SET Monthly Issue November 2016
Doubling Down On Dividend Income
We’re still in the same cautious frame of mind. We have been concerned with market volatility for a number of months now. This concern prompted us to recommend the iShares Edge MSCI Minimum Volatility Emerging Markets ETF so we could install a safety net to capture the upside of emerging market growth.
We also recommended the Vanguard High Dividend Yield ETF this summer because of the historic ability of dividend stocks to hold up better in market downturns and to outperform broader market averages over time.
Today, we are just as concerned with volatility as we were earlier in the year. Look at the performance of the VIX, the market’s index of volatility, so far this year…
That spike in June was triggered by BREXIT jitters… understandable, but notice the whipsawing that we’ve seen the past few weeks. We can attribute this to the unsettling blend of the U.S. elections, mixed corporate earnings reports, and ongoing global economic uncertainties. (Renewed concerns over valuation bubbles in China don’t help.)
Earnings bright spots on the U.S. markets have come from different sectors, with firms such as UnitedHealth and Netflix turning in solid performances. On the downside, IBM reported its 18th consecutive quarter of falling revenue and Apple revenues fell as iPhone sales slowed down.
All this leads us back to a familiar safe harbor… the relative safety of dividend stocks.
This search has turned up another dividend ETF to complement the Vanguard High Dividend Yield ETF we recommended in early September.
It’s the PowerShares Dividend Achievers ETF (PFM).
THE CONTINUING CASE FOR DIVIDENDS
Dividends are cash on the barrelhead evidence of solid financial performance.
This doesn’t mean that a company is profitable every quarter… we see this now with companies such as ExxonMobil, where cyclical losses prompt a company to dip into its savings to pay the dividend.
But over the long haul, shareholders are looked after. ExxonMobil has been paying a growing dividend since 1983. McDonald’s has run into rough stretches, but it’s been paying dividends since 1977.
What’s important is the long-term ability of the stock to pay a dividend. That’s why one of the ETF’s top holdings is Procter and Gamble, which has been rewarding shareholders with a growing dividend since 1957.
When the market falls, dividend stocks tend to hold up better than most.
And reinvesting dividends paid to pick up more shares of the stock is where the money is made.
Between 1897 and 2003, only 3% of after inflation profits came from capital gains and 97% came from reinvesting dividends.
When downturns come, you still have the dividend, even when the stock price stumbles. Since 1950, the S&P 500 has had 35 separate corrections of 10% or more.
INSIDE THE POWER SHARES DIVIDEND ACHIEVERS ETF
The bluest of the blue chips… that’s what you’ll see in the top holdings for PFM. But as we’ll explain in a minute, it’s the weighting of these stocks that’s significant.
| Company Name | Sector | % Weight | ||||
| Microsoft Corp. | Tech | 4.02% | ||||
| Exxon Mobil Corp. | Energy | 3.99% | ||||
| Johnson & Johnson | Health Care Products | 3.99% | ||||
| AT&T Inc. | Telecom | 3.65% | ||||
| Procter & Gamble Co. | Consumer Products | 3.43% | ||||
| 10/31/16 | ||||||
A CLOSER LOOK AT THE TOP 5 HOLDINGS
Microsoft Corp
The stock began the year below $55, fell into the $40s, and has moved back into the high $50s over the past few weeks.
Yield: 2.61%
Exxon Mobil Corp.
As oil prices rebound, but supply continues to outstrip demand, Exxon Mobil confronts a new energy landscape. Prices have fallen from recent highs.
Yield: 3.54%
Johnson & Johnson
Like Exxon Mobil, the stock has lost ground recently, the victim of uncertainties in the health care sector.
Yield: 2.77%
AT&T Inc.
The proposed merger with Time Warner may or may not happen, and the company’s stock has slid since the announcement. But business is good… AT&T’s most recent quarterly net income topped $13.4 billion.
Yield: 5.37%
Procter & Gamble Co.
The Consumer Discretionary sector has not been doing well this year, but its bellwether stock, Procter and Gamble, has outperformed its peers. P&G’s stock is up, and earnings are beating estimates.
Yield: 3.08%
PFM IS THE PERFECT COMPLEMENT TO VYM
We already hold one dividend ETF in our portfolio, the Vanguard High Dividend Yield ETF (VYM).
Why are we adding the PowerShares Dividend Achievers, and why do these two ETFs work well together?
