Financial Gurus - Are They Really?

By Rick Kahler, CFP, is President of Kahler Financial Group in Rapid City, S.D.

When a financial advisor or an author of financial books becomes well-known, investors may assume they can trust that person’s advice. This isn’t necessarily the case.

Fame and quality don’t always go together.

Financial planning has a solid core of professionals who quietly and ethically serve their clients. It also has its gurus, outstanding marketers, and fringe practitioners with extreme ideas. The challenge for consumers is identifying the reliable ones. Here are a few suggestions:

1. Get recommendations firsthand. Knowing about a professional isn't the same as knowing a professional. Everyone you know may have heard of Noted Local Advisor. That's not the same as being able to recommend him or her. Get recommendations from people who are clients of a firm, or who used the advice. Ask specific questions about what they did and how it worked for them.

2. Avoid cookie-cutter advice. Your financial situation is unique to you. Even if a method of building wealth is perfectly legitimate and works for others, it still may not be a good fit for you.

3. Promises of quick money are red flags. Yes, there are shortcuts to building wealth, but they come with very high risks. For most of us, the best ways to build wealth are gradual and even boring: saving part of every paycheck, living on less than we earn, and investing for the long term in a well-diversified portfolio of different asset classes. While it’s natural to wish for an easier, faster way, that desire makes you more vulnerable to high-risk schemes and scams.

4. Be skeptical. Apply the same common sense to financial products or wealth-building methods that you use anywhere else. For example, you probably don’t assume that a car’s advertised gas mileage is what you actually get under real-world conditions. In the same way, it's wise to assume your real-world results from a proposed investment or business will be lower than the advertised numbers.

Certainly, not every guru is a crook. Your job is to learn the financial basics so you can evaluate them with some educated skepticism. Keep in mind that the true genius of some financial experts is, after all, marketing.

******

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. 

Should Investors Fear Global Tensions?

By Zachary Karabell, Head of Global Strategy at Envestnet

Over the past few months, geopolitical crises seem to have proliferated. First, in March, long-simmering tension between Russia and the Ukraine metastasized to a full-blown crisis after the government of Ukraine was toppled by a popular revolt. That then led to the Russian annexation of Crimea, which was followed by sanctions imposed by the Western states, armed conflict between Russian separatists and the Ukrainian government in eastern Ukraine, and even more sanctions.

Then, in June, we witnessed the sudden eruption of another brief, intense war between Israel and Hamas-controlled Gaza, which saw daily scenes of bombs and missiles and reports of death and mayhem. That coincided with a rapid breakdown of order in northern Iraq, as the violence from the Syrian civil war at last spilled over in the form of the radical Sunni group ISIS, which swept through northern Iraq on the heels of the almost-complete disintegration of the Iraqi army.

And these were only the three crises that received the most attention. Also during these months, Libya teetered on the brink of a new collapse. While the country has hardly been a paragon of stability since the toppling of Qaddafi, the new round of fighting between various factions has reached a dangerous level. Nigeria faces its own insurgencies. If these regional wars were not enough to unsettle, the outbreak of the Ebola virus in West Africa added yet another element of uncertainty and potential havoc.

On the face of it, this would seem to be an unsettled time. Senator John McCain recently remarked that the world is "in greater turmoil than at any time in my lifetime," a sentiment that appears to be widely echoed.

Much of the market discussion in turn has begun to revolve around these crises. Almost daily on financial news channels, investor letters, and trader chatter, the overhang of geopolitics forms the backdrop to the discussion of where markets are heading. The line "markets sell off on geopolitical concerns" has been repeated ad nauseum over the past months.

It is not at all clear that the world today is particularly unstable. In fact, it is impossible to find a period over the past century -- let alone the vast sweep of human history -- that was free from wars, civil wars, conflict, disease, and chaos. And you can easily find times in the past fifty years that were more volatile.

The question we should be asking however is one that isn't being asked enough: Does any of this really matter for financial markets? Are these geopolitical crises bona fide market events or are they just noise that may shape daily movements in the absence of other compelling information? The answer, resoundingly, is that these events are almost always entirely noise that has little effect on the fundamentals and marginal influence on the behavior of stocks and bonds.

