Dividend Select Commentary – 1Q20
2020 has given us a wild ride so far. At the beginning of the year, the scene was set for another great year of economic expansion. The U.S. market and economic data kept rising throughout most of February, until the coronavirus suddenly took over the news. Things obviously changed overnight and we saw the S&P 500® Index journey from a bull to a bear market in just 20 days.
As the first quarter of 2020 has seen heightened market volatility, dividend stocks are quickly becoming a popular income alternative. As of this writing, the yield on the 10-year U.S. Treasury bond is a mere 0.7%. Against this incredibly low-interest rate backdrop, many investors are looking for strategies to enhance the return in their portfolios. That is where a high dividend strategy like ours can really work wonders over time. The following chart shows the yield on the Argent Dividend Select strategy versus the 10-year Treasury Yield.
Of course, given the financial impact of the coronavirus there are legitimate questions about dividends. Will companies keep paying them? Will annual dividend increases, which have averaged over 6% over the past 60 years, continue to be made?
Candidly, much is unclear right now, but certain industries – hotels, airlines, oil and gas for starters – will definitely be negatively impacted. Some banks are also suspect. However, as we see things today, Argent’s Dividend Select stock portfolio seems well-positioned to ride out this storm, and it is something we are watching closely. We studied our experience in the 2008-09 market collapse. Despite an even worse market downturn that we have now, the Dividend Select strategy never had a year throughout the crisis where overall dividend income did not grow, In fact, taking a longer-term horizon, the 5-year dividend growth rate of the portfolio has never dipped below 6% since the inception of the strategy, The following chart shows the trailing 5-year average dividend growth rate for the Argent Dividend Select strategy.
We cannot promise that level of growth this year, or in any year, but it is encouraging to know that our stock selection process has successfully weathered previous storms. The combination of the yield advantage over the 10-year Treasury bond, the potential growth in the dividends paid, and the opportunity for capital appreciation in the underlying stocks themselves has historically generated an attractive return stream. This illustrated by the following chart which shows the Argent Dividend Select long-term performance over time.
We continue to upgrade the quality of the stocks in the portfolio taking advantage of opportunities as they present themselves. This can be in the form of increasing position sizes of existing holdings or in adding new positions altogether. An example of this is our decision to initiate a position in Starbucks, a company we believe is a long term winner in any environment and was previously out of our reach from a valuation standpoint. The funds used to buy Starbucks came from our decision to sell Huntsman Corporation. Huntsman is a commodity-based chemical company, and in our view its future growth is less in management’s control and more dependent on commodity pricing. Given the uncertainties in the commodity markets we viewed Starbucks as a better trade and an opportunity to upgrade the portfolio.
As always, we appreciate your interest in Argent Capital Management. We have four very successful equity strategies – Large Cap U.S., Small Cap U.S., Dividend Select, and Mid Cap U.S. We are very proud of all, and if you have questions on any of these, or know others who might have an interest in our strategies and mailings, please call us.
Scott Harrison, CFA
PDF Version: Market Overview 1Q20
Performance results are net of fees. Past performance is no guarantee of future results. This is supplied as supplemental information to the composite disclosures presented later in this document. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.