Investing Insights: April 2014

Wednesday, April 30, 2014

Time to Look at Municipal Bond Funds

By Max Chen, ETF Trends

As investors adapt their fixed-income portfolios for the possibility of rising interest rates, select municipal bond funds are worth evaluating.

The huge sell-off in municipal debt last year has created a great opportunity in the munis market, writes Andrew B.J. Chorlton, a portfolio manager at Schroder Investment Management, for InvestmentNews.

“The municipal bond investor base is composed of mostly domestic retail investors — U.S. taxpayers,” Chorlton said in the article. “When retail investors sold off their muni bond holdings they created a vacuum that has made municipal bonds much more compelling from a valuation standpoint than comparable long-term credit instruments such as U.S. Treasuries.”

Specifically, Chorlton points to the municipal bond ratio to Treasuries in 30-year maturities, which stood at 102%. The ratio now looks attractive compared to the 91% long-term average.

Municipal bonds also show supportive fundamental technical indicators. States and local municipalities have seen their fiscal health improve for the last 17 consecutive quarters, with the exception of some standouts like Detroit and Puerto Rico. Supply is also declining, with new issuance at a negative for the last six years.

Moreover, muni debt default rates are still historically low. The overall muni bond default rate was 0.107% in 2013, down from 0.144% in 2012. In comparison, U.S. junk bond default rates were 2.1% for 2013.

“Municipal bonds, whether purchased individually or as part of an investment in a mutual fund, also provide investors with additional diversification during a still-uncertain market,”Chorlton said in the article. “Investors who allocate assets to municipal bonds from corporate bonds may mitigate credit risk because municipal bond defaults have historically been very low (municipalities have the power to simultaneously cut services and raise taxes to shore up their coffers, which helps decrease the likelihood of defaults).”

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.83% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 29 April 2014).

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.

Don’t Let Cash Rule Your Stock, Fund Investment Decisions

By Tom Lydon, ETF Trends

Most investors have chased after hot stocks or sold off after a bottom. However, the more egregious habit would be to sit out of investing entirely. Instead, investors can implement a trend following strategy to help navigate markets and exchange traded funds.

According to Bankrate.com research, almost three-quarters of Americans indicate they are not “more inclined to invest in the stock market right now,” reports Chuck Jaffe for MaketWatch.

The numbers match up across all ages and income groups from surveys done in 2012 and 2013, when 76% of Americans indicated they were not going to increase their stock market exposure back then.

While investors are not falling into their classic poor behavior of buying high and selling low, most Americans have missed out on a low interest rate environment that is fueling a stock market rally. Instead, most are sticking to savings accounts and cash.

“Individual investors, what money they are squirreling away is overwhelmingly dedicated to those liquid investments; they’re looking to keep money in a savings account or a money-market account which is indicative of just how nervous people are,” Greg McBride, chief analyst at Bankrate.com, said in the article. “Individual investors are not warming to the stock market…despite those record-low yields on cash and fixed-income and despite a record high in the stock market.”

By staying in cash, investors counter principal risk, or the chance they lose money in a market decline. However, investors could face purchasing-power risk, or the risk of losing out to inflation, and longevity risk where money could run out before your lifetime.

“Five percent CD yields are not coming back any time soon,” Scott Wren, senior equity strategist at Wells Fargo Advisors, said in the article. “Right now with low interest rates and a stock market that looks pretty good in my opinion, there’s not a lot of good things to take from people sitting on cash that is yielding virtually nothing.”

Investors who are thinking about dipping their toes back into the stock market waters should have a strategy in place. While some may fall back to chasing hot stocks or selling off at a bottom, a trend following strategy could help provide a structured investment regiment to limit emotional trades.

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Monday, April 28, 2014

Study Backs a Powerful Way to Manage Portfolio Risk

By Paula Aven Gladych

Diversification across asset classes significantly reduces dramatic declines, Manning & Napier study finds.
Diversification across multiple asset classes is one of the most effective risk management tools available to investors, according to Manning & Napier.

Investors can reduce the risk of declines in their portfolio by including multiple asset classes, like U.S. large cap stocks, small cap stocks, international stocks, short-term fixed income, intermediate-term bonds and long-term bonds.

Diversification risk-proofs your portfolio because when stocks are down, domestic bond prices may rise and international equities may not react at all.

