Brookmont Capital's Dividend Equity Strategy provides their Second Quarter report covering perspective on foreign markets, more assumptions on interest rates and how they positioned their portfolio in response.
“The markets struggled to move higher during the second quarter due to a conflux of bad news from foreign markets and earnings disappointments from several domestic companies. The markets took their biggest hit during the month of June as fears about Greece, China’s economy, and second quarter earnings announcements led to widespread sales activity.
The Dividend Equity Strategy was repositioned during the second quarter in anticipation of increasing risk in the equity markets. Valuations were becoming stretched based on expected earnings growth and consensus assumptions that the Federal Reserve will raise short-term interest rates during the second half of the year.
During the second quarter we reduced our position in mid-cap stocks by 50% and now represent only 16% of the portfolio. This is our lowest weighting in small and mid-cap stocks since early 2009. This market sector outperforms during the early stages of an economic recovery and has historically underperformed when interest rates rise and the market cycle has peaked.
At the end of the second quarter, the Strategy maintained an 8.25% weighting in short-term securities. Our normal cash position is 2.5% or less and we plan to invest the excessive cash when opportunities are available. This will happen if the markets pull back by at least 10% or if a specific company boosts its quarterly dividend by at least 20%.
In relation to dividend paying stocks, earnings growth is not the most important variable in determining its future performance. These names are historically driven by strong cash flow, pristine balance sheets, dividend growth, and a market environment that prefers equities with a lower risk profile. Likewise, the actions by the Federal Reserve will only impact dividend stocks when yields for taxable fixed income securities become an attractive alternative. We cannot envision a series of rate hikes during the current economic cycle that would bring after-tax yields much higher than the Dividend Equity Strategy.
We always encourage investors to maintain a long-term outlook and ignore the short-term fluctuations in the markets. How your portfolio is invested, as well as remaining invested in the markets, will have a much greater influence on long-term performance than anything else. The chart below is confirmation that a portfolio built on dividend growth has far outperformed stocks that provide no income for its shareholders (Source: Ned Davis Research, based on the Russell 3000 Index from 1987-2014).” Read the full report below.
To learn more about Brookmont Capital and other Money Managers, call us at 1-800-541-7774 or contact us here to speak to one of our Wealth Managers.
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