That said, she adds, the dividend growers “are not going to shield you from a market selloff. If you’re worried that the economy’s going to go into a tailspin, buy consumer staples, buy utilities, buy telecommunications.”
Dividend growers tend to do well during bull markets, when the economy is sizzling and inflation is rising. Moreover, these stocks have little correlation with bonds, so they don’t feel the pain of the bond proxies as interest rates increase.
“If you focus on dividend growth and higher quality, then you are more protected from the bond proxy correlation,” says Omar Aguilar, CIO of equities with Charles Schwab Investment Management. “What has happened over the last five years, the higher payout dividend stocks have been highly correlated with the performance of the bond market. Most of the people who have rotated away from fixed income into dividends are the ones who are seeking yield and they tend to be very concentrated in utilities and telecom.”
Of course the question is always: Which direction will the market go? A quick Google search on that will provide you with practically as many opinions as there are dividend funds and ETFs to choose from. Both Aguilar and Laura believe the bull market is in its seventh inning, with room to run, but maybe not as high and as fast as some people think.
While Janet Yellen and her Federal Reserve colleagues raised interest rates at their meeting in June, investors increasingly doubt the central bank’s projection for additional hikes, following soft reports on U.S. employment and inflation. Goldman Sachs has pushed back its forecast for a third rate increase this year to December from September; trading in futures contracts shows odds of a September increase have dropped to just one in four, and investors are now pricing in less than one rate hike in 2018 for the first time since the eve of the U.S. elections in November.
As with any investment strategy, the boring answer to the question above is: You can’t time the market, so it’s best to diversify.
The Schwab U.S. Dividend Equity ETF, for example, has large weightings in consumer staples (24.65%) and information technology (22.36%), with names like Procter & Gamble and Microsoft, so it has both a recessionary and bull market scenario covered.
Moreover, while consistent dividends tend to be associated with blue chip giants, investors should not discount the strategy elsewhere. Dividend-paying mid-cap funds present an interesting investment option, as these securities can offer many of the benefits of investing in large companies—strong cash flows and a stable business model—while offering some of the attractive features of smaller companies as well.
As with their large-cap counterparts, there are a variety of both mid-cap mutual funds and ETFs to choose from. The Sterling Capital Mid Value fund seeks capital appreciation over the long run, generally investing in the value stocks of mid-cap companies, while the T. Rowe Price Mid-Cap Value Fund prefers a long-term strategy of capital growth. Meanwhile, the Thrivent Partner Mid Cap Value fund invests most of its assets in companies with a market capitalization identical to those listed in the Russell Midcap Value Index. And the WisdomTree MidCap Dividend ETF seeks to replicate the WisdomTree MidCap Dividend Index, a benchmark comprising roughly 350 companies with a dividend yield of about 3.4%.
WisdomTree also offers the WisdomTree Emerging Markets Dividend Index which underlies the WisdomTree Emerging Markets High Dividend that screens ETFs for the highest dividend-yielding stocks (the top 30%) available in emerging markets. Of course, emerging markets tend to be volatile—the fund’s return over one year is a staggering 28.3%, but over five years that drops to 1.2%. Other emerging markets dividend ETFs show similar extremes.
Laura says he favors using passive strategies for international stocks he may not be as familiar with or that may have different reporting requirements than their U.S. counterparts. For clients with at least $250,000 of investable assets, he also favors a blend of mutual funds, ETFs and individual securities.
“The human touch of investing is becoming more important than ever,” he says, adding that the ability to communicate to your clients, for example, that they own Diageo and tell the story of how the U.K. liquor distiller, which produces many of the brands commonly found on people’s shelves at home, adds value. “They like to know that stuff. Being able to bring the investments to life is really an important connection advisors can make with clients, instead of: ‘You own these 20 mutual funds like everyone else. Hope it works out for you.’”