In a number of ways, these two ETFs are designed to do much the same thing… deliver investors thirsty for reliable yield a safe source of income.
Each ETF tracks many of the same stocks as its top holdings… Microsoft (MSFT), Exxon Mobil (XOM), and Johnson & Johnson (JNJ).
But there are some noteworthy differences. PFM is more concentrated in consumer stocks than the Vanguard ETF.
For instance, Wal-Mart (WMT), Coca-Cola (KO), and PepsiCo (PEP), are each top ten holdings in the PowerShares Dividend Achievers ETF, and are not top ten holdings in the Vanguard High Dividend Yield ETF.
Two big banks, JP Morgan Chase (JPM) and Wells Fargo (WFC), are top ten in the Vanguard ETF, and absent from the PowerShares top ten.
The significance of this… these ETFs are complimentary. This year, financial stocks have done well and consumer stocks have not. This is why the Vanguard ETF has delivered a higher yield, 2.96% YTD compared to 2.21% for PowerShares.
Sector strength can easily shift, which makes holding both ETFs a sound defensive move.
Trade Alert
Buy: PowerShares Dividend Achievers ETF (PFM) up to $23.00
Recent Price: $21.96
Price Target: $25.00
Stop Loss: $21.10
YEAR TO DATE SECTOR PERFORMANCE
| Consumer Discretionary | XLY | -0.08% | |||
| Consumer Staples | XLP | +4.32% | |||
| Energy | XLE | +15.00% | |||
| Financial Services | XLFS | +0.97% | |||
| Financials | XLF | +2.24% | |||
| Health Care | XLV | -6.48% | |||
| Industrials | XLI | +7.72% | |||
| Materials | XLB | +7.62% | |||
| Real Estate | XLRE | -2.10% | |||
| Technology | XLK | +10.72% | |||
| Utilities | XLU | +11.97% |
PORTFOLIO UPDATES
. . . . First Trust ISE Global Engineering & Construction Index Fund $FLM – BUY
The ETF is narrowly traded and there has been little movement. Continue to acquire shares up to $50.00.
Current yield is 1.97%.
. . . . Vanguard High Dividend Yield ETF $VYM – BUY
Recent market pullbacks have trimmed initial gains, but this remains a long-term, core holding.
Current yield is 2.96%.
Buy up to $77.00. The price target is $82.00.
. . . . iShares MSCI Emerging Markets Minimum Volatility ETF $EEMV – BUY
This ETF is another victim of recent market downturns, but there’s some interesting data that could foreshadow a rebound.
Forecasts from global purchasing managers suggest that growth in emerging markets is turning a corner. Manufacturing growth in China is rebounding and economic output in India is now at a two-year high.
Buy up to $59.25. The price target is $76.00.
. . . . Vanguard Information Technology ETF $VGT – HOLD
The ETF has been in a narrow trading range after consolidating substantial summer gains. Apple and IBM, each top ten holdings, are a drag on performance, which has otherwise been strong thanks to Alphabet and Facebook.
Current yield is 1.30%.
The price target is $127.00.
. . . . First Trust ISE-Revere Natural Gas Index Fund $FCG – BUY
Natural gas prices have been skidding. The problems… warm weather forecasts for the weeks ahead and a short-term supply glut with growing storage numbers.
The buy up to price for the ETF is $26.70 and the price target is $37.00.
. . . . PowerShares S&P SmallCap Energy ETF $PSCE – BUY
Less than three weeks ago, PSCE traded at $18.90. Today, it closed at $16.73.
The high came when crude oil prices hit a three year high following production announcements from OPEC. Since then, the markets have digested gains.
The ETF has dropped back below our buy up to price of $17.50.
Move from Hold to Buy.
. . . . Aberdeen Chile Fund $CH – HOLD
The ETF has rebounded since a dip last month. The Chilean peso has been gaining strength relative to the U.S. dollar and the country’s banks are showing positive momentum.
One of the ETF’s top holdings, Banco de Chile, recently hit a 52-week high.
The price target is $11.00.
. . . . Utilities Select Sector SPD $XLU – HOLD
The same story… continue holding. Despite the fallback from recent highs, this ETF remains a solid defensive, long-term position.
Portfolio Changes
- This month we’re buying PowerShares Dividend Achievers (PFM) up to $23.00.
- Move S&P SmallCap Energy ETF (PSCE) from Hold to Buy… it has dropped back below our buy up to price of $17.50
Category: SET Monthly Issues
