Dividend ETFs: Best Way To Capture A Recessionary Environment?

We now have 3 consecutive months of job losses, with March chiming in as the worst showing in 5 years. You'd think news like this would pound the market into submission. Instead, stocks have held onto the bulk of the 400+ point gains that came on April 1.

Does hope spring eternal? Or are we going to see yet another slide into the abyss?

Perhaps investors are beginning to see that the Fed/Congress/Treasury Department are committed to muting the effects of this recession. Or perhaps investors recognize that the little cited Dow Jones Transportation Average holds a key to the direction of the U.S. economy.

The iShares Dow Jones Transportation Fund (IYT) has gains for 1-day, 5-days, 3-months, 6-months and 1 year. What's more, if the sector performance facts don't encourage, you might want to check the fact that IYT has risen above its 200-day moving average. (Review my feature, "Wanna Know When Things Will Get Better?")

The chart is quite telling. Our stock markets first felt the wrath of the credit crisis pain and the need for Fed intervention back in August of 2007. That's when the iShares Dow Jones Transportation Fund (IYT) fell below its long-term trend. It now appears to have made a convincing move above its long-term trend... in the eye of the recessionary storm.

And that's NOT uncommon!  Stocks roughly average 23% in price appreciation from the mid-point of an actual recession. If the Dow Jones Transportation Fund (IYT) is the forward-looking indicator that it has been throughout history, the mid-point of the recession might actually be March 31. (Could it be that the near 400 point jump on April 1 was actually the start of something new?)

So let's say Bernanke's Fed is correct in its assessment. We may see nega-growth in Q1 and Q2, but the Fed expects recovery to begin occurring in the 2nd half. if that were to come to fruition, you'd have the March 31 mid-point. More importantly, you'd better begin preparing your BUY list. (Here again are my top sector ETFs for an economic recovery.)

Yet before anyone gets ahead of him or herself... is it possible that the "bad times" could get worse? They sure could. It's not like the Fed was ahead of the curve back in 2007... they responded late to the credit crunch and the trend towards recession.

And let's take the devil's advocate position a step further. If subprime/real estate could take down financials, and financials/real estate could take down the U.S. economy, couldn't the U.S. economy drag on developed and international markets that had been growing furiously? Maybe.

It follows that there needs to be a simple plan for balanced investors to manage the uncertainty; that is, you need to participate, but you may need to go a safer route to victory.

What's the route? Dividends. You have to think about the companies that have been properly "vetted" with more than 5 years of dividend growth alongside the highest yields.

In the U.S. right now, the 100 highest paying dividend stocks are collectively paying 4%+. That's better than CDs, money markets or most bond alternatives. If you think that the stock market will be higher or even flat over the next year, then the Dow Jones Select Dividend Index (DVY) may be for you. (Read more about DVY here.)

Keep in mind just how "battle-tested" the Dow Jones Select Dividend Index (DVY) is. These 100 companies pulled form the Dow Jones U.S. Total Market Index have increased their dividends in each of the last 5 years without cutting or decreasing a single payment. AND... their collective yield is greater than the rate of inflation.

There's another gem in the dividend jewelry box... but not that many investors have shown interest one way or the other. The investment? The SPDR S&P International Dividend ETF (DWX).

I have written about this relatively new offering at great length. (Here's my earlier review of DWX.)

Using the same logic as I have with DVY, it's impossible to ignore the 2% quarterly dividend income stream that the SPDR S&P International Dividend Fund (DWX) is producing. Foreign stocks could fizzle and go flat over the next year, and you'd still earn 8%. Or they might gain 20% off their current spot... and you'd pick up a healthy income stream to augment your total profit.

It's the exceptionally low volume than makes this a difficult investment for investors to get a better buy price or a better sell price. Yet that may improve with a bit of time and a bit of desire on the part of the investing public.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.