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2012 YTD Portfolio Performance

September 1st, 2012 Leave a comment Go to comments

We’re just past the middle of the third quarter. This wouldn’t normally be a good time to talk about performance since we are not at a typical time break. After taking some of the summer off from this site, I think its a good time to put this out there. It is a great time to reflect on your portfolio because the markets right now are at an inflection point. We’ve come up from a bottom in June to re-capture the highs achieved in the April. This is what the YTD S&P500 chart looks like now:

S&P500 YTD

Where do we go from here? That’s a good question. The high of 1420 marks a new high from the bottom in 2009. Clearly the market has recovered from the bottom and is on the cusp of breaking through the 2012 highs to new levels. I’m not predicting this, but it is a possibility and the market can demonstrate this by breaking through that high we saw in April.

It wouldn’t be complete without mentioning other major assets classes along with the stock market. Look at what the 10 year treasury and Gold have done YTD. All of these assets have appreciated in price in 2012.

S&P500 / 10 Year Treasury / Gold



What Is Driving The Markets

The backdrop of the advance of all these asset classes is the fast and free money accommodation by the Federal Reserve. When every major asset class appreciates. There are also some side effects that are being caused by this policy that plays to the intent of the Fed. In a normal market situation, investors would price bonds and stocks based upon relative rates of return and expected risk. Since the Fed is manipulating the bond market, we are seeing these tradeoffs distorted.

Here’s what we have seen so far in 2012:

  • The stock market is up double digits. There are probably millions of people out there who still think the market is down from 2009 because they left and never came back. They have missed all the multi-year gains.
  • In a search for yield, dividend stocks and all kinds of corporate debt (even low investment grade) are being bought up. Two of my preferred stocks (HCN-D and O-D) were called, then each company issued new debt at lower rates to a hungry debt market.
  • In a search for safety, bond yields on U.S Government debt have plummeted. Some U.S. debt trades at an effective negative interest rate when taking into account inflation.
  • European debt and economic problems has made U.S debt a safe haven. The Euro hasn’t fallen that much relative to the U.S dollar given the circumstances that both central authorities are printing more money.
  • The Federal Reserve is going to keep trying to fix the labor market and low economic growth using accomodation. They have recently indicated a willingness to print more if the labor market and economic conditions don’t improve. Little do they know that this accommodation has caused inflation overseas – not here – because that’s where the hiring is.


Companies Are Getting Free Money, Too

Interest rates are so low that many companies today can issue debt at a cheaper rate than the dividends on their common stock. You can probably guess where this is going. A company with solid long term prospects can simply borrow money and buy back stock to take out all the future earnings.

The math here is tremendous because a loan has a fixed rate, whereas, a dividend at a quality company grows over time. Microsoft (MSFT) recently borrowed long term money at around 3%. Lorillard (LO), which is in my portfolio, recently issued $500 million dollars worth of 5 year notes at on 2.3%. Given that the dividend yield of LO is about 5% and grows each year,  you can make an easy case to simply borrow the money and pocket the difference for the shareholders.

Less than two weeks after the debt announcement, LO released that they are going to buy back $500 million worth of stock. How’s that for creating shareholder value?


Portfolio Performance

 My portfolio is having another good year. The reason is simple: I own what is working. These are the kind of stocks that are working right now:
  • High, yet sustainable and growing, dividend yields.
  • Every company (except the preferreds, which are like bonds) raised it’s dividend over the past 12 months.
  • Companies are “secular growth stocks” – unlike the cyclicals have been seesawing as the economy tries to find its mojo.
After a great 2011 performance with these same companies, I have to wonder if and when this train will stop?
Investment Name 2012 Gain
2012 Dividend yield

PM Philip Morris 13.8% 4.8%
EPD Enterprise Partners 15.1% 4.8%
MO Altria 14.5% 4.9%
PAYX Paychex 10.4% 3.9%
LO Lorillard 10.1% 4.9%
O.E Realty Income E preferred flat 6.9%
MER.E Merrill Lynch E preferred 22.5% 7.2%



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  1. September 7th, 2012 at 10:42 | #1

    You said the preferreds were called:
    1) But you have them in your portfolio table. Is that just so you can track what happened in 2012 YTD?
    2) I never heard of preferreds being called? Does that mean they were convertible in nature? Not all preferreds are convertible, r ight?

    • September 8th, 2012 at 16:13 | #2

      Evan, thanks for stopping by.

      I had removed the O-D and HCN-D preferreds from my portfolio. They should be gone. I still have a few left that are still active.

      Preferred’s are very much like bonds and come in all kinds just like them. Some are convertible while others are simply debt with a stated call date. A company may choose to call the debt if they can afford to or perhaps if they can refinance the debt more cheaply. Think about a mortgage. When you refinance, you are in a sense ‘calling’ your loan because you want to float another loan with different terms. Companies do the same thing.