“When a portfolio includes broad exposure to multiple asset classes, it is less exposed to extreme market fluctuations because declines in one asset class may not be experienced by other asset classes, and quite possibly may be offset by gains in another asset class,” the report stated.

“Clearly, broad diversification across multiple asset classes can significantly reduce the probability of an investor’s portfolio experiencing dramatic declines,” the report found. “While it may be tempting to try to identify the single asset class that is expected to perform the best over the near term and invest solely in that asset class, history has proven that asset class returns are unstable over time and the best performing asset class can turn into the worst performing asset class very quickly.”

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Stick With High Quality Over Momentum Funds

By Max Chen, ETF Trends

Despite a short rebound last week, momentum stocks and related sector exchange traded funds may not regain their previous highs any time soon. However, some higher quality momentum stocks can still hold their ground, Goldman Sachs says.

David Kostin, Goldman’s chief U.S. stocks strategist, said that clients have become more optimistic about a “re-momentum” trade but warns against being overly optimistic, reports Alexandra Scaggs for the Wall Street Journal.

Specifically, Kostin points out that high-flying stocks have only recovered in the six months after a major sell-off 40% of the time since 1980. Additionally, a number of outside factors have supported the stocks when they did make the recovery.

Higher quality picks, companies with high margins, strong balance sheets and high return on capital, have fallen behind last year’s high flyers. Now, Kostin argues that these higher quality momentum stocks offer above-average prospects for growth and are cheaper than their sector peers.

For instance, larger quality names like Google (GOOG) and Microsoft (MSFT). Momentum tech stocks and funds have clearly been taken to task, but while that has been happening, funds with heavy exposure to older, more traditional tech companies have remained firm.

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First Trust NASDAQ Technology Dividend Index Fund (TDIV) (see above) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current dividend yield of the portfolio is 5.43% (as of 28 April 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Multi-Asset Menagerie With This Fund

By Todd Shriber, ETF Trends

What a difference a year makes. Last year’s “tantrum” resulting from the specter of tapering of its quantitative easing by the Federal Reserve was a drag on multiple corners of the exchange traded products universe, including multi-asset funds.

At the height of the Federal Reserve’s quantitative easing spectacle and when little thought was given to rising Treasury yields, income investors were enamored of high-yielding multi-asset ETFs. For income investors, there is a lot to like with funds such as the First Trust NASDAQ Multi-Asset Diversified Income Index Fund (MDIV).

MDIV features a 12-month distribution of almost 6%, the result of its lineup of nearly 120 holdings being comprised of a mix of junk bonds, master limited partnerships (MLPs) and real estate investment trusts (REITs), among other asset classes.

That composition makes MDIV appealing in sanguine rate environments, but not so much when Treasury yields surge as they did last year.

“There’s a downside to MDIV. Its diverse exposure and extremely low volatility mean it won’t participate in much of the upside of the U.S. equity markets. Last year, for example, it rose 11 percent when the market was up 32 percent. If interest rates were to rise quickly, many of the holdings in MDIV could lose value. Mortgage REITs in particular, which yield about 15 percent, could be hit hard, since they use short-term loans to buy mortgage-backed securities and generate income from the difference between the two,” writes Eric Balchunas for Bloomberg.

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First Trust NASDAQ Multi-Asset Diversified Income Index Fund is a component of the D2 Capital Management Multi-Asset Income Portfolio.

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Sunday, April 27, 2014

The Search for Yield: How Long Could It Last?

By Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

Stubbornly low yields have made income tough to come by in recent years, and they have sent investors searching for yield and income wherever they can find it.

A key question on investors’ minds remains how long low rates, and the accompanying search for yield, are likely to continue. The search for yield is likely to remain in place throughout the remainder of this year and into 2015.

Why? The reality is that while the U.S. economy continues to recover, short-term interest rates are likely to remain anchored at zero throughout 2014. The Federal Reserve is facing few inflationary pressures and structural challenges are keeping employment low.

Meanwhile, there are several factors—both cyclical and secular—that are conspiring to hold down long-term rates. These factors include the tail end of the consumer deleveraging, lower supply of debt, a strong institutional need for high quality bonds, and demographic trends.

While I still expect that the yield on the U.S. 10-year Treasury note will rise modestly throughout the course of the year to 3% to 3.25%, the backup in yields is likely to be a slow, modest climb characterized by volatility and back and forth movement. In addition, even at 3% or 3.5%, the 10-year yield would be well below its 20-year average (and only about half of the 60-year average).

