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Investment Strategy

The Lifelong Income Portfolio, One Year Later

By Roger S. Conrad, on Jul. 3, 2014

These results are roughly in line with the S&P 500 and S&P 500 Dividend Artistocrats Index–solid results in a challenging environment for income-oriented stocks.

At the same time, the names in our model Portfolio sport an average yield of 5.5 percent, compared to a current return of 1.9 percent for the S&P 500 and 2.3 percent for the S&P 500 Dividend Aristocrats.

And in the first two quarters of 2014, our Lifelong Income Portfolio holdings have delivered an average return of 13.2 percent, compared to 7.6 percent for the S&P 500.

Interest Rates and Dividend-Paying Stocks

Contrary to popular belief, dividend-paying security classes–utility stocks, real estate investment trusts (REIT) and master limited partnerships (MLP)–exhibit a higher correlation to the overall stock market than to interest rates. (See What’s Rate Sensitive and What’s Not.)

That being said, this misperception that income-oriented stocks act as bond substitutes means that expectations for interest rates can drive near-term moves in these equities.

Last year, the crowd overreacted to the Federal Reserve’s plan to roll back quantitative easing, giving us an opportunity to scoop up shares of dividend-paying stocks on the cheap.

But income-oriented stocks have rallied this year, as the pullback in interest rates has drawn investors to the space.

Traders have piled into exchange-traded funds (ETF) that promise one-stop exposure to MLPs, REITs and other income-oriented stocks.

As we explained in Dividends and the Exchange-Traded Fund, we prefer to select individual equities; the instant diversification offered by ETFs also translates into diluted exposure to and industry or sector’s best names.

ETFs’ rising popularity as trading vehicles has helped to bid up some popular dividend-paying stocks to frothy valuations that price in everything going right–and then some.

Although these market darlings have rallied hard, valuations look increasingly stretched; with many of these names pricing in perfection, the risk of a potential pullback continues to grow.

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