PAST PATTERNS - If we look at how markets have behaved during a series of geopolitical crises over the past fifty years, we find a startling pattern: even if there is an initial sharp reaction, within a few months, it is as if nothing happened. Yes, after the outbreak of the First Gulf War with the Iraqi invasion of Kuwait in August of 1990, the S&P 500 was down almost 10% a month later. But six months later, it was nearly back to where it was the day before the crisis began. And yes, after the attacks of 9/11, stocks initially plunged when markets reopened the week following, but they quickly stabilized in the face of aggressive central bank action. Even smaller moves followed other selected crises such as the seizure of the U.S. Embassy in Tehran in 1979, and even going as far back to the Tet Offensive of January 1968 when the North Vietnamese launched a sudden and unanticipated multi-pronged attack on U.S forces through South Vietnam.

The absence of a strong and consistent market reaction to geopolitical crises makes for a very strong pattern. It also stands in contrast to the immediate market reactions to such crises and the buzz of commentary and speculation that surrounds each new one. The short-term market reactions suggest that these crises have the potential to spin out of control and become wider. Stocks might sag briefly, and investors might flee to areas of safety such as U.S. Treasuries or gold. But these reactions are very short-lived if they occur at all. And, within a few months at most, usually weeks, whatever trend had been in place prior to the crisis reasserts itself.

UNDERSTANDING HOW MARKETS REACT - So how do we explain the widespread belief that geopolitical instability sets the stage for market behavior? First, there is always the concern of a much wider global contagion that would then impact the earnings of companies and the behavior of institutional and individual investors. All of the crises of the past fifty years have been contained. Even the largest war in 1991 in the Persian Gulf involved multiple countries, but lasted less than two months and never spread instability throughout that region. None of the current crises involve a major world power save for Russia and the Ukraine, and that crisis has yet to morph beyond low-levels of violence, one tragically downed commercial aircraft, and some relatively mild economic sanctions. None of these crises, in short, have yet to directly impact the behavior of consumers worldwide or the bottom line of all but a few companies.

To put it another way, on a fundamental level, none of these crises affect how many smartphones will be sold in Asia, or how much clothing people will buy in North America. None of them occur in a financial center, and hence have not been a contagion for financial markets -- save for a short period of concern that they might trigger a financial panic.

The only aspects of markets demonstrably impacted are commodities and commodity production directly affected by the chaos. Many of today's crises take place in areas that also produce oil. We have seen crude oil stay around $100 a barrel even as demand from North America is falling and demand across the globe has been stagnant. Some of that is a direct result of oil production dropping, as it has in Nigeria and Libya, or of fears that it will drop in Iraq, or that sanctions will lead to either a sharp decrease in oil production, oil exports, or natural gas exports from Russia if the crisis deepens.

Other than the effect on the oil market, however, the pattern is clear: geopolitical crises of the sort we have faced and are now facing do not move markets other than briefly and for the very short-term. They are headlines; they are noise. They have not altered the fundamentals of either companies or global financial markets. They have not led to major moves in bond yields.

Yes, the fear and uncertainty that any one of these crises can spin out of control needs to be taken seriously. Just because past crises did not lead to contagion does not mean that current ones will not do the same. But it does mean that we should be very wary of commentary that draws a clear link between crises, uncertainty, and financial markets. These geopolitical issues are real and critical to the world we live in, but they are very rarely market events.

******

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. 

Municipal Funds for Portfolio Diversity & Income

By Max Chen, ETF Trends

Despite some high-profile scares in the municipal debt market, muni bonds and related exchange traded funds are still a relatively safe asset class, provide attractive tax-equivalent yields and offer increased diversification.

On a recent presentation, "What’s Next for Municipals?", Blair Ridley, Director and Portfolio Manager for Deutsche Asset & Wealth Management, points out that the majority of municipalities are on a strong footing.

“Municipal revenues continue to increase and defaults continue to decline,” Ridley said.

State collections have increased for 16 consecutive quarters after declining five straight quarters during the recession. Municipalities have also kept their debt-to-GDP relatively stable over the past five decades. State and local debt-to-GDP have remain below 20%, whereas federal debt ratios have increased to over 100%.

Moreover, credit agencies have recently upgraded some states’ credit ratings due to their decreasing budget deficits, including California and New York.

The muni market is also being supported by a record low supply of new issuance. Some analysts expect new issuance of $300 billion or less in 2014.

The recent swings in the munis market are attributed to the high-profile bankruptcy filings in Detroit, Michigan and Stockton, California, along with financial problems in Puerto Rico. Specifically, general-obligation bonds, which are backed by credit an the taxing ability of the issuing municipality, are under increased scrutiny as some cities fail to generate enough tax revenue to cover their debt.