In this environment, many investors are still determined to wait out the bond market, believing that rates will eventually normalize and provide investors with a risk-free 5% yield, though this isn’t likely to happen anytime soon. At the same time, others are overreaching for yield by entering ever more speculative fixed income asset classes, such as Greek bonds and leveraged loans, where the risks may not be worth the potential returns.

In my opinion, investors should be wary of both of these strategies. As many of the traditional income plays have become expensive, I continue to advocate that investors instead adopt a flexible and opportunistic approach within fixed income and consider bond market substitutes – such as dividend-paying stocks – as an alternative way to generate income. In addition, I continue to see relative value in select areas of the fixed income market such as tax-exempt bonds, commercial mortgaged-backed securities (CMBS) and U.S. high yield.

The bottom line: investors should consider strategies that allow for the premise that yield may continue to be hard to obtain for a while longer, while also balancing out their desire for income with their risk tolerance.

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Saturday, April 26, 2014

Boomer Retiree Prospects Up Slightly, Study Says

By Ted Knutson, Financial Advisor magazine

Retirement prospects for baby boomers have improved slightly in the last year, but remain precarious for more than 40% of that generation, according to a new study.

Among early baby boomers—those born between 1948 and 1954—the percentage projected to finish retirement without running out of money has risen to 56.7 percent from 55.1 percent last year, according to the Employee Benefits Research Institute.

For late boomers—those born between 1955 and 1964—the percentage of those expected to not run out of money rose to 58.5 percent from 57.5 percent.

Among GenXers—the generation born between 1965 and 1974—the percentage of those with enough money to last in retirement went from 57.2 percent to 57.7 percent.

The improvements appear to be the result of gains in qualified retirement accounts and increases in housing values, according to EBRI.

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Thursday, April 24, 2014

Warren Buffett: Stocks aren't 'too frothy' now

By Alex Crippen, CNBC

Warren Buffett rejected the suggestion the U.S. stock market is "too frothy" right now as the major indexes re-approach their all-time highs.

"I think we're in a range, and it's a big zone always, of reasonableness. But stocks ought to be higher every 10 years.There's a plow back of earnings that goes back year after year. Stocks will become worth more decade after decade, not in any precise manner, not in an even manner or anything of the sort. But 10 years, 20 years, 30 years, stocks will be worth more than they are today."

Asked if he agreed with hedge fund manager David Einhorn's warning that "we are witnessing our second tech bubble in 15 years," Buffett said he doesn't always understand tech valuations, but it's not like the period before 2001 when "you could almost sell anything and capitalize eyeballs and all of that. I don't think it's reached that point and certainly I don't think the general market level is going to bubble up."

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Tech Dividend Fund Could Add More Apple to Its Basket

By Todd Shriber, ETF Trends

The First Trust NASDAQ Technology Dividend Index Fund (TDIV) is up nearly 19% in the past year and has raked in more than $186 million of its $478.3 million in assets under management since the start of 2014.

So it might be fair to say TDIV does not need much more help gaining fans, but there is nothing like some assistance from a widely-followed company such as Apple (AAPL) to shine a brighter light on TDIV.

Shares of the iPad maker surged 7.6% during Wednesday’s after-hours session after the company, among other announcements, said it will boost its quarterly dividend by 8% to $3.29 per share. At the start of this year, it was reported Apple would need to raise its dividend by at least 8% to become the largest U.S. dividend payer. The company has done that and the move could affect the stock’s position in TDIV.

TDIV tracks the NASDAQ Technology Dividend Index, which is rebalanced quarterly and “employs a modified dividend value weighting methodology. At each evaluation, the index securities are classified as technology or telecommunications based on their ICB classification. The technology securities are given a collective weight of 80% and the telecommunications securities are given a collective weight of 20% in the index. The index weighting methodology includes caps to prevent high concentrations among larger stocks,” according to First Trust.

Translation: TDIV’s constituent companies are weighted by total dividends paid over the past year, giving the ETF’s shareholders ample exposure to the largest dividend payers in the tech sector. That means after the ETF’s next rebalance, Apple could move up a spot or two in the lineup.

Apple’s ascent in any dividend ETF that uses a methodology based on paid cash dividends could come down to how many shares the company has repurchased by the time the new dividend takes effect and when those ETFs rebalance. The company said Wednesday it is aiming to repurchase $90 billion of its own stock by the end of 2015, up from its original target of $60 billion.

