Though a bull market ruled from 2009 to 2014, anticipation of a lift-off as early as this month is likely to put a spanner into the ascent. The bet was never so strong before with a procession of Fed official supporting the December timeline this time around.
Though the latest manufacturing numbers came in at a six-year low or even contracted after three years, we believe a stronger greenback, global growth issues and spending cuts at the energy sector were the main culprits of this debacle; the underlying strength of the U.S. economy was innocent. Other data points, be it job, housing or auto sales, have been pretty decent, giving the Fed a serious thought to policy normalization this month.
How Would High Income Investing React?
This makes it more important to take a keen look at high dividend investing. The widespread perception of income investing is that this investing spectrum underperforms in a rising rate environment as the benchmark Treasury bond yields start to soar. As a result, the natural trend over the last one month was to dump high income securities, be it stocks or bonds or alternative assets and the related ETFs (read: Rate Hike Bet Put These Inverse Sector ETFs in Focus).
However, investors should note that dividend investing is still in fine fettle. In fact, 10-year Treasury bonds have seen yields fall consistently since the last 10 days from roughly 2.26% to 2.15% (as of December 1, 2015). The yields jumped just 3 basis points since the start of the year, which seems nothing in the face of a rising rate environment.
Every blow that came from the Fed hit the short end of the yield curve, leading yields on the six-month U.S. Treasury bonds to jump 31 bps to 0.42% since the start of the year. In such a situation, investors can very well bet on the income-producing securities as long-term Treasury yields started backtracking.
Secondly, volatility levels are likely to flare up once the U.S. economy changes the monetary era from a loose to a tight one and some market correction looks inevitable, though for a while. The dividend earned from securities should then make up for the likely capital loss.
Finally, although the Fed is highly expected to turn hawkish in December, it repeatedly asserted that it will opt for a slow rate hike trajectory making dividing investing a not-so-downbeat area in the days to come. Even if the yields rise ahead, investors may look for benchmark Treasury yield beating options that offer decent capital gains in a choppy market.
For them, we highlight three stocks and equity ETFs yielding around 3% or more. These could be interesting plays for investors in the days to come (read: 5 Dividend ETFs for Growth):
Communications Systems Inc. (JCS)
This Minnesota-based company is into the business of communications’ components. The company along with its subsidiaries makes and sells modular connecting and wiring devices, digital subscriber line filters and media and rate conversion products. The stock has a Zacks Rank #1, Zacks Growth and Momentum scores of ‘B’ each and a Value score of ‘C’. JCS yielded 8.13% as of December 1, 2015.
PBF Logistics LP (PBFX)
PBF Logistics LP owns, leases, develops and operates crude oil and refined petroleum products terminals, pipelines, storage facilities and other logistics assets in the U.S. As oil and gas stockpiles are high at present, the need for storage would be higher as would be the demand for such a logistic company. PBFX has a Zacks Rank #1 and a Zacks Value score of ‘B.’ PBFX yielded 7.91% as of December 1, 2015.
Hospitality Properties Trust (HPT)
Massachusetts-based Hospitality Properties Trust, a REIT, is into purchasing, owning and leasing hotels. Since the U.S. hotel industry is on a high-flying mode with the pickup in the economy, REITs related to the hotel business should perform well despite the rate hike worries. HPT has a Zacks Rank #2 (Buy) and has a Value score of ‘A’ and a Momentum score of ‘B.’ HPT yielded 7.2% as of December 1, 2015.
First Trust Morningstar Dividend Leaders Index Fund (FDL)
This fund follows the Morningstar Dividend Leaders Index with AUM of $834 million in its asset base. In total, the fund holds 99 stocks with Dogs of the Dow dominating the fund. From a sector look, consumer staples takes the top spot with about 21.3% exposure followed by utilities (19.5%), telecom (15.3%), industrials (12%) and energy (11.7%) each taking a double-digit allocation in the basket.
Volume is good as it exchanges nearly 197,000 shares a day on average while expense ratio comes in at 0.45%. The fund lost just 0.6% in the last one month and has a dividend yield of 3.50% annually (as of December 1, 2015). FDL has a Zacks ETF Rank #3 (Hold) with Medium risk.
iShares Select Dividend ETF (DVY)
This $13.6-billion ETF considers companies that have provided relatively high dividend yields on a consistent basis over time. The 99-stock fund is heavy on utilities (32.6%) followed by financials (12.4%), consumer staples (11.8%) and consumer discretionary (11.1%). The fund yields 3.27% but charges 39 bps in fees. It lost only 0.1% in the last one month (as of December 1, 2015). The fund has a Zacks ETF Rank #3 with a Medium risk.
iShares High Dividend ETF (HDV)
This product provides exposure to 75 dividend stocks by tracking the Morningstar Dividend Yield Focus Index. The nine Dogs of the Dow account for more than half of the portfolio, suggesting that these Dogs dominate the returns of the fund. From a sector look, the fund is well spread out with double-digit exposure to consumer staples, energy, health care, telecom and information technology (read: Time for Dow ETFs?).
HDV is among the largest and most popular ETF in the large cap space with AUM of about $5 billion and average trading volume of over 300,000 shares. It charges 12 bps in fees per year but lost 1.3% in the last one month. The fund has an annual dividend yield of 3.80% (read: 3 Dirt Cheap High Dividend ETFs to Watch).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>