Municipal bond investors can enjoy attractive yields, especially those who are in higher income brackets. After the tax hikes in 2013, investors in the top bracket generated a 6.18% tax-equivalent yield in 2013, compared to a 5.38% tax-equivalent yield in 2012, on muni bonds with an average 3.5% yield.

Furthermore, muni investors offer attractive diversification benefits, showing a low correlation to equities and other fixed-income assets.

Municipal bonds have historically provided attractive risk/return characteristics, particularly when tax benefits are considered.

******

The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.86% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 19 August 2014).  Year to date the portfolio is up 7.54%

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. 

Taking Stock of Investors' Concerns

By E.S. Browning , Wall Street Journal

Stocks have come so far, so fast that investors are getting nervous.

With the S&P 500 up 30% last year and 6% more this year, it is just 2% off its July record. Even some mainstream advisers suggest caution.

"For investors concerned about short-term performance, I have been urging people to get a little more defensive and raise a little more cash to create a little more firepower for later," said David Joy, chief market strategist at Ameriprise Financial Inc., which oversees $810 billion.

Some fear a bear market, meaning a pullback of 20% or more. Mr. Joy expects a smaller decline. Others say the pullback is over and it is time to buy.

A central question is whether market excess is as bad as before the collapses of 2000 and 2008. In 2000, speculative fever infected many large stocks. In 2008, housing and lending excesses almost caused a depression.

Those aren't today's problems. But fears remain, notably because unprecedented Federal Reserve intervention has distorted markets in ways that are hard to evaluate.

Here are some issues on investors' minds:

The Fed: Many believe this bull market's main driver has been the central bank's decision to hold interest rates at their lowest levels since World War II, and to stimulate markets by buying more than $1 trillion in bonds.

Now the Fed is ending the bond-buying and preparing to raise interest rates next year. The prospect of higher rates, Mr. Joy said, could unsettle markets. But he and many others say investors should shrug that off because the Fed intends to move slowly and keep rates low for years. "I don't see a big problem but rather a source of temporary uncertainty" with stocks falling around 10% late this year, he said.

Adam Parker, Morgan Stanley's MS +0.99%  chief U.S. stock strategist, said the pullback is already over. "I think this is a buying opportunity," he said.

High Prices: "Our clients are concerned that the market has come so far in the past five years that stocks are expensive," said Scott Wren, senior stock strategist at brokerage firm Wells Fargo Advisors.

The S&P 500 has nearly tripled since March 2009. It trades at 18.5 times its companies' reported profits for the past 12 months, according to Birinyi Associates. The long-term average is 15.5.

Stocks are expensive but not outrageous as in 2000, when the S&P 500 was near 40 times earnings. Stocks were about this expensive before 2008 but the big problem then wasn't valuation; it was housing and lending.

Joseph Mezrich, head of quantitative investment strategy at Nomura Securities, measures the earnings gains needed to justify stock prices. Stocks now price in 7% earnings growth, which is normal, he said.

"The way I value the market," he said, "there is no bubble at all." The S&P could rise 5% and it wouldn't be overvalued, he said.

Earnings: "For our clients," said Wells Fargo's WFC +0.84%  Mr. Wren, "the No. 1 concern is that the economy is going to slip into recession again."

Corporate profits are rising less than 9% a year, much slower than early in the recovery. Mr. Wren tells clients this pace is fine but clients still hold more money in cash than he recommends, he said.

"Ultimately," said Mr. Parker at Morgan Stanley, "the trajectory of earnings is what matters" for stock prices and "I don't know of anybody who thinks earnings are going down in the second half of the year."

Geopolitics: Many analysts blame recent stock volatility on conflicts involving Ukraine, Russia, Iraq, Syria and Israel.

For stocks, only two aspects of geopolitics have mattered much in the past: energy prices and major U.S. troop involvement. With the latter unlikely, analysts focus on energy.

Oil is plentiful, so attention centers on fears Russia could disrupt natural-gas deliveries to countries including Germany. A European recession could damage stocks globally.

"Energy markets are a concern if there is any interruption in supply," said Mr. Joy of Ameriprise, but he and others said it would take a big energy-price jump to affect U.S. stocks much.

Speculation: Many worry that Fed cash injections and low interest rates have led to excessive investment with borrowed money.

Several market corners appear overheated, including biotech and social-media companies, junk bonds, some real-estate investment trusts and securities backed by bank loans. Junk-bond prices sagged in July, but have begun recovering.

Borrowed money with stocks as collateral, called margin debt, is at a record in dollar terms. But as a percentage of total stock-market value, it isn't near 2007 extremes, said independent market analyst Phil Roth.

