{"id":24186,"date":"2011-09-30T09:00:39","date_gmt":"2011-09-30T13:00:39","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/09\/30\/how-have-european-dividend-achievers-held-up\/"},"modified":"2011-09-30T09:00:39","modified_gmt":"2011-09-30T13:00:39","slug":"how-have-european-dividend-achievers-held-up","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/09\/30\/how-have-european-dividend-achievers-held-up\/","title":{"rendered":"How Have European Dividend Achievers Held Up?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a><\/p>\n

Wise? Yes. But could he manage a stock portfolio?<\/p>\n<\/div>\n

As the wise King Solomon noted 3,000 years ago, \u201cto everything there is a season.\u201d\u00a0 Solomon had no knowledge of the stock market, of course, but his words can certainly be applied.<\/p>\n

There is a time to be invested in growth stocks\u2014such as the 1990s\u2014and a time to be invested in value\u2014such as the mid-2000s.\u00a0 And as recent experience has shown, there is a time to be out of the market altogether.<\/p>\n

So what \u201cseason\u201d might we be in today?\u00a0 If the last two months of volatility are any indication, a rough one.<\/p>\n

For the past year, I\u2019ve been advocating a high-dividend strategy, though this was more by process of elimination than anything else.\u00a0 Consider:<\/p>\n

    \n
  1. Bonds, by and large, do not yield enough to warrant serious consideration.\u00a0 Why risk capital loss for a puny 2.0% yield?\u00a0\u00a0 You\u2019d be better off keeping your funds liquid, in cash.\u00a0 But\u2026<\/li>\n
  2. Cash pays virtually zero.\u00a0 Even if inflation remains benign\u2014and the history of credit bubbles and busts suggest it will\u2014you\u2019re likely going to see a negative real return on your cash for the rest of this decade.<\/li>\n
  3. Stocks, though cheap, can get a lot cheaper.\u00a0\u00a0 While I am not a bear by any stretch, investors should have reasonable assumptions about market returns.\u00a0 Stocks may<\/em> go much higher from current levels, but given the ongoing fallout from the U.S. mortgage crisis and the never-ending sovereign debt drama coming out of Europe, it promises to be a rough ride.<\/li>\n
  4. Gold ($<\/span>GLD<\/a>)<\/strong> is exhibiting all of the signs of a bubble, and that bubble may already be in the process of deflating (see \u201cIs it Time to Call the Top?<\/a>\u201d).\u00a0 But even if gold enjoys another leg up, do you want to bet your financial future on an asset whose value is determined purely by the whims of speculators?\u00a0 Remember, gold has no intrinsic value.\u00a0 It has no earnings, and it pays no income.\u00a0 It\u2019s worth only what the market says<\/em> it\u2019s worth today, and the market can be a rather fickle mistress.<\/li>\n
  5. Oil and gas Master Limited Partnerships ($<\/span>AMJ<\/a>)<\/strong> and subsectors of the REIT universe that are less economically sensitive\u2014such as apartments , self-storage, or senior living facilities\u2014are priced reasonably and generally pay out a healthy amount of cash distributions.\u00a0 But you can\u2019t put your entire net worth into pipelines and REITs.\u00a0 Both are highly sensitive to interest rate movements and to changes in the tax code.\u00a0 As investors in the Canadian royalty trust sector learned a few years ago, changes in the tax code can absolutely wreck a portfolio.\u00a0 Most financial planners would not advocate putting more than 10-15% in each, and I am inclined to agree.<\/li>\n<\/ol>\n

    So, for lack of anywhere else to go, I come back to high-dividend equities.\u00a0 The case here is pretty straightforward.\u00a0 Stocks that pay a dividend guarantee you at least a modest realized return, even if the share price goes nowhere.\u00a0 And most importantly, healthy companies raise<\/em> their dividends over time, and not always by a trivial amount.\u00a0 Microsoft ($<\/span>MSFT<\/a>)<\/strong> , for example, raised its dividend by a full 25% this quarter.<\/p>\n

    The other case for dividends is more philosophical.\u00a0 When a company raises its dividend, it sends a very important message that management is confident about the company\u2019s future and that it takes its obligation to reward shareholders seriously.\u00a0\u00a0 And if a company is able to raise its dividend during crisis years like 2008\u2014when plenty of companies had to slash <\/em>their dividends to preserve cash\u2014you know they can survive Armageddon.<\/p>\n

    With that said, let\u2019s take a look at how the PowerShares International Dividend Achiever ETF (NYSE: $<\/span>PID<\/a>)<\/strong> held up during the recent spate of volatility emanating from Europe.\u00a0 This ETF is composed of non-U.S. (mostly European) companies that have raised their dividend for a minimum of five consecutive years\u2014years that include the annus horribilis<\/em> of 2008.\u00a0 For comparative purposes, I graphed Dividend Achiever ETF against the larger iShares MSCI EAFE ETF (NYSE: $<\/span>EFA<\/a>)<\/strong>, which is also primarily composed of European stocks.<\/p>\n

    \"\"<\/a><\/p>\n

    Figure 1: PID vs. EFA<\/p>\n<\/div>\n

    Not shockingly, the Dividend Achiever ETF took less of a beating over the past three months.\u00a0 It did, however, still manage to lose 10%.<\/p>\n

    What are we as investors to take away from this?<\/p>\n

    To start, during a short-term panic or a liquidity crisis, all<\/em> stocks fall.\u00a0 So, if you need access to your funds in the near future the same rules as always apply: don\u2019t put funds into the market that you need in the immediate future for basic necessities.\u00a0 And if you believe that stocks in general are wildly overpriced or at particular risk of a major correction (or if there are simply better investment options out there), then by all means, stay out.<\/p>\n

    But if you believe, as I do, that the market will move mostly sideways over the next several years (with random and hard-to-predict mini-booms and mini-busts scattered throughout), then a dividend growth strategy is the way to go.\u00a0 Investors in or near retirement can use the dividends to meet current living expenses.\u00a0 And investors investing for long-term growth can reinvest the dividend and put the magic of compounding to work.<\/p>\n

    In an environment in which returns can be hard to come by, take the dividend check in the mail.<\/p>\n","protected":false},"excerpt":{"rendered":"

    By The Sizemore Letter Wise? Yes. But could he manage a stock portfolio? As the wise King Solomon noted 3,000 years ago, \u201cto everything there is a season.\u201d\u00a0 Solomon had no knowledge of the stock market, of course, but his words can certainly be applied. There is a time to be invested in growth stocks\u2014such … <\/p>\n

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