How Dividend Payout Ratios Impact Valuation

   One of the greatest misconceptions among investors is that valuing the market at any given time is impossible. Many people seem to believe the stock market is nothing more than a betting parlour where today's price or tomorrow's price is whatever the fickled gods of Wall Street decree it to be.

Part of this misconception comes from the many voices in the media that are at the extremes in their predictions of where the market is going. On one side, the “stock market bubble” pessimists (who have been saying the same things for the past 5 years) are predicting that the market is overvalued 25% or more. On the other hand, many in the bullish crowd are saying the market is as much as 25% undervalued.

Whom are investors to believe?

Consolidating, Validating and Recalibrating

A number of different worries have rattled the market to start 2014.  Let’s take a closer look at what they are and what each of them means for the global economy and markets.

1. Housing Slowdown

Housing represents a very large part of the U.S. economy (about 20%), which is why economists and investors alike pay close attention to housing data.

 

After a strong 2013, the housing market data has weakened.  New home construction surged in November 2013, but fell in December 2013 and January 2014.  Rising interest rates are likely to blame.  Mortgage rates have risen to 4.5% from their lows around 3.5% in early 2013.  The threat of rising interest rates in 2014 and 2015 has investors concerned that the weakness in housing may continue.

The lull we are seeing in the data could be a result of last year’s low rates, which likely pulled forward some purchases that may not have ordinarily occurred until six months to a full year later.  The abnormally cold winter may also be

ABCs of Dividend Investing: How to Navigate the Current Sell-off

Since the beginning of the year, stocks have fallen by about 5%.  The modest pullback has many investors wondering whether a full out “correction” (drop in prices by 10% or more) is on its way.  

When the inevitable fluctuations in stock prices come, investors are all left with the same question: What should I do with my portfolio?

At Donaldson Capital Management, we have a particular strategy for handling market upswings and downswings.

What Is An ABC Portfolio?

As many of you are familiar, we invest only in dividend-paying stocks but we break down our portfolios into three types of dividend-paying stocks.  For those of you who are not familiar, we structure our portfolio into A, B and C stocks.  

Below is a summary of each sub-portfolio and it’s specific characteristics.  You can read about each sub-portfolio in more detail here.

Our primary investment model (“Rising Dividend-Cornerstone”) is comprised of all three types of dividend stocks.  

Regardless of what type of market we are in, a portfolio of A, B and C dividend stocks will have at least one group that performs better-than-expected.  This type of portfolio significantly outperforms