STAPLES, HEALTHCARE, AND TELECOM ETFS HIT NEW HIGHS -- ALL THREE ARE DIVIDEND PAYING GROUPS WHICH HAVE STRONG APPEAL WITH BOND YIELDS AT RECORD LOWS -- THEY'RE ALSO DEFENIVE IN NATURE WHICH MAKE THEM ATTRACTIVE CHOICES FOR CONSERVATIVE STOCK INVESTORS
DEFENSIVE ETFS HIT NEW HIGHS... The stock market's short term outlook has improved since last Friday's latest Euro bailout. What has caught my attention, however, is that the strongest chart patterns still belong to defensive stock groups. Chart 1, for example, shows a new high by the Consumer Staples SPDR (XLP). The XLP usually shows market leadership during a market correction, not a market upturn. Chart 2 shows the Health Care SPDR (XLV) doing the same thing. Chart 3 shows Telecom iShares (IYZ) breaking through its spring high in decisive fashion. Telecom stocks have been especially strong since the start of June. Those three stock groups have at least two things in common. One is that they're defensive in nature. The other is they pay relatively high dividends. I suspect it's the latter reason that accounts for their continuing popularity. That view is strengthened by the fact that DJ Dividend iShares (DVY) are also close to a new high (Chart 4). Dividend paying stocks compete with Treasuries for yield. With bond yields so low, dividend stocks are a stronger alternative. History shows that dividend stocks do better when bond yields fall.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
FALLING BOND YIELD BOOSTS DIVIDEND STOCKS ... Chart 5 compares the 10-Year T-Note Yield (green line) to a ratio of the Dividend iShares divided by the S&P 500. The red ratio shows us the "relative" performance of dividend paying stocks. Notice the tendency of the two lines to trend in opposite directions. A plunge in bond yields during the first nine months of 2011 coincided with a sharp upturn in the relative performance of Dividend iShares. [A lot of their stronger performance resulted from a correction in the S&P 500]. During this first quarter, an upturn in bond yields pushed dividend shares lower. Falling bond yields since mid-March, however, coincided with a sharp rebound in dividend stocks. With bond yields so low, investors are being forced to seek higher yield elsewhere. Dividend paying stocks are one alternative. They also offer investors a more conservative way to move some money into safer parts of the stock market.
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Chart 5
DIVIDEND SHARES ARE ALSO DEFENSIVE ... Another appeal of dividend shares is that they're generally defensive in nature. They offer capital appreciation when stocks are rising, although not as much as the S&P 500. But they also offer downside protection when the S&P 500 weakens. That's a nice combination for conservative investors. Chart 6 compares the S&P 500 (gray area) to a ratio of the DVY divided by the S&P 500 (red line) since the start of 2010. There again, the two lines usually trend in opposite directions. That was especially true during the two S&P 500 corrections during the springs of 2010 and 2011. Dividend stocks did much better both times. They did the same during this spring's market correction. Upturns in the S&P 500 cause dividend shares to underperform. That happened during the second half of 2010 and the first quarter of 2012. That's because the four biggest categories in the DVY are healthcare, consumer goods, telecom, and utilities -- all of which are defensive in nature. They zig when the market zags. That makes them an attractive choice with record low bond yields and an uncertain stock market climate.