At the close of U.S. markets Wednesday, Apple was TDIV’s fifth-largest holding at a weight of 7.81%, trailing Dow components, Intel (INTC), Cisco (CSCO), Microsoft (MSFT) and IBM (IBM).

The tech is one of largest contributors to S&P 500 dividend growth over the past few years and TDIV is among the ETFs that have capitalized on that trend. With Wednesday’s announcement, Apple’s dividend has increased 24% in two years. Cisco’s payout has tripled in three years. Microsoft’s dividend has more than doubled in less than four years.

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First Trust NASDAQ Technology Dividend Index Fund (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current dividend yield of the portfolio is 5.43% (as of 23 April 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Wednesday, April 23, 2014

Stocks have room to run

Osterweis Capital Management’s John Osterweis and Matt Berler think stocks have room to run:

"...Markets, of course, never go straight up or straight down: they zig-zag. Short term, we would not be surprised if the market took a breather after its strong gains last year. Additionally we may see volatility related to news coming out of the Middle East and Russia. But longer term, we remain very optimistic on the outlook for U.S. equities…[We] believe U.S. equities are very attractive relative to the alternatives. The great bull market in bonds appears to be over. The great decades of emerging market growth appear to be behind us. Hedge funds in aggregate have been mediocre performers for some time. We expect money to flow back into stocks, particularly U.S. equities. This is a technical (money flow) argument for a continued bull market. It augments the fundamental case based on earnings and valuation..."

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Tuesday, April 22, 2014

Right Sector Mix Lifting This Dividend Fund

By Todd Shriber, ETF Trends

Over the past 90 days, the top two sectors are Utilities and Energy and theother sectors are not even close.

Combine the dividend and value reputations of the energy and utilities sectors, and it would be logical to assume that plenty of dividend funds are benefiting from the rise of those sectors. The Global X SuperDividend U.S. exchange traded fund (DIV) certainly is, having joined an array of energy and utilities ETFs in hitting consecutive all-time highs in recent days.

DIV allocates almost 44% of its combined weight to the utilities and energy sectors. None of the four largest U.S. dividend ETFs exceed DIV’s combined utilities and energy sector allocations.

DIV’s utilities and energy mix is proving rewarding. Over the past 90 days, the fund, which sports a trailing 12-month yield of 5.7%, is higher by more than 4%.

To be fair, DIV has an advantage over some of its rivals in that all of its energy holdings with the exception of Chevron are master limited partnerships, a trait that bolsters DIV’s yield while making the ETF a beneficiary of declining Treasury yields. Speaking of falling Treasury yields…

As have other utilities-heavy dividend ETFs, DIV has benefited from declining Treasury yields. Ten-year Treasury yields are lower by nearly 5% over the past three months.

After Federal Reserve Chair Janet Yellen hinted in late March that interest rates could rise sooner than previously expected, some investors are understandably skittish about exactly when rates will rise and the subsequent impact on their portfolios. However, that has not adversely affected DIV and that is arguably a pleasant surprise when considering the ETF allocates over half of its combined weight to rate-sensitive utilities, telecoms and real estate investment trusts.

DIV pays a monthly dividend.

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Global X Super Dividend (DIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current dividend yield of DIV is 5.7% and the dividend yield of the total portfolio is 5.43% (as of 22 April 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Monday, April 21, 2014

Spring Checkup: Five Investment Ideas for Your Portfolio

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

Severe weather had a significant impact on first quarter economic data, and a major new geopolitical risk popped up in Ukraine. Indeed, if I could use one phrase to describe what’s happened over the last three months, it would probably be “reversal of fortune,” since the best-performing assets of 2013 underperformed, while the 2013 losers flourished. In the biggest surprise, bond yields fell as prices rose.

Nonetheless, we’re sticking with the broad game plan we laid out in December for how to navigate this environment. As we enter the second quarter of 2014, investing opportunities appear more elusive than at the beginning of the year (and the challenges more evident).

However, as Jeffrey Rosenberg, Peter Hayes and I write in the spring update to our 2014 Outlook – The List: What to Know, What to Do, even though it’s a tough environment, it’s not one without opportunity. Here are five opportunities we think are worth considering this spring:

1. Stick with stocks. We still believe that stocks offer better value than bonds, even after a five-year bull market. At the same time, we expect to see continued low inflation and low interest rates, as well as a gradually improving economy— all factors that are supportive of stocks. As such, we expect that the market will push ahead in the months to come, although it will likely be a slow and uneven grind given ongoing geopolitical turmoil and Federal Reserve (Fed) tapering. As such, investors should have modest expectations, at least compared to 2013′s outsized gains.

