The Center for Financial Planning, a Southfield, Mich.-based hybrid firm that’s part of Raymond James Financial Services, is diversifying its exposure to try to capture yield as rates trend upward, says Angela Palacios, the firm’s director of investments. The firm tries to balance dividend and growth strategies, and it derives income from stocks, bonds and its small real estate portfolio.
For investors nearing or in retirement, dividends “are a good regular source of a paycheck,” Palacios says. “[But] we don’t want to stretch and add unnecessary risk to our portfolio just to get those dividends.”
The center uses outside managers and has lowered the duration of its fixed-income portfolio quite a bit over the last couple of years, says Palacios. In this portfolio, “We also have the flexibility to utilize strategies that may look and feel like a bond,” she says, “but aren’t necessarily a bond.”
Early this spring, the firm introduced market-neutral strategies to its core bond sleeve (which houses investment-grade corporate securities and Treasurys) to reduce clients’ interest rate sensitivity. These strategies (which can go long or short on various assets) represent 20% of the firm’s core bond sleeve. That’s the same weight they have in its strategic income sleeve (which includes high-yield securities and emerging market debt).
Looking for Leaders
Dividends are a big focus for value investors FAI Wealth Management, a fee-only financial planning and investment management firm in Columbia, Md. “It’s a part of our DNA,” says Curt Gross, FAI’s chief investment officer.
The firm expects further rate hikes to have a disproportionate impact on equities, particularly those with static dividend payments. The de-risking of yield has recently begun, he says, noting that investors are shifting from equities to bonds.
FAI has never sought the securities that pay the highest dividends, says Gross, but rather those that can grow their dividends faster. He says the dividend growth for the equities in the firm’s portfolios, typically market leaders in fast-growing markets across all sectors, is currently 8% to 10%.
FAI is well positioned in the financial sector, which is expected to generate higher profitability if a steepening yield curve accompanies rising rates. FAI is also putting emphasis on the service industry. Over the past couple of years, says Gross, consumers have kept up their spending on services (including leisure, travel, health care and broadband entertainment), while cutting back their spending on goods.
FAI is shying away from the historically high-yielding telecommunications sector. Telecom companies face saturation in their main growth business in the U.S. (dissemination and use of cell phones) and declines in their legacy business (landlines), he says. “You’re not going to get the growth rate there unless they reinvent themselves,” he says. “It’s very similar in the utility sector.”