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Portfolio Review And Strategy Change

|Includes:CB, GE, ITW, JNJ, 3M Company (MMM), OXY, TRV

As the market slogs along toward the end of the year, I've been conducting a strategy review and have now started to transition toward a strategy I think of as "Dividend Growth and Yield on Steroids."

Briefly, after much experimenting with a screener, I've concluded that dividend stocks, whether high yield or dividend growth, are likely to outperform the market going forward, not so much based on total return as based on reduced volatility and lower drawdowns in declining markets.

In order to give the strategy some pop, I'm implementing it with diagonal spreads. Rather than buying the shares, I control them by means of deep in the money LEAPS. Covered calls are sold against the resulting positions, as a way of funding the time cost, and replacing the dividend income that would normally accrue from owning the shares. I expect that this will amount to about 2.5 X leverage on the results I would achieve by owning the shares.

Recent trades involve new positions in 3M (NYSE:MMM), Occidental Petroleum (NYSE:OXY) and Johnson & Johnson (NYSE:JNJ). Healthcare and Energy were not previously represented in my portfolio, which has been overweight Financials (insurance companies) and old Tech.

Performance year to date has me ahead of the S&P 500 by about 7%, not that much considering the volatility of the existing portfolio. Hence the change to a less volatile type of stock.

Many of the most profitable trades have developed to where they consist of vertical or diagonal call spreads with both legs deep in the money. I closed all but one of these positions today, on the grounds that from where they are they amount to the sale of low-cost, out of the money puts, not an activity I consider rewarding. Closed with fine profits were Chubb (NYSE:CB), Travelers (NYSE:TRV), Illinois Tool Works (NYSE:ITW) and General Electric (NYSE:GE).

Using StockScreen123, I've combined Dividend Growth and Dividend Yield into a Screen that backtests very well for the past 5 and 10 year periods. It produces an equal weight portfolio that varies from a low of 26 to a high of 60 depending on market level. Looking at the past, it has a tendency to produce more prospects when market levels present buying opportunities. Right now, it produces 56 prospects, compared to 60 as of December 2008.

I'm picking from among those prospects, using FastGraphs as a tool for quick analysis. I'm holding position size small, in order to get a decent level of diversification. I'm starting with sectors where I'm underweight or not exposed.

Disclosure: I am long MMM, OXY, JNJ.

Stocks: MMM, OXY, JNJ, TRV, CB, GE, ITW