Download As we forecasted at the beginning of the year, the market has

2014 Quarter 2
As we
forecasted at
10.00%
the beginning
9.00%
of the year, the
8.00%
market has
continued
7.00%
upwards after a
6.00%
big 2013, but
5.00%
it’s been
4.00%
anything but a
9.93%
7.14%
4.58%
3.00%
smooth ride.
Foreign
conflicts in
Ukraine, Syria
2.00%
3.12%
4.16%
3.93%
1.00%
US Stocks
International Stocks
Emerging Markets
Bond
Commodities
Gold
& Iraq coupled
with a rough first testimony given by new Fed Chairwoman Janet Yellen created incredible headline risk,
giving investors reasons to take their profits and park it in cash. However, even we are surprised at the
resiliency this market as shown. It’s been yet another lesson in “don’t fight the Fed and the trend.”
Despite a very cold winter and harsh economic numbers, the economy is turning the corner. Although some
claim that growth in the 2nd quarter was a result of pent up demand from lost spending, we view the situation
as more positive. As an example, maybe you waited for the ground to thaw and bought your car in April vs
February. However, if you missed going to the movies in the winter, you certainly didn’t double up in the
Spring! While we are still holding strong that a correction is due and necessary, we think that any dip will
present a great opportunity to put that cash back to work as the economy continues on it’s path of
improvement. Below we profile two investment ideas which we think have the potential to deliver, on a long
term basis, superior returns: Dividend Paying Stocks and US Energy Infrastructure.
With rates appearing to stay at historically depressed levels for at least the foreseeable future, investors are
continuing in their search for the almighty YIELD. This has led to a boom in income producing assets:
REITS, Junk Bonds, & Dividend Paying Stocks. While a majority of these investments are now trading well
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2014 Quarter 2
above historical valuations due to the excessive demand, we still continue to be big proponents of investing
in Dividend Paying Stocks. They offer:
Reinvestment opportunities - Dividend payouts among S&P 500 stocks have boosted the
index’s annualized return by 4.10% since 1929 (Source: Ned David Research).
S&P 500 (1929-2014)
12.00%
10.00%
4.10%
8.00%
6.00%
4.00%
2.00%
0.00%
Total Return
Without Dividends
Competitive Yields & Inflation Protection – The average yield in our US Dividend Stock
portfolio is around 3.00%, compared to the Barclays US Aggregate Bond index yielding around
2.20%. These stocks also offer a greater potential for growth, which should protect investors
from rising interest rates and inflation.
Tax Advantages – With recent tax law changes, dividends are much more favorable sources
of income than interest payments – Dividends paid by corporations are taxed at 15% (20% for
the highest earners) vs interest income which is taxed as high as 39.6%. The following
example illustrates how this savings can be significant – we assume $100,000 invested
(Source: Briefing.com):
Security
20 Year Treasury
Corporate Dividend
Yield
3.00%
3.00%
Amount Paid
on $100,000
$
3,000.00
$
3,000.00
Tax Rate
35%
15%
After Tax
Amount
$ 1,950.00
$ 2,250.00
After Tax
Yield %
1.95%
2.55%
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2014 Quarter 2
We have always been big fans of T Boone Pickens. His book, The First Billion is the Hardest, was published
in 2008. The premise of the book
was that the US needed to
become energy independent. It is
amazing that we made such
significant strides in 6 years (see
chart, Source: 361 Capital
Markets). Although Pickens would
love to take all the credit for this
progress, it is really the result of
technology and innovation in the
energy industry. Today the United
States is the largest producer of
petroleum products in the world.
Not only is energy independence important, but also increased energy exports help to balance our trade
deficits.
So
how
do
investors
take
advantage of the boom? We
believe a great way to play it is
through MLPs (Master Limited
Partnerships). MLPs own the
pipelines that transport oil and
natural gas to refineries and
export
terminals.
They
don’t
necessarily care about the price
of oil or natural gas, they are
essentially charging a toll on whatever passes through the pipelines. We believe there are three important
characteristics of MLPs:
Structure – Similar to a REIT, if MLPs distribute the majority of their income to the limited partners,
the remainder is tax free.
Taxation – If you own individual company MLPs, the majority of the income they generate (~5%
annually) is tax deferred until you have received your initial investment back.
Diversification – Compared to stocks, MLPs have a low correlation, typically between .25 & .50. In
addition, the correlation to bonds is actually negative. These characteristics, make the MLP asset
class a great diversifier
1401 EAST CARY STREET, SUITE 401 RICHMOND, VIRGINIA 23219 | www.canalcapitalmanagement.com | T +1 804.325.1450 | F +1 866.381.5362
2014 Quarter 2
2014 has been a very busy but great year as the firm went through its first tax season offering return filing
and preparation. Currently we are very busy preparing projections and creating plans for 2014. The
feedback from clients who have taken advantage of this new service has been incredibly positive, and we
look forward to continuing our on going effort of aggregating our clients complete financial lives under one
roof.
Our Director of Tax Services and Financial Planning, Margaret Smith,
CPA, who spearheaded our newest service offering, was recently
featured in the Richmond Times-Dispatch – you can read the full story by
clicking here: http://goo.gl/EC7SPG
We hope everyone has a great rest of their summer and we look forward
to continued success in the second half of the year. As always, if there is
any change in your personal financial situation that would result in an adjustment to your risk tolerance,
please call us to schedule a meeting.
DISCLOSURE: Past performance is no guarantee of future results. Investments are subject to risk, including the loss of principal. Because
investment return and principal value fluctuate, shares may be worth more or less than original value. These investments may not be
suitable for all investors, and there is no guarantee that any investment objective will be obtained.
All indices are unmanaged and investors cannot invest directly in an index. Unlike investments, indices do not incur management fees,
charges or expenses.
Investing in alternative investments may not be suitable for all investors and involves special risks, such as risk associated with leveraging
the investment, potential adverse market forces, regulatory changes, and potential illiquidity. The purchase of bonds is subject to availability
and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and
vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
Treasury bonds are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, they offer
a fixed rate of return and fixed principal value. U.S. Treasury bonds do not eliminate market risk.
The precious metals, rare coin and rare currency markets are speculative, unregulated and volatile and prices for these items may rise or
fall over time. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide
competition, government regulations, and economic conditions.
1401 EAST CARY STREET, SUITE 401 RICHMOND, VIRGINIA 23219 | www.canalcapitalmanagement.com | T +1 804.325.1450 | F +1 866.381.5362