Gauging Risk For Dividend Stocks
Dividend investors generally look long-term, but when looking for new positions, a proper entry point could mean big things down the road.
The Fed has been very vague about its plans to lift interest rates from historic lows, and while Bernanke suggested it could be a while, the first hint that the time is getting closer could send the dollar off to the races. Yesterday’s dollar spike gave investors a preview of what tightened monetary policy could do to stocks and commodities, and since many of the top dividend plays are tied to energy markets, we want to highlight the potential risk of certain high-yielding sectors.
Master limited partnerships (MLPs) pay out the majority of cash flows to shareholders in lieu of taxes, making them one of the highest yielding sectors on the Street. A look at the MLPs Index’s performance chart shows that, as a whole, the segment largely trades in tandem with the S&P 500.
Within the MLP sector, Enterprise Products Partners (EPD), Kinder Morgan Energy Partners (KMP), and Plains All American Pipeline (PAA) were favorites among Pros at the end of the second quarter. Over 30 Pros counted each of the stocks among their top-15 U.S.-listed holdings as of the most recent filings with the SEC.
While MLPs are certainly not immune to equity losses, their commodity market exposure isn’t as great as energy trusts – another high yielding equity sector. Over the last month, strength in the energy markets has helped the Canadian Energy Trusts Index outperform the S&P 500 by 14%. While this divergence is a benefit on the upside, any strength in the dollar could weigh heavily on commodity prices, potentially sending oil off its 2009 highs above the $80 mark. A look at the energy trust segment’s performance during oil declines is evidence of the potential downside risk.
Enerplus Resources Fund (ERF) and Penn West Energy Trust (PWE) yield over 6.5% based on current valuations. Continued economic recovery is bullish for oil prices moving forward, but depending on medium-term monetary policy, more attractive entry points might present themselves.
Perhaps the safest place to earn solid dividends is in bond ETFs. A look at the Bond ETFs Index’s performance chart shows that the sector was largely immune to equity losses during the recession, and although gains are relatively unexciting, they distribute interest payments via an average 3.6% dividend.
As of the most recent 13F filings with the SEC, the iShares Barclays TIPS Bond Fund (TIP), iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), and iShares Barclays Aggregate Bond Fund (AGG) were the most popular bond ETFs among Pros, based on their top U.S.-listed holdings.
Investors can track these high-yielding Indexes as well as more than 250 others at tickerspy.com.
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