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Our Prescription for Market Volatility
June 24, 2011
By Peter C. Thoms, CFA
Founder, Orion Capital Management LLC
It’s been a tough stretch for the U.S. markets and economy recently. The stock market has taken investors on a stomach-churning ride for the last decade while the lowest interest rates in fifty years have reduced to almost nothing the amount you can earn in a money market or savings account.
Our prescription for investors that are frustrated at low interest rates and choppy markets is simple: focus on the payout.
‘Focus on the payout’ means that investors seeking long-term growth should allocate their investment dollars to several asset classes that 1) each offer a robust, tangible payout and 2) do not move up and down in lock-step with one another.
Here is a partial list of asset classes we employ in portfolios and their approximate yields:
Dividend-Paying U.S. Stocks 3%
Dividend-Paying International Stocks 4%
Master Limited Partnerships (MLPs) 6%
Investment-Grade Corporate Bonds 4%
High Yield Corporate Bonds 7.5%
Preferred Stocks 7%
Let’s take it piece by piece:
1. Dividend-paying stocks have historically performed better than non-dividend paying stocks on an absolute basis—but they have also done so while being less volatile than the overall market. International dividend stocks, moreover, offer investors three additional benefits:
- Their yields are generally higher than comparable U.S. companies
- They offer exposure to faster-growing parts of the world
- They offer a return not denominated in the weakening U.S. dollar
2. Master limited partnerships are publicly-traded partnerships that often own hard assets—such as natural gas pipelines or energy storage facilities—that do not pay tax at the corporate level but instead pay out nearly all of their earnings to their limited partners (called unit holders). Because MLPs do not pay tax at the corporate level and because they are often involved in business activities that generate predictable cash flows, they are able (and expected) to pay out a significant cash stream to their unit holders.
3. Investment-grade and high-yield corporate bonds both offer significantly higher payouts than money market funds—but come of course with an extra dollop of risk. One of the most important attributes of bonds (particularly investment-grade bonds) is that they often move counter to the stock market on a short-term basis. Thus, a portfolio comprising both dividend-paying stocks and corporate bonds can be designed to have both a higher tangible payout as well as lower volatility than an equity-only portfolio.
4. Preferred stocks, which are often issued by financial companies or utilities, tend to have higher yields than common stocks as well as lower volatility. They can be an important component in a portfolio designed to deliver a high payout.
Excessive volatility in one’s investment portfolio is not much fun. Having a robust and consistent tangible payout, however, can be very pleasant. Furthermore, having a diversified portfolio of high-payout assets will give investors the strength (and cash flow) to replenish the weaker areas of their portfolios during regular rebalancing.
The model portfolio described above is for illustrative purposes only and is not to be construed as advice for any particular investor. For many investors, however, ‘focusing on the payout’ can be a great way to increase the dollar output of your portfolio while making it sturdier for those times when the stock market winds whip up.
If you would like to find out more about how a ‘focus on the payout’ strategy might work for you, please don’t hesitate to call or email us.
Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619.435.1701
Email: [email protected]
About the Author:
Peter C. Thoms, CFA, is the founder and managing member of Orion Capital Management LLC, an independent Registered Investment Advisor based in Coronado, California. The firm focuses on managing global equity and fixed income accounts for institutional and private clients.
Disclosure:
This document is for informational purposes only. Nothing in this report is to be construed as a specific investment recommendation. This document does not constitute the provision of investment advice, which is only provided by Orion Capital Management LLC under a written investment advisory agreement and only in states in which Orion Capital Management LLC is registered or is exempt from registration requirements. Orion is not a tax advisor and does not provide tax advice. For tax advice individuals should consult their CPA.
