By Carla Pasternak, globaldividends.com
Sometimes it takes guts to be an income investor.
A few weeks ago, the S&P 500 closed above 1,400 for the first time since May 2008, before the Lehman Brothers collapse led off the financial crisis. In total, the index has gained a remarkable 11% so far this year (versus 0% for all of last year).
That’s good news, right?
Well, lower-yielding financials and tech stocks have led the move higher, while defensive high-yield utilities and master limited partnerships (MLPs) have lagged to the downside.
For instance, the Alerian MLP Index is up less than 1% year-to-date, and the utility sector, down more than 3%, is the worst-performing sector in the S&P 500.
Last year, these two groups outperformed as nervous investors sought safe dividend returns amid volatile markets. This year, however, the reverse started taking place. Financial and technology companies listed on the S&P 500 have risen about 17%.
Investors have taken more chances on increased signs of economic recovery in the U.S. and easing concerns about Europe’s debt crisis. As a result, some are investing their capital into riskier sectors, such as energy, that can benefit from economic growth.
As well, Treasury yields have spiked. Yields on 10-year Treasuries climbed to a recent high of 2.40% (before pulling back), from a record low of 1.67% in September.
The problem is the yields on many of my favorite high-yield sectors — like MLPs and municipal bonds — are loosely pegged to the 10-year Treasury yield. So as Treasury yields rose (meaning Treasury prices fell), prices for these securities fell in line with historical spreads.
In the past couple of weeks, yields have stabilized as the appetite for risk has fallen with the pullback in the market. Safe-haven MLPs and utilities in my High-Yield Investing portfolios surged back as investors started questioning their optimistic outlook on the overall economy.
We income investors can expect to see more volatility as sentiment improves and the recovery gains traction in the months ahead. Despite that, I am not ready to abandon my safe-haven MLPs, utilities, or preferred shares, which will remain core holdings in my income portfolios. These investments should hold their value over the long-term. I don’t anticipate that their steady and rising income stream will go out of style, whatever the economic environment.
And there’s one more reason to like stable income payers. Recent history says they could outperform.
You may have heard of the S&P High-Yield Dividend Aristocrats Index. This index consists of the highest-yielding stocks that have also increased dividends for at least 25 consecutive years. In others words, these stocks are some of the best known and most consistent dividend payers on the market.
The chart below shows the value of the S&P High-Yield Dividend Aristocrats Index divided by the value of the S&P 500. When the chart goes up, that means these dividend payers are outperforming the broader market. When the chart falls, it means the Dividend Aristocrats are underperforming…
While the S&P 500 has returned 11% this year, the Aristocrats have only returned roughly 3%. But that underperformance may not last much longer. As you can see, if the history of the past three years is any indicator, when prices of the Aristocrats compared to the broader market reach the levels seen now, these dividend payers make a comeback.
Of course, there’s no guarantee this will happen, but as I said earlier, I don’t anticipate that steady and rising income will go out of style, no matter the economic environment, making these stocks attractive anyway.
Good Investing!
Carla Pasternak’s Dividend Opportunities
