golden egg

Content provided by Matt Santini, CLS Portfolio Manager

Blind yield buying has come back to haunt those who have never bothered to peek. And, since investors are rarely alone and adhere to crowdsourcing, the impact that has rippled through the markets has impacted our sacred defensive sectors. Utilities, REITS, telecom, high yielding credit, and preferred shares among others have all come under recent pressure. If too many buyers are chasing the same item – in this case yield – with disregard to fundamentals, it can oftentimes lead to the phone call in the night scenario. This time the call came from The Fed: I can promise you, Hillary will not be there to answer.

This is very simple market efficiency. Why would any investor want to now own a similarly yielding investment to that of a Treasury bond? The opportunity cost of the now expensive alternatives no longer appears to make sense.

But, not everything that currently pays a nice dividend is necessarily expensive. And this, readers, is where it is all about the quality, baby.  We want to look beyond debt laden sectors and look to companies that benefit from an improving economy, especially those cash rich ones that have the ability to grow their dividends over time. Particularly, we want to exploit the ones that have the ability to sweeten their payout ratio.

Believe it or not, there is yield to be had in our market’s unloved cyclical sectors, and we believe the payout ratios of these tech, industrial, and material companies offer opportunity for improvement. Not only is the yield respectable, but these sectors have proven time and time again that in a rising rate environment, they can be top performers.

So as we watch the curve gyrate, we are also determining where exactly our yield is derived from. And we are confident the quality of the yield will trump the quantity.

 

 

 

 

This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance.
1453-CLS-7/17/2013