Zeke Ashton is the founder and Managing Partner of Centaur Capital Partners, a value-oriented investment firm based in Dallas, Texas. Centaur Capital Partners is the advisor to the Centaur Value Fund, a long/short equity hedge fund. In addition, Centaur Capital Partners serves as the sub-advisor to the Tilson Dividend Fund (TILDX) which is a retail mutual fund that follows a value-based equity income strategy.
Safety and income are the hot buzzwords in today’s market. Given the fear-inducing headlines and the market volatility of the last several years, it is perhaps understandable that investor demand for safety, liquidity, and income may be as intense now as it has ever been. The rush to government bonds perceived as safe havens has driven yields to generational lows, and such is the demand for safety that investors have accepted negative interest rates to have money invested in certain Swiss government securities.
The search for yield has spilled over into the equity world, where dividend investing is all the rage. While most of the world’s stock markets performed poorly in 2011, U.S. dividend stock indices performed strongly. As an example, the Dow Jones Select Dividend Index returned 12.4% last year, beating the S&P 500 by over 1,000 basis points.
Here are two approaches using options that a value-sensitive equity investor may wish to consider: Buy undervalued stocks and sell covered calls against all or a portion of the position. Sell puts on stocks that would potentially convert into equity purchases at an attractive price.
Unfortunately, the popularity of “dividend investing” isn’t making my job of finding bargains any easier, and the popularity of the theme makes us cautious. One of my favorite concepts regarding the practice of risk-averse investing comes from noted fixed income investor Howard Marks, and that is the idea of a “pendulum” of investor enthusiasm. Having an awareness of where a given asset class, sector, or category is along the spectrum of popularity is a very good way to prevent lasting damage. As value investors, we generally want to buy into any asset class or sector at something close to a low point in popularity and to be selling into the high points. It appears to me that the concept of investing for income is very much hovering towards the popular end of the spectrum, albeit within the broader context of equities in general being on the unpopular side. Said differently, I perceive that stocks are generally out of favor – except for “safe” dividend stocks.
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