In my previous article on this subject, I laid out the history of my investment in mutual funds during my working career in the 20th century. I also explained the rationale for selling Vanguard Health Care Fund. Last Thursday September 13, 2012, Ben Bernanke made it abundantly clear that QE3 was the order of business. He also indicated that the Federal Reserve would be buying Mortgage Backed Securities at the rate of $40B per month for the foreseeable future as well as maintaining ZIRP. This caused a market pop and another mutual fund Vanguard Mid Cap Index Fund (VIMAX) exceeded its high price since inception.
Having seen this pattern twice since my retirement in 2000, I believe we are at the top of this business cycle and can expect a drop of at least 30% from here for the Mid Cap Index. In addition, the yield on this fund is 1.46% and it has become a drag on my portfolio yield of 4%. With this current pop, it is up 16.39% for the year, which exceeds its 10-year average of 9.19% appreciation. Therefore, I sold 58% of this holding to re-balance my portfolio back toward the 26% mid-cap stocks represented in the MISCI US Market Index. I am still overweight mid-cap stocks by 10%. However, my portfolio is now positioned at 30% cash and 70% stocks.
In order to take advantage of the bargains that I believe will soon be arriving in dividend growth stocks, I have placed limit orders on 4 stocks; American Capital Mortgage (MTGE), Intel (INTC), Comcast (CMCSA), and Caterpillar (CAT). There are several portfolio improvements that these stocks will provide. MTGE as explained in this article benefits from both the additional agency mortgage demand and the higher yield spread of non-agency mortgages. There is a detailed discussion by the CEO, Gary Kain in his presentation to Barclays Global Financial Services Conference.
This stock is still small cap, but has grown to about $951M market cap in its first year of operation. The current yield is 13.9%. I am limiting mREITs as a sector to 20% of my portfolio and they are currently 11%. The book value of MTGE was reported to be $22.08 at the end of the second quarter. I put in my order at $23, but currently the stock is selling at $26.23 for a 19% premium to book. I believe MTGE will perform similar to American Capital Agency (AGNC) in a downturn.
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Intel has performed as I anticipated last year when I bought it at the 4% yield point. I have once again placed a limit order at the 4% yield point, which is $22.50. I consider it to be a cyclical stock with good yield + dividend growth rate. The technology sector is 19% of the U.S. Market. I am underweight in technology by 10.7% of portfolio. Even with this 2 position purchase, I will still be underweight technology by 7%.
Comcast has answered the question I had in this earlier article. CMCSA is a growth stock. I have placed a limit order at $33.38, which is my estimate of its fair value based on projected earnings per share growth. This purchase will round my position up to 4% of portfolio (2 full positions). The main benefit that it will provide to the portfolio is additional exposure to large-cap stocks (67% of the U.S. market), of which I am still underweight 11%.
My new addition to the portfolio will be Caterpillar . This is a cyclical industrial stock, which is at the low ebb of its cycle. However , as explained in this article it is a good dividend growth stock in a sector in which I am 6% underweight (Industrials). My order is in at $90, but with the unsettled market, I may have to wait for some time to get it. It, too is large cap and will help balance that aspect of the portfolio. Perhaps all of the construction mandated by the Chinese recently will provide a good market for Caterpillar equipment.
Conclusion: With the presidential election campaign in full swing, the Federal Reserve stating that it will pull out all the stops to improve the jobs situation, the Europeans getting together on a common currency with backing, and the Chinese massive infrastructure investment, these are exciting times. I fear that there will be quite a let down after the presidential election and 2013 will be a down year. I don't think next year will be as bad as 2008.
It is important that each investor does his or her own due diligence on any investment. It may be a risky time, but there are many opportunities opening up in the markets.
Additional disclosure: I am long Vanguard Mid Cap Index Fund (VIMAX). One share class of this fund is the ETF (VO).