April 2018 was yet another month where our US portfolio performed
better than the S&P 500 in the trailing twelve month period (TTM). This
time it was 2.41% which is noticeable lower than for the 12-month periods ending
in Dec 2017 and Jan, Feb and March 2018. With raising interest rates dividend
aristocrat behave a little bit more bond-like, that is as the interest rates go
up the share prices will have some downward pressure. As a result the dividend
yield for the dividend aristocrats tends to move somewhat in parallel with the
yield on interest-free investments like for example the 3-months US treasury
bills in the secondary market. Our US portfolio has allocated about 80% of its
funds to dividend aristocrats at the moment.
We have previously discussed the rising interest rates. We
continue to believe that these represent the biggest threat to gains in the
share market for the time being. Unless the US Federal Reserve indicates that
interest rates have reached the desired level, we believe the rising interest rates
will continue to put downward pressure on share prices.
Taking a much longer timeframe such as 10 years or more,
history tells us that interest rates fall and rise. After each rise there was a
fall in the past. After each fall there was a rise. At the moment we are in a
longer period where interest rates are trending up. At some point this will
come to a halt. Nobody knows yet when that will be as it would require to
predict the future.
If you buy shares with the intention to keep them
indefinitely the current share prices doesn’t really matter at all. All that
matters is what you think the earnings are doing which in turn feed dividend
payments. Companies like Stanley Black & Decker (SWK) have paid dividends
for 140 years and have increased their dividend each year for 50 consecutive
years. It looks as if at least for SWK the ups and downs of the interest rate over
the last 50 years didn’t really matter when it came to increasing the dividend.
It just was more each year. We don’t expect this to change any time soon for
SWK but also for a few more positions we have in our US portfolio.
Obviously we like a higher active return over a lower.
Still, we are happy with 2.41% over the S&P 500 over the last 12 months. We
are also prepared that until the interest rates in the US stop rising our
portfolio may not return as much as in scenarios where the interest rates are
flat or even falling. We’ll see. We cannot predict the future either.
Happy investing!