2. More international exposure. Within equities, we believe that, in general, many investors should consider paring back some U.S. exposure in favor of non-U.S. stocks. Despite the reality of geopolitical uncertainty, we see plenty of growth opportunities abroad and would encourage investors to expand their reach globally.

In particular, we have a favorable view toward eurozone and Japanese stocks. Events in Ukraine present some risks for Europe, but we believe both European and Japanese equities look attractively valued compared to U.S. stocks. Finally, for investors with a strong stomach and long time horizon, we suggest having some exposure to emerging markets, which offer a combination of attractive value and compelling long-term growth prospects.

3. Consider a flexible bond approach. It has been a tough time for bond investors, and conditions aren’t getting any easier. What to do? Being flexible and diversified globally remains key. With yields likely to be volatile, and some areas of the fixed income market feeling the effects more so than others, a flexible, go-anywhere bond portfolio that can make adjustments on the fly is something to consider having in your fixed income toolkit.

4. Think high yield and municipal bonds. We continue to believe that investments such as high yield bonds and municipal bonds remain attractive sources of income. In regards to the latter, municipal bonds continue to look attractive versus both Treasuries and corporate bonds. We’re seeing competitive yields on a before-tax basis—which only further illuminates the after-tax value. However given the likelihood of rising rates and improving data, a diversified and unconstrained approach is a necessary strategy in the tax-exempt space as well.

5. Go beyond traditional stocks and bonds. Investors could incorporate alternative strategies that can help broaden their diversification, protect against rising rates, and contribute to growth. (Remember, however, that diversification does not ensure profits or protect against loss.)

Diversifying with alternatives means adding new asset classes such as physical real estate and infrastructure investments. You also may want to consider new strategies such as long/short approaches that can be employed with both stocks and bonds to mitigate volatility, seek out returns and contribute to diversification. While the risks of long/short strategies include the possibility of losses larger than invested capital, we believe they can offer a powerful differentiated source of return and the potential for more consistent results over time.

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Wednesday, April 16, 2014

Junk Bond Default Rate Lowest Since 2008

By Michael Aneiro, Barron's

The default rate among non-investment grade (junk)-rated U.S. companies keeps shrinking to ever-more negligible levels, and it fell to 1.7% at the end of the first quarter, its lowest level since February 2008, Moody’s Investors Service said today. That ultra-low default rate is what’s underpinning investor confidence in a junk-bond market that yields just 5.2% on average these days, when prior to 2012 its average yield had never dropped below 6.5%.

Moody’s forecasts that the default rate will rise to 2.4% by the end of the year and 2.7% a year from now, still well below the historical average of 4.5% since 1993.

Moody’s said capital markets “continue to be open for low-rated companies, supporting a low default rate.” Thanks to the Fed rates have been so low over the past five years that all but the junkiest of junk-rated companies has been able to refinance old debt by issuing newer bonds, extending maturities and lowering borrowing costs.

Taking the latest temperature of the junk-bond market: it’s gained 3.33% already in 2014 and trades at an average price of 104.6 cents on the dollar with an average spread of 376 basis points over Treasuries, per a benchmark Bank of America Merrill Lynch index.

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AdvisorShares Peritus High Yield Fund (HYLD) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current dividend yield of HYLD is 7.58% and the dividend yield of the total portfolio is 5.43% (as of 15 April 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Tuesday, April 15, 2014

Your Grandparents Would Like This Tech Fund

By Tom Lydon, ETFTrends

With the Nasdaq faltering recently, it might be hard for some investors to believe that things are not entirely gloom and doom in the technology sector.

Most of the gloom has come courtesy of once high-flying Internet and social media stocks.

Not all technology sector funds are wearing scarlet letters though. While not much too write home about, more conservatively-positioned tech ETFs have been sturdy in recent weeks.

A standout has been the First Trust NASDAQ Technology Dividend Index Fund (TDIV), which was sporting one-month gain of nearly 3% entering early this week. A large part of the reason TDIV has been sturdy as higher beta tech fare has withered is the funds allocations to the sector’s more mature names.

