Getting Defensive with Dividends
03/31/2009 11:34 am EST
Carlton Delfeld, editor of Chartwell Global ETF Report, says the recent rally will be short-lived and he likes an ETF that covers global companies that raise dividends.
I would recommend shifting your portfolio to a more defensive posture since in my view this rally will be short-lived.
The rebound in US markets reminds me of some of the surges in Japan during its lost decade. The Nikkei closed at 12,190 on March 19, 2001 and went on to rally all the way to 14,529 by May 7th for a nice 20% advance. But by July 11, 2001, four months later, the Nikkei was back to 12,005 as the stock market pulled a big U-turn. It took three more years for the market to climb back to 14,500.
Government cannot prevent nature from taking its course. The economic backdrop highlighted in [the recent] Federal Reserve press statement makes me feel that much more confident that corporate earnings are going to slide again this year to $40 for Standard & Poor's 500 operating earnings per share, from nearly $50 in 2008.
A "black hole" in the US commercial property market is set to put further pressure on troubled banks. Leon Black, founder of Apollo Management, said the extra costs of cleaning up the US banking industry could total as much as $2,000 billion and the woes of commercial property had not yet been reflected fully on bank balance sheets.
In addition, a lot of risk capital has been taken off the table. Back in 2008, the global hedge fund industry had some $2,600bn of assets, according to Hedge Fund Intelligence, a research group. Hedge fund gurus gathered [recently] in Dublin, though, reckoned that sum would be near $1,000bn by the end of this year. Just as important and even more dramatic is the virtual disappearance of banks' proprietary trading desks.
You may wish to take a close look at PowerShares International Dividend Achievers ETF (NYSEArca: PID), which is a basket of offshore companies traded on US exchanges showing five years of dividend growth.
This ETF offers investors the comfort that these international companies are adhering to US reporting standards, but more importantly, the companies have increased annual dividends for four straight years.
To quote PID's prospectus, "To become eligible for inclusion in the International Dividend Achievers Index a stock must be incorporated outside the United States, trade on the NYSE, NASDAQ or AMEX, and have increased its annual regular dividend payments for the last five or more consecutive years."
[This is a good choice for] investors looking for high-quality international plays with some income protection. The risk factor is medium, and I suggest an 8% trailing stop loss. (It closed below $9 Monday—Editor.)