Around a year ago, we began the process of building out our real money Dividend Growth and High Yield Portfolios.
So far, I’ve been very pleased with the way these portfolios are shaping up.
Our Dividend Growth Portfolio currently has much stronger fundamentals than the S&P 500-
While trading at a more attractive valuation relative to its expected earnings growth.
The companies we own are growing faster and generating higher returns on invested capital than the broad market.
Meanwhile, our High Yield Portfolio is producing a 9.32% yield on our invested cost, while also seeing share-price appreciation.
Seeing dividend growth from our holdings, alongside improving durability in the underlying businesses, gives me greater confidence in the sustainability of our income.
Today, we’re adding one position to the Dividend Growth Portfolio and one position to the High Yield Portfolio.
Let’s dive in.
📊 Market Update
It’s no secret that market valuations have reached historically expensive levels.
Regardless of whether you are looking at the P/E multiple, Price to sales, price to book, or any other standard valuation metric, we are at all-time highs.
Of course, you know this doesn’t tell the whole story.
We’re currently in the midst of one of the greatest earning booms of all-time.
So we have to consider how quickly the underlying earnings are expected to grow.
So when we look at the valuation of the market on a price-to-earnings-growth basis (PEG), things seem much more reasonable.
This is based on analyst earnings projections over the next 5 years.
But if we look even closer, even that doesn’t paint the full picture.
This is a sharply divided market, with very different results across sectors.
Take a look at the one-month performance by sector below.
Between August 24 and September 24, technology rose 8.14%, while the S&P 500 ETF in the comparison gained just 0.46%.
Other than communication services, every other sector ETF was down.
Industrials fell 5.68%, real estate declined 8.12%, and utilities dropped 8.93%.
Technology is single handedly pushing the market higher.
so does that weakness from sectors outside of tech create opportunities?
Maybe… But it depends.
Take a closer look at the valuation comparison by sector below.
Industrials trade at 23 times forward earnings.
Their valuation relative to the S&P 500 sits in the 97th percentile of the past 30 years.
Technology, meanwhile, trades at 20 times forward earnings, with its relative valuation in the 42nd percentile.
At current levels (compared to their history), industrials are expensive, while tech is cheap.
This is why we need to evaluate each opportunity on its own fundamentals.
A sector can sell off and still carry a demanding valuation, while strong earnings growth can make another sector’s multiple easier to justify.
Treasury yields are also changing the math behind the decisions we make when considering income opportunities.
The 10-year Treasury yield hit 5.2% today, its highest level since 2007.
Higher Treasury yields raise the bar for dividend stocks, preferred shares and REITs.
A company’s ability to grow cash flow and dividends becomes an increasingly important part of the investment case.
I believe today’s additions can take advantage of this environment while becoming positions we can hold for the long term in their respective portfolios.
If you’d like to get access to these portfolios, as well as everything mentioned below, you can do so here.
Now, let’s get into our two additions.