Think Dow components Microsoft, International Business Machines, Intel and Cisco. Those are four of the 14 Dow stocks that are higher year-to-date. Those are TDIV’s four largest holdings, combining for a third of the fund'ss weight.

Allocations like those explain “why TDIV has the lowest volatility of the 36 tech funds and is about half as volatile,” writes Eric Balchunas for Bloomberg.

While the concept of dividend growth in the tech sector is still relatively new, that does not mean it will not prove rewarding for investors. The sector is one of largest contributors to S&P 500 dividend growth over the past few years and TDIV is up 24.6% since coming to market in August 2014.

Investors have noticed and have poured almost $464 million into the fund.

“TDIV has had a DiMaggio-esque streak of positive inflows for 20 straight months since its August 2012 inception. It even has positive inflows so far in April — a minor miracle given the recent carnage in tech. The flows have been slow and steady, which indicates that smaller (read: more stable) investors are doing the buying. That, plus all the attention social media got, is why TDIV has slipped under the radar and become a sleeper hit,” writes Balchunas.

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First Trust NASDAQ Technology Dividend Index Fund (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current dividend yield of the portfolio is 5.43% (as of 15 April 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Monday, April 14, 2014

7 reasons to consider dividend-paying stocks for retirement

By Jonathan Clements, MarketWatch

It’s OK to spend your income, but never, ever dip into capital.

Remember that old financial commandment? It was discarded long ago as a fuddy-duddy rule that doesn’t work in our low-yield world. But as I ponder retirement, focusing on dividend-paying stocks, so you don’t have to dip so often into capital, looks better and better — for seven reasons.

Low bond yields. While stocks aren’t cheap, bonds frighten me more. The 10-year Treasury yields about 2.6%, almost double its 2012 bottom but still historically low. There isn’t much room for interest rates to fall, and they could rise sharply, especially as the Federal Reserve scales back its bond purchases. If rates climb, bondholders could suffer painful declines in their portfolio’s value.

Less risk. Instead of investing for dividends, investors have been encouraged in recent decades to create their own dividends by occasionally selling shares. But recall those two huge bear markets we’ve had over the past 14 years. If you needed to create your own dividends, you could have found yourself selling stocks at deeply depressed prices.

By contrast, dividends aren’t nearly as volatile as share prices, though they too have had some notable declines. Five years ago, as the Great Recession took its toll, the S&P 500 companies slashed their dividends by 24%. It was particularly grim during the Great Depression, when dividends were cut 47%, even after adjusting for that period’s deflation. In both instances, however, the decline in dividends wasn’t nearly as severe as the decline in share prices.

Still, those severe cuts suggest that, even if you could afford to live solely off your portfolio’s dividend yield, you need a safety net. One possibility: You might combine investing for dividends with, say, a cash reserve that you could draw on when economic crises hit and dividends get scaled back.

Inflation protection. Over the long haul, dividends have handily outpaced inflation, potentially providing retirees with a growing stream of income. Consider some numbers based on data from the website of Yale University economics professor Robert Shiller.

Over the past 100 years, the dividends from a diversified collection of U.S. stocks would have grown an average of 4.4% a year, easily outpacing the 3.2% average inflation rate. Even as you collected your dividends, your shares would have been climbing in value, notching price gains averaging 5.6% a year.

Intriguing funds. Unless you have a huge portfolio, you would find it tough to live off the S&P 500’s 2% yield. But what if you bought high-dividend stock funds? Yields can easily exceed 3%.

Favorable tax treatment. While interest from bonds is taxed as ordinary income, qualifying dividends are taxed at the long-term capital-gains rate. For everybody except those in the top federal income-tax bracket, that will mean paying 15% or less. One caveat: While dividends from most blue-chip U.S. stocks should qualify for this tax treatment, you may find that dividends from some U.S. stocks and foreign shares are taxed as ordinary income.

Value effect. Research suggests that bargain-priced value stocks have, over the long haul, outperformed fast-expanding growth stocks. High-dividend stocks are usually value stocks, so they could perform better than average if the value effect persists.

More discipline. In recent years, companies have eschewed dividend increases in favor of stock buybacks. But companies are quick to halt buyback programs when their finances get tight, whereas they’re loath to cut dividends. Indeed, paying a large, regular dividend provides managers with a healthy dose of discipline and forces them to think more carefully about how they spend the company’s remaining cash.

