $DLN) and the PowerShares International Dividend Achievers ETF (NYSE:$PID).

For more active trading, investors might consider a contrarian bet on Spain.  I wrote favorably about Spain at the beginning of the quarter (see “Eurozone Member to Watch: Spain”), and I would reiterate this view today.  Spain has some of the cheapest stock prices and highest dividend yields in the world today, and Spanish firms outside of the construction sector tend to get a significant percentage of their revenues from outside the crisis-wracked country.

Keep the faith, dear reader.  There is money to be made in this market.

This article first appeared on MarketWatch.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Next Boom: Profiting from a Housing Recovery

Last week, I announced to the world what a momentously bad investment I had just made (see “I just made a horrible investment”).

Yes, dear reader, I was dragged kicking and screaming against my will into homeownership by my wife and two-year-old son.  My days of enjoying my Saturday mornings as an urban yuppy, drinking freshly-ground French press coffee and reading the weekend edition of the Financial Times on the patio of my Dallas Uptown highrise, are over.   Instead, they are spent at the local Home Depot (NYSE: $HD) buying rope and tools to hang a tree swing.

Men who pound away on financial calculators for a living have no business being within 100 yards of a Home Depot.  We don’t have the foggiest clue what we’re doing, and we end up spending small fortunes on tools we don’t need and have no idea how to use. And after buying it all, we generally abandon the project halfway through and end up paying a professional to redo it all.

I bring all of this up for an important reason.  The housing market has a disproportionately large impact on the health of the economy.  In addition to the obvious construction and mortgage finance industries that directly benefit from the construction and sale of homes, virtually every other industry benefits as well from an overall higher level of consumption.  When you own your dwelling, you tend to spend a lot more money on the things that go in it.  This would include furniture, appliances, electronics, decorations and artwork, and—yes—even tree swings.  Many of these purchases (though probably not the tree swings) are purchased on credit.  Thus housing and credit booms go hand in hand.

Of course, this also works in reverse. The U.S. economy has been in the dumps since the bursting of the housing bubble, with consumer spending and retail sales growth tepid at best.

All of this is about to change, and the catalyst will not be another stimulus bill or quantitative easing.  It will be demographics.

As a “thirty something” member of Generation X, I’m actually a little late to the homeownership party.  Knowing full and well what a terrible “investment” a personal residence is, I put it off as long as I could until family considerations made further delay all but impossible.  My generation is small relative to the one that came before it—the Baby Boomers—and the one that came after it—the Echo Boomers.  And our impact (or lack thereof) on the housing market has already been made.

It is the Echo Boomers that should have property developers salivating.  These children of the Baby Boomers, born in the 1980s and 1990s, form a generation even larger than that of their parents.  And they are quickly entering their peak marriage and family formation years.

The settling down of the largest generation to date will create unprecedented demand for starter homes and rentals.  Meanwhile, new supply has all but disappeared in the wake of the bust.  New home construction hit its lowest levels on record last year…breaking the record lows of the year before and the year before.

It may seem absurd to talk about given the foreclosure backlog that still plagues the market, but in a few short years we may actually have a housing shortage, at least in the cities attracting these new families.

It’s too early for me to recommend that readers buy homebuilders based on these fundamentals, and in any event homebuilder stocks have already had a phenomenal run.  The SPDR S&P Homebuilder ETF (NYSE: $XHB) has nearly doubled in less than six months, and homebuilders tend to be wildly volatile.

Figure 1: SPDR S&P Homebuilders

The best course of action would be to build a portfolio of entry-level rental properties.  While your principle residence is a terrible investment (it’s a major drain on cash flow), rental properties are an entirely different story.  If bought correctly and at reasonable prices, they generate a positive cash flow every month that is tax advantaged.  Depreciation and other charges ensure that much (if not all) of your cash income is tax free.  And real estate is a more reliable hedge against inflation than precious metals like gold or silver.

No less an authority than Warren Buffett would appear to agree.  The Economist recently quoted the Sage of Omaha as saying that he would buy “a couple hundred thousand” homes if it were practical for him to do so (see “Holding Back the Spring”).

Investors without the patience or the bankroll to buy a portfolio of rental properties can settle for apartment REITS or for the stocks of companies that cater to a recovering housing markets such as Home Depot or rival Lowe’s (NYSE: $LOW).

Oh, and about that tree swing.  It took me four hours of cursing and swearing, but I finally got it hung properly.  My two year old son loves it.

This article first appeared on MarketWatch.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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