Stock Markets Looking Top Heavy? Consider Dividend Reinvestment Alternatives

Stock Markets Looking Top Heavy? Consider Dividend Reinvestment Alternatives

As we head into the final weeks of trading for 2014, it is a good idea to assess where stock markets are headed in terms of the dominant trends. The latest bull run has been undeniable, but when stocks are trading at consistent records, there is always the risk for a macro turnaround or at least a period of profit-taking that can leave existing positions underwater.

In fact, it doesn’t take much to think back to the last time this occurred. In terms of market volatility, the September-October period was one of the most volatile of the year. US stock benchmarks came off sharply from their highs and this ignited a wave of panic selling that drove the SPDR S&P 500 Trust ETF (NYSE: SPY) roughly 9.9% lower during that period. The ripple effects in moves like these can be massive and extend to seemingly unrelated asset classes. So it makes sense for investors to think about which sectors are best positioned to weather any further market volatility as we head into next year.

(Chart Source: CornerTrader)

Unfortunately, the answer does not appear to be found in assets like gold and silver: “In many cases, investors look to the safe haven attraction of precious metals in these types of environments,” said Jonathan Millet, stocks analyst at BitCoin News. “But there is clear evidence that the historical safe haven correlation in precious metals has started to break down.” Specifically, this year’s performance in the SPDR Gold Trust ETF (NYSE: GLD) has been characterized by a 17.5% decline from the highs seen in mid-March, so it is very difficult to argue that precious metals have found any real benefit from stock volatility or the seemingly constant geopolitical tensions in Russia and the Middle East.

(Chart Source: CornerTrader)

The GLD ETF can be thought of as a microcosm defining the broader trends in gold trends and the daily chart above spells trouble for those looking to gain market protection using precious metals assets. In short, this means investors should be looking for exposure in viable alternatives.

Dividend Stocks Create Viable Alternative

Many of these recent market trends were helped forward by profit-taking from long-term investors looking to capitalize on the post-2009 rebound in stocks. Those that held their positions in equities during this period were certainly rewarded for their patience. But with stocks trading at elevated levels and a macro climate that is showing signs of potential change, investors will need to look for asset types that can stand up to the pressure if valuation levels become more volatile in coming quarters.

Here, there are clear arguments showing that the smartest alternative can be found in dividend stocks, as this section of the market has shown the tendency to encounter far less volatility during periods of uncertainty. Not all dividend strategies approach the market in the same way but there are some attractive opportunities in high-yielding stocks that should be considered by investors that might be looking to take some profits on prior positions in benchmark assets like SPY.

Daily Chart: Citigroup C-Tracks ETN Miller/Howard Strategic Dividend Reinvestor

For those comparing some of the available options, one of the latest instruments in this category can be found in the Citigroup C-Tracks ETN Miller/Howard Strategic Dividend Reinvestor (NYSEARCA:DIVC), which is offered by CitiGroup and is currently the best way for investors to gain exposure to the Miller/Howard Strategic Dividend Index.

(Chart Source: NASDAQ)

This index tracks 30 equally weighted stocks with a market cap of at least $1 billion and no record of dividend cuts over the previous year. Overall, the portfolio strategy is one that centers most of its focus on current dividend yield and expected future growth. The selections are then separated by criteria that compares return on invested capital metrics relative to the stock’s P/E ratio. All are factors that should be considered by those looking to safeguard active market positions while stock valuations are still trading at elevated levels.

Individual stock components are taken from a wide variety of sectors (with the exception of REITS and master limited partnerships). Positions in DIVC come with a dividend yield of 3.1%, a number that is looking very attractive given that the yield for the broader S&P 500 is still seen below 2%. Key names within the ETN include Exxon Mobil (XOM), Ford Motor (F), and Valero Energy (VLO), so one of the most interesting aspects seen in the portfolio stock selection is its focus on the energy sector. Energy markets have seen massive declines in recent months, and bullish rebounds here are starting to look more and more imminent. A positive outcome in these areas would be clearly bullish for DIVC. But in addition to these positive prospects for growth, it should be remembered that these names represent some of the stable dividend payers in the market.

The Longer-Term Outlook

Over time, positions in dividend stocks tend to be much more stable because investors generally adopt ‘buy and hold’ strategies that create more sustainable trends when compared to daytrading methods that look to profit from shorter-term price fluctuations. The Citigroup C-Tracks ETN Miller/Howard Strategic Dividend Reinvestor accounts for cash dividend payouts by notionally reinvesting those payouts back into the index. This is a great way for investors to maximize exposure in these areas without adding new capital to the investment.

DIVC is still a relatively new offering, and for those looking for added dividend exposure there is added valuation advantage from a price-to-earnings perspective (the current P/E ratio is holding near 15). This means there is clear potential for further gains once trading volumes start to increase. For longer-term investors with a more conservative outlook, dividend reinvestment strategies are highly favorable and should continue to act as a protective safeguard if we start to see the broader market drop off from its record highs. DIVC offers solidly diversified dividend exposure at cheap valuations, making it a potential standout as we head into next year.

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