This isn’t to say you should bet your retirement solely on high-dividend stocks. The financial world is too uncertain for that. But tilting toward high-dividend stocks deserves a place alongside other retirement-income strategies, including delaying Social Security, annuitizing a portion of your savings and holding a hefty cash reserve.

If you’re collecting 3% in dividends and your goal is the often-recommended 4% portfolio withdrawal rate, you will need to augment your retirement income by dipping a little into capital and doing some occasional selling. But thanks to the dividends, you won’t have to do much selling — which means you can watch those stock-market swings with far greater equanimity, while you wait for your next dividend check to arrive.

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Sunday, April 13, 2014

Rising stock market volatility is no “sell” signal

By Jeff Benjamin, Investment News

Just because volatility in the stock market has spiked and is likely to remain elevated, investors shouldn't be heading for the hills in a panic.

While 200-point plunges in the Dow Jones Industrial Average, such as the one on Thursday, will always draw attention, it's important to consider the context and accept a dose of reality.

“We started telling people at the beginning of the year that with the Fed reducing its quantitative easing, the market reins are being handed back to the market, and this is the kind of adjustments we can expect,” said Karyn Cavanaugh, senior market strategist at ING U.S. Investment Management.

Despite the increased level of daily market swings, Ms. Cavanaugh pointed out that stock market volatility, as measured by the S&P 500 Volatility Index (VIX) is still below the average of the past 10 years. In fact, the VIX is currently around 15, which compares with an average of 20 since 2004.

For added perspective, the VIX spiked above 40 during both the height of the euro crisis in 2005 and immediately after the U.S. credit downgrade in August 2011.

“At 15 on the VIX, I wouldn't be too worried,” Ms. Cavanaugh said. “We're still in the midst of an economic expansion, so a stock that was good yesterday is still a good stock today.”

So far this year, the S&P's direction seems to have changed by the month, including a 3.5% decline in January, a 4.8% gain in February and a flat March. All told, the index is essentially flat year-to-date.

But if investors and by extension the markets, are rattled or even a bit confused, that doesn't fit with the data, according to Dick Burridge, co-founder and chief investment officer of RMB Capital, a wealth management firm with $4 billion under advisement.

“We think the economy right now is much stronger than investors are giving it credit for,” he said, citing improving data from the construction industry and auto industry, a pickup in consumer spending and rising consumer confidence.

“We're seeing positive GDP growth in Europe, Japan and the U.S. all at the same time for the first time since before the financial crisis,” he added.

Granted, with the S&P up about 170% since it bottomed during the financial crisis in March 2009, Mr. Burridge admits the market is probably due for a breather. Just not yet.

“We think we're in the third and final phase of the bull market, and we see markets at fair value right now,” he said. “And at fair-value levels, volatility increases because during this phase you will go from being fairly valued to being overvalued.”

But being overvalued is a legitimate part of the cycle and should be embraced.

“Every bull market dating back to the 1970s has peaked at premium valuations,” Mr. Burridge said. “I still think this bull market will last another couple of years, and will gain another 40% from here.”

Even putting the volatility into perspective doesn't always alleviate the anxiety of big market moves, as hedge fund manager Scott Wallace, founder of Shorepath Capital Management, said.

“I think what you have today is selling begetting more selling, and that's happening in the context of reasonably good economic news,” he said. “We're coming up on corporate earnings season, and I think as investors start to see the world isn't in such bad shape, we'll see things start to settle down.”

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Thursday, April 10, 2014

Dividends at Record Levels

Publicly traded companies issued a record number of dividend increases in the first quarter, with dividend net increases rising $17.8 billion, according to data from S&P Dow Jones Indices.

During the first three months of the year, 1078 dividend increases were reported, a 14% increase from the prior year period and displacing the prior first quarter record of 1069 set in 1979.

"Companies are being pressured to use their available cash, resulting in near record levels of total shareholder returns from public companies from both cash dividends and buybacks," S&P Dow Jones Indices senior index analyst Howard Silverblatt said. He also noted that increases outnumbered decreases by more than 10 to 1.

Of the roughly 10,000 U.S. traded companies, only 102 companies decreased or suspended dividends in the quarter, compared with 139 companies a year earlier.

Source: Wall Street Journal

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57% of the holdings in the D2 Capital Management Multi-Asset Income Portfolio consist of dividend paying companies. Current dividend yield of the total portfolio is 5.43% (as of 9 April 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.