David Fabian: In the first article of my three-part series on 2014 ETF income investing, I touched on the opportunities and pitfalls for fixed-income in the New Year. I generally divide my strategic income portfolio into three sleeves that include bonds, dividend paying equities, and alternative investments. This piece will focus exclusively on my outlook for both domestic and international dividend paying stocks over the next 12 months.
The search for yield would not be complete without including dividend paying equities in a well-balanced income portfolio. I have always regarded stalwart dividend stocks as an opportunity for both capital appreciation and inflation protection. Historically, they have made an excellent companion to a fixed-income allocation as a way to balance volatility and enhance total return.
If 2013 taught us anything, it’s that stocks can indefinitely climb a wall of worry despite a variety of factors that threaten to throw the economy off track. The SPDR S&P 500 ETF (NYSEARCA:SPY) notched a total return of more than 30% last year and has now been above its 200-day average for more than 13 straight months. This resilience has brought on a level of complacency that may be tested in 2014 as the natural ebbs and flows of the market come into play. However, the one thing that I will always stress is that you should let the price action dictate your portfolio game plan.
Monitoring stocks in relation to their long-term moving averages is an easy way to check on the progress of the market and can serve as a guidepost for making changes to your equity holdings. Right now we are still in a long and intermediate term up-trend which is why I am recommending that you hold your equity positions and look to add on any short-term weakness.
If we saw SPY fall convincingly below its 200-day moving average, I would begin to lighten up on equity exposure as a function of risk management. This would allow me to shift money back to cash, fixed-income, or alternative investments in order to survey the field and re-deploy capital when the timing is right.
One of the areas I am specifically targeting for additional exposure in 2014 isinternational dividend paying stocks. A bright spot for international stocks is that they haven’t had the same huge move that domestic equities experienced in 2013, which makes them more attractive from a valuation standpoint. In addition, many foreign dividend-paying equities are offering much larger yields than their domestic counterparts. Both developed and emerging market countries underperformed the U.S. in 2013 and I believe that we could see a reversal of that trend this year.