However, investing today is dominated by hedge funds, which use other borrowing sources that are hard to track, Mr. Roth noted. No one knows how much they have borrowed. If hedge funds have to raise cash because of declines in risky investments made with borrowed funds, no one knows how many mainstream stocks they might sell.

Other potential problems are also hard to gauge: the seriousness of China's housing bubble, the strength of its financial system, the risk of global terrorism, the risk of another European financial blowup.

Still, by traditional measures, markets don't look as excessive as in 2000 and 2008.

******

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. 

You are Terrible at Investing

By Sam Ro, Business Insider

Most people are just terrible at investing. We hear about this frequently.

One big problem is that investors often find themselves buying at highs and selling at lows, especially when volatility picks up and patience is tested.

"Amidst difficult financial times, emotional instincts often drive investors to take actions that make no rational sense but make perfect emotional sense," said BlackRock back in 2012. "Psychological factors such as fear often translate into poor timing of buys and sells."

Richard Bernstein of Richard Bernstein Advisors considers twenty years of historical data for this in a new research note.

"The performance of the typical investor over this time period is shockingly poor," wrote Bernstein. "The average investor has underperformed every category except Asian emerging market and Japanese equities. The average investor even underperformed cash (listed here as 3-month t-bills)! The average investor underperformed nearly every asset class. They could have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities. Thus, their underperformance suggests investors’ timing of asset allocation decisions must have been particularly poor, i.e., investors consistently bought assets that were overvalued and sold assets that were undervalued."

Bernstein's data is based on the buying and selling activity of mutual fund investors.

"They bought high and sold low," he added. "When chaos occurred, investors ran away."

******

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. 

The Stars Align for Real Estate Investment Trusts

By Tom Lydon, ETF Trends

As Treasury yields fall to a 14-month low, real estate investment trust-related exchange traded funds are outperforming the broader equities market and are attracting income-minded investors.

Year-to-date, the Vanguard REIT ETF (VNQ) has gained 17.2%.  In comparison, the S&P 500 Index is up 4.6% this year.

REIT ETFs also held up better than the broader markets over the past month.

“The outperformance compared to the S&P 500 index came from REIT sectors representing a broad range of U.S. economic activity, and was supported by good supply and demand balance in commercial real estate markets around the country,”  NAREIT President and CEO Steven A. Wechsler said in a CNBC article.

Supporting the REITs space as an attractive yield-generating option, benchmark 10-year Treasury yields have dipped to a 14-month low.

“Low interest rates are a positive for REITs because they really offer investors an attractive yield alternative relative to Treasurys or fixed income and you have a growth characteristic to that dividend yield that will go up and increase versus kind of a fixed return over a period of time,” Steve Sakwa of ISI Group said in the article.

For instance, VNQ has a 3.05% 12-month yield.

“I cannot remember a time when you had such a confluence of strong real estate fundamentals, relatively disciplined supply, good demand and accommodative capital markets,” Ross Smotrich of Barclays Capital said in the article.

******

The Vanguard REIT ETF (VNQ) is a component of the D2 Capital Management Multi-Asset Income Portfolio.  Current yield on the portfolio is 5.50% and year to date the portfolio is up 8.95% (as of 9 August 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.

 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. 

MLP Funds Reveal Long-Term Staying Power

By Tom Lydon, ETF Trends

Master limited partnerships and related exchange traded funds have provided impressive capital appreciation, along with attractive yields, in a long-term portfolio.

According to First Trust Portfolios, the Alerian MLP Index has generated a cumulative total return of 1,231.8%, or an average annualized return of 19.4%, from Dec. 31, 1999 through July 31, 2014. In comparison, the S&P 500 energy index generated a total return of 346.2%, or an annualized return of 10.8%.

MLPs are limited partnerships that are traded on a U.S. exchange and traditionally generate large cash flows that payout the majority to investors as dividends.

Unlike other energy sector stocks, MLPs primarily deal with distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.

While MLPs distribute cash and their underlying value can be influenced by interest rate risk, the cash flow distributed by MLPs is not fixed. As a type of toll road business model, these companies generate revenue based on demand for the energy products, and the U.S. economy is still heavily reliant on oil.

“If interest rates are rising due to an acceleration in economic activity, the demand for energy could also rise, and that could boost revenues,” according to Bob Carey, Chief Market Strategist at First Trust. “The opposite scenario could apply as well.”

