For months, I’ve expressed optimism on China’s slow-n-steady approach to providing measured stimulus to its economy. Rather than drastically cut interest rates or entertain unconventional bond-buying measures like their central bank counterparts in the developed world, China’s leadership allowed its slowdown to play itself out.
The result? China’s manufacturing gauge (PMI) indicated that the segment expanded for the first time in three months. Additionally, we have seen several months of improvements in manufacturing activity, suggesting that contraction has run its course.
In “Three ETF Categories That Are Not Afraid Of The Big Bad Cliff,” I highlighted three investment areas to target, in spite of the well-documented fiscal headwinds in the United States. Granted, the negotiations in a lame-duck Congress could get hairy. Yet the fear and loathing for elected officials should also present dip-buying opportunities for owning Asian Neighbor ETFs; they are benefiting immensely from stabilization in the world’s 2nd largest economy.
That said, sensible diversification requires other asset groupings that are less tied to global economic cycles. One can use the same dips to pursue a dividend income stream from high yielding assets. Not just any high yielder, but those individual positions or funds with a “5/5 plan.”
In essence, a 5/5 plan is a¬†valuation metric that many investment advisers use to find a potential portfolio fit. We often look for investments with a 5% dividend yield and a 5% dividend growth rate.
Unfortunately, this type of asset is extremely difficult to find in the largest corporations worldwide. Smaller entities like individual pipeline partnerships and individual real estate investment trusts can get there. Investors can consider things like Boardwalk Pipeline Partners (BWP) and Health Care REIT (HCN).
Yet the volatility in the individual securities may make some investors skittish. What’s more, while I have been a long-time fan of exchange-traded vehicles dedicated to the pipeline partnership arena, there are a number of drawbacks that should give one pause for concern.
That brings us back to dividend stocks of the largest companies in the world.¬†If there are precious few with the ability to generate the requisite 5%¬†yield and a 5% dividend growth rate, why am I still taking about it? For one thing, a continuation of the market pullback could open up a number of opportunities. Secondly, there is a Sector ETF that is currently approaching the desired criteria.
The iShares Global Telecom Fund (IXP) has had modest success in 2012; downside pressure is due in large part to foreign exposure, particularly in Spain. Yet the dividend yield is roughly 4.75% and its constituents have the capacity to raise their dividends annually. Moreover, with a three-year beta of a mere 0.66, the volatility is a fraction of prominent benchmarks like the S&P 500 or the MSCI All-World Index.
The iShares Global Telecom Fund (IXP) has shown¬†relative weakness since the S&P 500 hit multi-year highs back on September 14. In addition, IXP did not find support at its 50-day moving average and is approximately -5% below its recent peak.
Nevertheless, a pullback to the 200-day trendline may prove to be an ideal entry point for dividend investors. Indeed, the income can be counted on with less volatility than world stock benchmarks and at a price discount between 7% and 10%.