Dividend Growth Portfolio August 2017 Performance and Outlook

August was an unusual month. We had escalating nuclear tensions with North Korea, and a storm – Hurricane Harvey – that will likely go down in history as the costliest natural disaster in U.S. history once the damages are tallied.

Yet perhaps shockingly, the stock market remained surprisingly quiet. Volatility ticked up modestly from its summer doldrums, but the S&P 500 managed to finish the month flat, up 0.1%.

The Dividend Growth portfolio finished the month down slightly, giving up 0.28% after fees and expenses. Year to date, the Dividend Growth portfolio was up 6.7% compared to 10.4% for the S&P 500 [Note: All returns data calculated by Interactive Brokers as of 8/31/2017; past performance no guarantee of future results].

I made several portfolio moves in August to better position the portfolio for the remainder of 2017.

To start, I took partial profits in oil and gas tanker operator Teekay Corporation (TK). Teekay’s stock price has been volatile in 2017 (along with energy prices), and I have been adding to the position when it reaches the lower end of its wide trading range and taking partial profits when it reaches the upper end of that range. While I expect Teekay to go much higher from current levels, I also intend to continue opportunistically trading the shares as conditions allow.

Following the announcement of a major dividend hike, I added shares of Citigroup (C) in August. The financial sector stands to benefit from several very favorable trends in the coming years. To start, while I don’t expect the Federal Reserve to be particularly aggressive in raising short-term interest rates, I do expect rates to go at least modestly higher. All else equal, higher interest rates and stronger economic growth mean higher profits for banks.

But beyond this, the large banks are one of the few true remaining pockets of value in a market that seems to get more expensive by the day. Citi trades for just 90% of book value and at a modest 11 times expected 2017 earnings.

Citi doubled its dividend last month after passing the Fed’s stress test. But even after the hike, Citi only pays out about 25% of its profits as dividends, so there is plenty of room to grow the dividend further.

Additionally, I sold three positions – Prospect Capital (PSEC), Main Street Capital (MAIN) and GameStop Corp (GME) – and have decided to keep the proceeds in cash for now.  While I do not believe a major stock-market correction is imminent, we are entering the September – October window when the market tends to be a little more volatile, and I felt it prudent to keep a little more cash on hand than usual. Assuming no unexpected developments, I will look to redeploy the capital within the next two months.

Prospect Capital’s performance has been below expectations for the past two quarters and, expecting a dividend cut, I decided it made sense to sell the shares. Prospect Capital did ultimately cut its dividend, vindicating my decision to sell.

After the post-dividend-cut selling, Prospect now sits at a very attractive 28% discount to book value, meaning the company is worth more dead than alive. I’m evaluating Prospect for re-entry and expect to make a decision in the coming weeks.

My decision to sell Main Street was based less on fear and more on opportunity cost. Main Street trades at a large premium to its peers in the business development company space, and at current prices, I don’t see a lot of upside left in Main Street, so it made since to sell and keep a little extra cash on hand to take advantage of any buying opportunities in September and October.

And finally, I believe that GameStop’s recent subpar performance is mostly due to negative sentiment towards brick-and-mortar retailers – negative sentiment that I consider extreme and overdone. Nevertheless, I see no immediate catalyst to send the stock higher. So, for now, I’m comfortable selling the stock and reevaluating it a few months from now.

That’s going to wrap it up for this month.

Thanks, as always, for trusting me with your hard-earned capital.

Charles Lewis Sizemore, CFA

Disclosures: Long TK, C

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.