Since 2000, yields on benchmark 10-year Treasuries finished higher in five calendar years. Meanwhile, the Alerian MLP Index posted positive returns in each of those five years – 2003, 2005, 2006, 2009 and 2013.

“With the U.S. moving towards energy independence, investors may want to consider having exposure to both the distribution and production sides of the energy sector, in our opinion,” Carey added.

******

The D2 Capital Management Multi-Asset Income Portfolio holds Global X MLP (MLPA) and Yorkville High Income (YYY) both of which include MLPs.  Current yield on the portfolio is 5.50% and year to date the portfolio is up 8.35% (as of 7 August 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.

 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. 

Many Americans are not prepared for retirement

By MarketWatch

Many U.S. households are not prepared or even planning for retirement, according to a new survey released by the Federal Reserve Thursday.

“When it comes to planning and saving for retirement, the survey results tell a somewhat cautionary tale,” the survey concluded.

Despite the shift from pension plans to 401k plans, which has placed responsibility on the individual to plan for his or her their retirement, only about a quarter of those surveyed appear to be actively doing so.

Here are some stark facts:

• Just under a third of non-retired U.S. households reported having no retirement savings or pension, including just under 20% of households aged 55 to 64.
• A quarter of the respondents said they had done no retirement planning at all.
• Of those who have given some thought to retirement planning and plan to retire at some point, 25% didn’t know how they will pay their expenses in retirement.

Even the concept of retirement seems to be losing its luster. Among those ages 55 to 64 who had not yet retired, more respondents said they expect to keep working “as long as possible” than households who said they plan to follow the traditional retirement model of working full time until a set date and then stopping working altogether.

******

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. 

Where to Seek Equity Income

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

During the 25 years prior to 2009, investment income was ridiculously easy to come by. Doing something as simple as buying a 3-month Treasury bill produced an average yield of nearly 5%. That all changed, however, in late 2008, when yields dropped.

Since then, investors looking for income have had to become more creative, and many have looked to equities for income.

But with the bull market now more than 5 years old, you may be wondering whether this approach still makes sense. My answer: Yes, assuming you can take the volatility and look beyond U.S.-focused funds.

To be sure, as I pointed out recently, I’d be wary of seeking income at all costs and ignoring valuation. In other words, asset class cross-dressing, or using stock portfolios to generate income while simultaneously building equity-like exposure in bond portfolios, is becoming risky in some scenarios.

However, there are segments of the dividend space that still look interesting: international and global dividend stocks. Here are two reasons why:

Stocks are still cheaper than bonds. While stocks are no longer cheap, they are cheaper than bonds. One way to measure this – particularly for investors focused on income – is to compare the yield available from a bond fund to the yield available from an equity alternative.

Since 1995, the dividend yield on a broad global benchmark (the MSCI World) has, on average, been 40% of the yield generated from an investment-grade bond index (Moody’s Aaa). Today the ratio is closer to 60%.

While this is below the record of 80% recorded two years ago, it still compares very favorably with the norm. In addition, equities have three additional advantages over bond alternatives: tax treatment favors dividends, stocks have the prospect for future capital gains and stocks can provide a better inflation hedge.

International dividend funds look cheaper than U.S. focused funds. While stocks offer better value than bonds, I would bring up exposure to international and global dividend funds rather than focus exclusively on U.S. dividend funds, which look more expensive. Reflecting this fact, dividend yields in the United States are low compared to the rest of the world. The S&P 500 yields roughly 1.9% versus 3.3% for other developed market stocks (MSCI World ex-USA Index) based on World ex-US and 2.70% for emerging market equities (MSCI Emerging Markets Index).

At less than 2%, the current U.S. dividend yield not only looks relatively low compared to the rest of the world, but it also looks low compared to its own history. And while the yield on U.S. equities is close to its long-term average, the yield on other developed market stocks is nearly 30% higher than the norm.

Still, there’s no getting around the fact that stocks are no longer cheap. Given current valuations, I would expect returns over the next five years to be substantially lower than the previous five.

In addition, investors need to remain mindful of risk. While stocks are cheaper than bonds, equities generally come with more volatility. Today the case for equities as a dividend source comes down to relative value: Stocks are cheaper than bonds while simultaneously providing some upside potential.

The bottom line: For investors looking for income, international and global dividend funds are still a reasonable choice, at least given the alternatives.

******

The D2 Capital Management Multi-Asset Income Portfolio is overweight in global and international dividend funds. Current yield on the portfolio is 5.46% and year to date the portfolio is up 9.27%.

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.

 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.