For our Covestor Dividend and Growth Plus portfolio, I combine stocks that pay a modest but increasing dividend with stocks that have a high dividend yield but typically are less likely prospects to raise their dividend consistently over time.
This combination potentially provides our clients with a relatively high and rising dividend stream that can be used for income – or reinvested for growth. I like the idea of stocks that pay us to hold them – it’s like adding a “company match” to an 401(k) account. Of course, future dividends are at the discretion of the company.
Below is one of our more popular holdings, Prospect Capital Corporation (PSEC). Shown is a price chart for the past twelve months. You can see that PSEC had a sudden drop in November of 2012.
This turned out to be more frustrating than troubling, as the following month, (indicated by the yellow arrows) PSEC actually increased its dividend by 7.8%. Not the typical actions of a company in trouble, as might have been indicated by the November price drop.
Chart 1 Prospect Capital Corporation 12 Month Return
However, what the chart doesn’t show is that PSEC’s current dividend adds up to a 12.03% yield. The stock also sports a lower than market Price to Earnings ratio (P/E) of only 8.49 based on projected 12 month earnings.
These are the stocks I love: high yields and low valuations. The only question is whether earnings will be stable enough to continue paying high dividends. If recent results are any indication, the answer may be “yes.” The company just announced that their net investment income increased by 43%, year over year for the period ending June 30, 2013.
What does this mean to our clients? Not only does the current dividend seem “safe,” but PSEC also announced that they plan on increasing their dividend payout beginning in March of 2014.
The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. The opinions and views expressed herein are of the portfolio manager and may differ from other managers, or the firm as a whole.
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Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.
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