We’ve been blogging and podcasting for some time about the uncertainties in the market right now, and so we thought we’d expand on fixed-income strategies today.
We advise three broad investment categories for income:
- Fixed income (bonds)
- Dividend equities
- High-yield alternatives
We think that asset allocation is what makes or breaks an investment strategy, and we are advising our clients to put a high allocation of their portfolio into fixed income at this time. We have several vehicles for this and can advise you in more detail if you call our office. Please call us at 800-391-1118 for a free portfolio review.
We also believe that now is a bad time to get into dividend equities, and we are advising our clients against saddling their portfolios with over priced investment vehicles at this time. Instead of the either-or choice of safety vs. yield, we’ve developed a strategy designed to maximize income while at the same time managing the various risks inherent whenever you put money to work in the market.
Check out our special report for more information on how to invest wisely, here.
A diversified approach to investing has proven to be a wise strategy to deal with market volatility, especially during the past six months. Dividend-paying stocks also have proven their worth during that time as the market’s direction varied going into 2012. One of the best ways to enhance your portfolio with both diversification and dividend- paying stocks is the SPDR S&P Dividend ETF (SDY).
The SPDR S&P Dividend ETF seeks to match the returns and characteristics, before expenses, of the S&P High Yield Dividend Aristocrats Index. The fund’s strategy is designed to provide you with low portfolio turnover, accurate tracking, and limited costs.
With more than 62 holdings and a current dividend yield of 3.19%, SDY can provide investors with exposure to a basket of sectors, including consumer staples, financials, industrials, utilities, consumer discretionary, materials and healthcare. All of these sectors have an allocation ranging between 19% and 10%. The fund’s top 10 holdings, as of Jan. 10, were: Pitney Bowes Inc, 3.99%; AT&T Inc., 3.33%; Cincinnati Finl Corp, 2.89%; HCP Inc., 2.89%; Leggett & Platt Inc., 2.74%; Old Rep Intl Corp., 2.34%; Consolidated Edison Inc., 2.20%; Kimberly Clark Corp., 2.18%; Nucor Corp., 2.12%; and Sysco Corp. 2.12%.
Naturally, uncertainty causes investors to become wary about putting their hard-earned cash into the market. But such times can provide the best opportunities to find real value, if you are good at separating the winners from the losers. Doing your homework and finding solid performers amid volatility can pay off, especially when markets become highly correlated. Diversification and buying dividend-paying stocks are time-tested ways to build a successful investment portfolio, no matter which way the market is heading at a particular time. ETFs such as SDY let you invest by using a strategic approach that many professional investors and institutions follow themselves.
One of the newest exchange-traded funds (ETFs) currently available to investors is the Schwab U.S. Divided ETF (SCHD). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Dividend 100 Index.
This ETF tracks high-yielding dividend stocks that are a favorite of many investors. If you are intrigued, you should know that the fund is designed to give you both income and capital appreciation. SCHD, which began trading just last week on Oct. 20, gives you access to the newest Dow Jones benchmark. The Dow Jones U.S. Dividend 100 Index is built to measure the performance of high-dividend yielding companies with strong fundamentals and a long history of dividend payments.
One of the biggest differences between the Dow Jones U.S. Dividend 100 Index and other indexes is its method for selecting stocks. Each company in the index is heavily scrutinized by its cash flow to debt ratio, five-year dividend growth rate, return on equity and dividend yield. These stocks must also have a dividend history of 10 consecutive years. Putting it simply, after Dow Jones ranks them, only the highest companies in those four categories are accepted into the index. Furthermore, each stock can only have a maximum weight of 5% in the index, and each sector is capped at 25%. So, this index is intended to hold a highly diversified group of 100 stocks with the strongest set of credentials.
The top 10 holdings of SCHD are considered some of the most stable investment plays available, and are all blue-chip stocks such as: Intel Corp., 4.9%; IBM, 4.7%; Exxon Mobil, 4.7%; Chevron Corp., 4.6%; Procter and Gamble, 4.4%; Johnson & Johnson, 4.2%; Coca-Cola, 4.0%; Wal-Mart Stores, 3.8%; PepsiCo Inc., 3.7% and McDonald’s, 3.6%.
With the investing community looking for safe havens, and desperately searching for both high yield and low risk, it is a perfect time for Schwab to be rolling out SCHD. Its launch has come with considerable media attention since last week. SCHD just adds to the lineup of dividend ETFs that currently are available to investors. The fund shares similar characteristics to iShares DJ Select Dividend (DVY) and SPDR S&P Dividend (SDY).
