Dividend Stars Portfolio Beats Benchmark in First Quarter

BOSTON (TheStreet Ratings) -- The Dividend Stars portfolio returned 2.3% in March on a total return basis, a slight underperformance to the Dow Jones US Dividend 100 Index (DJUSDIVT), which returned 2.4%.

Since being launched Nov. 10, the Dividend Stars portfolio has returned 12.4%, versus 10.7% for the benchmark, an outperformance of 174 basis points. For the first quarter, the Dividend Stars portfolio returned 8.5%, exceeding the benchmark performance by 1.3%. The current portfolio offers an average dividend yield of 2.7% versus 3% for the benchmark. (The S&P Dividend Yield is currently at 1.97%.)

Since the start of 2012, investors have turned away from defensive sectors (such as Utilities, Telecom and Healthcare) and turned to cyclical sectors such as Financials and Technology. This has led to an outperformance for lower-quality stocks, as companies rated C&D on the quality scale (according to Merrill Lynch -- see chart below) have significantly outperformed, returning 22.5% in the first quarter.

High-dividend-yielding stocks have underperformed, while companies with strong dividend growth outperformed in the first quarter. Investors have opted to assume more risk, as evidenced by the strong performance of Low Price to Book and High Beta factors in the table below.

With low quality, high beta and cyclical companies leading the way for the year thus far, I'm quite pleased with the performance of the portfolio. I continue to seek companies that offer an above-average level of income return, but also have the potential for significant capital appreciation.

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Portfolio Changes:

Positions Sold in the Month: Norfolk Southern and Miller Industries. There were no positions added during the month.

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Highlights:

Three of our latest additions to the portfolio were the best performers in March:National Research (NRCI) (+11.2%) was the top performer in the portfolio, while Copa Holdings (CPA) (+10.7%) and Miller Industries (MLR) (+7.6%) also turned in strong performances.

Miller reported strong fourth quarter results and raised its quarterly dividend from $0.12 to $0.13. Despite the good results, I'm moving on from Miller. In reading through the fourth-quarter report, it seems as if the loss of government contracts could impact business over the rest of the year and into 2013. Also, I'm noticing a lot of insider selling, mostly on the part of CEO William Miller and his son William Miller II. Might just be profit taking, but the amount of shares sold in March alone (between the two they sold roughly 150,000 shares) is alarming.

Panamanian airline Copa Holdings reported that 2012 is starting out strong as economic growth in Panama continues to prosper. Construction in the region remains brisk, as a new convention center scheduled to be finished in early 2014 promises to bring more visibility and visitors to the region. With earnings for 2012 estimated at $7.50 and demand expected to keep growing, the stock still appears reasonable, trading at just 10.6 times earnings.

Lowlights:

Norfolk Southern (NSC) (-4.46%) was the worst performer for the month as continued worries regarding the slowdown in coal demand weighed on the company. Warm winter weather has reduced demand for coal, and with natural gas prices at depressed prices, there could be accelerated closures of coal-based plants. Coal represents roughly 31% of overall shipments for NSC and is likely to weigh signficantly on near-term results. Since I don't see any positive momentum for the stock in the upcoming quarters, I'm cutting losses here at a loss of -10.8%.
Below is the Dividend Stars Portfolio as of March 30, with current profit/losses since inception on Nov. 10, 2011. Note that NSC and MLR were sold at the end of the month.

If you have any questions, comments or suggestions, feel free to message me on Twitter at @bostoncfa

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.