Don’t Run Scared, Just Reduce Risk
by Jason Jenkins, Investment U Research
Thursday, October 13, 2011
Now is not the time to follow the crowd.
It’s times like these when strategy wins out over mentality. We’ve seen what the herd mentality can do to overall markets historically and over the past few years in particular.
The herd tells you that every piece of positive information out of Germany and France should cause a rally. And then a day or two later, Greece still doesn’t hit its austerity measures and the Slovakian government votes not to expand a 440-billion euro bailout fund, throwing a monkey wrench into the EU’s crusade to contain its sovereign debt crisis.
Everyone yells, “Sell!” and money is funneled into Treasuries with a return of less than two percent. Save yourself the heart attack of this rollercoaster ride. This is a time when trusted strategies can deliver peace of mind.
Reducing Investment Risk With Dividends
No one has a clear view of how this market is going to work out so drastic reallocation every other day isn’t going to work. What you should be looking to do now is reduce risk – gaining the best possible return for the lowest amount of risk.
If you are focusing on large, dividend-paying multinational corporations, you can get the best of both worlds. As I wrote last week, many multinational stocks are benefiting from record-level profit margins, lower cost of debt, and long-term global demand from emerging economies.
For example, take a look at these three dividend bellwethers:
AT&T is still a leading telecom and wireless company that has raised dividends for 27 straight years no matter what the economic climate. Its current yield is near six percent. That’s about double the yield on 30-year Treasuries and three times that of the S&P 500.
Nestle has raised dividends for 15 consecutive years. It has a current yield of 3.8 percent. Also, expect Nestle’s earnings to get a substantial boost by the Swiss National Bank’s policies to make the Swiss franc competitive against the euro and other international currencies.
PepsiCo is definitely taking advantage of global demand from emerging economies racking up annual revenue growth of about 24 percent in those same markets. Pepsi has raised dividends 39 years in a row and its stock yields 3.4 percent.
More Diversified Dividend Options
We’ve also written before about exchange traded funds, which offer a little more diversity in this space. For example, keep an eye on PowerShares Dividend Achievers Portfolio (NYSE: PFM). This ETF is based on the Broad Dividend Achiever Index (Index). The Index is designed to identify a diversified group of dividend paying companies that have increased their annual dividend for 10 or more consecutive years.
Also, the Vanguard High Dividend Yield ETF (NYSE: VYM) attempts to track the performance of the FTSE High Dividend Yield Index. This measures the investment return of common stocks of companies characterized by high dividend yields over a period of time.
Remember, dividend-paying stocks are not going to promise to set the world on fire with returns, but the right companies or ETF can deliver stability in a rocky landscape.
Good investing,
Jason Jenkins
Article by Investment U