With all of the negative stories in the news — the U.S. unemployment rate above 9%, the debt ceiling debate, and talk of the dollar losing its status as the world’s reserve currency – diversification is as important as ever for investors to limit their risk.
Investing in commodities, such as gold and silver, is a popular way to diversify a portfolio. However, going with the crowd is not always good investment strategy. Instead, I have identified an exchange-traded fund (ETF) that offers another way to diversify your portfolio, and it is the iShares Dow Jones Select Dividend Index (DVY).
This fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Select Dividend Index. The ETF tracks an array of broad-based stocks, and thus it avoids placing too much of its financial capital in any one holding.
Dividends also help to protect DVY from volatility by providing additional profits even when stock prices are falling. Wharton Business School Professor Jeremy Siegel has researched equities going back decades and found that the best-performing investments for long-term periods are income-generating equities. DVY fits that description perfectly.
Dividends are a great way to earn some extra income. You also can grow your principal through capital appreciation with good dividend-paying equities. One way to gain both of these benefits is through dividend-focused exchange-traded funds (ETFs). But the path to doing so has become increasingly treacherous for investors to follow as once-solid corporations struggle for survival. If you are an income-oriented investor, here are four simple tips on how to select these types of funds.
First, pick ETFs that hold stocks in stable companies with sustainable dividend yields. In this market, even traditional dividend-paying companies such as Bank of America, General Motors and Citigroup, have suspended their dividends because of poor performance. In 2008, 62 companies in the S&P 500 cut their dividends. To protect your capital and enjoy steady income, choose ETFs that invest in companies likely to continue paying dividends.
Second, find ETFs that are invested in cash-rich companies. As I have said many times before, in bear markets, cash is king. Cutting dividends harms the company’s reputation and typically hurts its stock price, as well as your principal. Find ETFs that hold stock in firms with fat cash positions and your dividends likely will keep coming.
Third, beware of ETFs that have too much exposure to any single sector. Take a close look at the financial or energy sectors, since any ETF that follows these sectors could be down more than 50% in the last year — costing you much of your initial investment. Remember, when earnings fall sharply, dividend cuts often follow.
Finally, and possibly most important, do your homework before you buy any ETF. Know its holdings, find out if the fund is leveraged or not, check its past performance and make sure that it is well-diversified.
ETFs are a great and easy way to moderate risk in any portfolio, especially in times of volatility. Several studies have found that dividend-paying stocks held for the long run provide better risk-adjusted returns than low-paying ones. Also consider your appetite for risk and your short- and long-term financial goals. Then, invest accordingly.
When the stock market is trending downward, it is difficult to know what to do. Amid the uncertainty is the proven benefit of owning dividend-paying stocks. Sure, the share prices of such stocks and equity ETFs can fall, but the dividend payments continue to generate income in both good and bad times.
Despite the current market gyrations, one intriguing new ETF that offers exposure to a growth-oriented foreign market and dividend income is the WisdomTree Middle East Dividend Fund (GULF). The new ETF began trading on July 16. The fund is based on the performance of the WisdomTree Middle East Dividend Index.
GULF gives investors exposure to approximately 70 dividend-paying companies listed in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar and the United Arab Emirates. If you’re worried that oil prices will resume their upward trajectory after their recent pullback, the countries featured in the GULF ETF should benefit economically from such a trend. Oil certainly is a key commodity for Middle Eastern countries and their economies but this fund is not dependent on the performance of just one sector. In fact, its biggest exposure is to Middle Eastern banks and other financial stocks. That sector accounted for 49.61% of the fund’s assets as of July 29.
The fund’s second- and third-largest sector holdings are telecommunications services and industrials, respectively. Telecommunications companies drew 24.56% of the fund’s assets as of July 29, while industrials took in 11.37%. Clearly, this fund is diversified in ways that focus on the region’s overall growth opportunities and the kinds of companies that will benefit from continued Gross Domestic Product (GDP) gains.
Kuwait is the nation that has attracted the most investment dollars of GULF. The fund has put 27.73% of its holdings into Kuwaiti companies, while the United Arab Emirates, with 18.12%, and Egypt, with 12.69%, round out the top three countries where GULF has placed its investment funds.
I am not recommending this new fund right now, as it still is trying to build its trading volume to the threshold of 100,000 shares a day that I like to see before pursuing such an opportunity. You may want to hold off on investing in GULF until its trading volume increases, and until we see its price performance for the first four-to-six weeks.
Still, I think the idea of mining for dividends in the Middle East is sound, and I will definitely be keeping a close watch on GULF for all of us.