This stock market is on track for multi-year highs

 

Author: Mark Holder, Stone Fox Capital

Covestor model: Net Payout Yields

The Net Payout Yields model gained a solid 4.3% in March versus 3.1% for the benchmark S&P 500. The model remained strong all month even as the S&P 500 struggled toward the end of March. This month was a normal trading period for this model with only one trade initiated in order to reduce the cash balance.

Time Warner (TWX) was bought as the stock flashed one of the highest Net Payout Yields in the over $10 billion market cap group with a huge buyback. The stock also maintains a strong 2.9% dividend. For more details on why Time Warner was selected, please read this article.

The largest gains came from Lowes (LOW), WellPoint (WLP), Gap (GPS), and Goldman Sachs (GS) along with several other stocks that had solid gains. Most of those stocks saw gains that exceeded 10%, easing the pain from a recent loss in Itau Unibanco Holding (ITUB).

Typical of a model that allows for trading signals based on an indicator such as the Net Payout Yield, a stock like Goldman Sachs was purchased back in January at a time when most investors were ignoring it. Then by March, the stock was producing major gains as most other investors were just catching on.

The market in general remains in a uptrend that likely will lead to multi-year highs and possibly eventually to all time highs in the S&P 500. This model will remain fully invested to capture as much upside as possible while protecting against any major downside from owning solid large cap stocks with outsized yields.

Our biggest concern to this model remains that end of year tax hikes to dividends will hurt these stocks in the short term. This appeared to happen during the last quarter of 2010 when the Bush tax cuts were on threat of expiring. Naturally 2011 was a strong year for dividend stocks as the fears subsided. This might not happen in 2013 if the taxes are hiked.

The other concern is that most dividend stocks have reached lofty levels after a very strong Q1. This model has rotated out of several stocks where the dividend yield has declined below acceptable levels, and we expect to add a few more in the coming weeks and months. Considering this, we don’t expect a huge impact on the model from such a tax hike as the buyback stocks in the model could excel as investors rotate to the more favorable tax treatment.