By Charles Sizemore As we jump into May, I can find very little cause to complain. The Dividend Growth Portfolio is off to a solid start, up 5.7% through April 30, net of all fees and expenses. This compares to a total return in the S&P 500 of just 1.9%. The portfolio's high allocation to energy and to non-US stocks have been major drivers of performance, and I continue to view these areas as being particularly attractive.
Alas, all the news can't be good. REITs—which make up about a quarter of the portfolio—are suffering their worst correction in two years. As an example, Realty Income (O), considered one of the highest-quality blue chips in the REIT space, is down about 15% from its late January highs and now yields about 4.8% in dividends. That's a comfortable spread over the 10-year Treasury of about 2.8%.
STAG Industrial (STAG), a smaller and more speculative REIT holding of the Dividend Growth portfolio, has seen an even bigger selloff. STAG is down about 21% from its recent highs and now yields over 6% in dividends. I will save you the details of a REIT-by-REIT breakdown, but suffice it to say that the entire sector is down significantly from its January highs. This begs two questions: 1. Why the price declines? 2. What do we expect going forward?
Part of the reason for the decline is simply profit taking. REITs, along with most other income-oriented assets, had a monster 2014, and some of what we're seeing in 2015 is nothing more than the ebb and flow of the market. We also have to remember that, as income-oriented assets, REITs are extremely sensitive to changes in bond yields.