Diversify Your Dividends: ETF Alternatives for Hot Stock Picks

by Will Ashworth | August 12, 2013 2:35 pm

All good things must come to an end. Last week, The Dow Jones Industrial Average‘s six-week winning streak was derailed, while the S&P 500 also declined.

Technical indicators suggest the S&P 500 is having a hard time staying above the 1700 level, which indicates there could be more trouble ahead.

Of course, that could make it the perfect time to bundle hot stock to weather the storm. With that in mind, here are exchange-traded fund alternatives for last week’s stock recommendations:

Weight Watchers International

Weight Watchers International’s (WTW[1]) recent 19% post-earnings slide had Tom Taulli examining the pros and cons[2] of owning its stock. Because of its strong brand and very cheap valuation, Taulli believes the company maintains a strong long-term buy. If you think he could be right but want to protect yourself, an ETF might be the way to go.

Good news: WTW is the fifth-largest holding in the Market Vectors Wide Moat ETF (MOAT[3]), which seeks to replicate the performance of the Morningstar Wide Moat Focus Index — a collection of 20 equal-weighted stocks that are attractively priced and possess a sustainable competitive advantage.

WTW is the sole consumer discretionary stock in the portfolio and, at a reasonable expense ratio of 0.49%, you’re buying an excellent group of companies.

Dividend Stocks

The Dividend Growth Investor discussed the art of dividend investing[4] last week as well. While there are all sorts of financial metrics one can use to evaluate dividend stocks, success or failure usually comes down to experience — the reason I’m always reminding novice investors the only way to learn is by making mistakes.

Still, one of the best ways to achieve success with dividend investing is to find companies whose dividends and earnings are steadily increasing. While the Dividend Growth Investor mentions a few good possibilities, there is a perfect ETF alternative.

The Vanguard Dividend Appreciation ETF (VIG[5]) is a group of 146 stocks have a record of growing their dividends year-over-year. Of the five stocks mentioned by the Dividend Growth Investor, only one is held by VIG. Not to worry … there are a lot of good companies in the top 10 holdings and beyond.

Since its inception in April 2006, the fund’s annual total return has been slightly better than the S&P 500. No wonder Morningstar gives it five stars. And on its fees alone — annual expense ratio of only 0.10% — it’s a winner.

Shipping Stocks

It’s been years since shipping stocks were in their glory. Bloomberg suggests that private equity investors like Wilber Ross are buying into the shipping industry[6] to take advantage of low prices. Since 2008, the 145 shipping companies that are part of U.S. indexes have lost 60% of their value.

Tim Melvin believes the overcapacity that has plagued the industry[7] is slowly being worked off, though. Two companies on Melvin’s radar: Tsakos Energy Navigation (TNP[8]) and International Shipholding (ISH[9]). Both trade far below tangible book value.

But if you’re going to go “cigar butt” investing, you are wise to do so with a diversified group of holdings rather than one or two possibilities. The Guggenheim Shipping ETF (SEA[10]) is a group of 25 shipping stocks including TNP — one of Melvin’s recommendations — at a weighting of 1.7%. Its fees aren’t cheap at 0.65% annually, but it’s your best course of action if you feel shipping stocks are worth a second look.

GSV Capital

Last week, InvestorPlace Editor Jeff Reeves discussed GSV Capital (GSVC[11]) — a closed-end fund[12] that invests in non-public tech companies like Twitter and Dropbox. Its most famous investment is Facebook (FB[13]), which it invested in prior to the May 2012 IPO. In July, GSVC sold half its position in the social media giant, so Facebook now represents less than 2% of its overall portfolio.

With Twitter accounting for 15% of its investment portfolio and an IPO in the distant future, GSVC should continue experiencing significant capital appreciation. Just because GSVC has more upside potential, though, doesn’t mean you shouldn’t consider an ETF alternative to mitigate the risk.

GSVC is a micro-cap stock with a great deal of volatility. To protect yourself from the specific company risk associated with investing in just one stock, buy the PowerShares Zacks Micro Cap Portfolio (PZI[14]). It’s a group of 400 stocks including GSVC, its second-largest holding.

Keep in mind that its annual expense ratio is 0.91% … so only invest in PZI if you want exposure to a lot of micro caps.

Debt Collectors

In a recent article[15], Lawrence Meyers once again expressed his love for debt collectors like Portfolio Recovery Associates (PRAA[16]) and Encore Capital Group (ECPG[17]). He thinks they are fantastic businesses that generate lots of cash flow, and is putting his money where his mouth is.

Still, while both of these businesses have cheap money available at the moment, it won’t always be that way. Meyers knows this; when the worm turns and interest rates rise, he’ll be long gone.

To avoid having to time this, you could instead look at the PowerShares S&P SmallCap Financials Portfolio (PSCF[18]), which represents financial services companies held in the S&P SmallCap 600. It has 112 stocks, with PRAA as a top 10 holding and ECPG exposure as well.

The portfolio gives you a good mixture of banking, investment services, insurance and real estate finance stocks, but all of the small-cap variety and for a nice annual expense ratio of 0.29%.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Endnotes:
  1. WTW: http://studio-5.financialcontent.com/investplace/quote?Symbol=WTW
  2. pros and cons: http://investorplace.com/2013/08/should-i-buy-shares-of-weight-watchers-3-pros-3-cons/
  3. MOAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MOAT
  4. the art of dividend investing: http://investorplace.com/2013/08/dividend-investing-science-versus-intuition-ko-mcd-yum-pm-intc/view-all/
  5. VIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIG
  6. buying into the shipping industry: http://www.bloomberg.com/news/2012-09-12/billionaire-ross-says-shipping-rout-attracts-more-private-equity.html
  7. overcapacity that has plagued the industry: http://investorplace.com/2013/08/2-shipping-stocks-ready-to-sail-higher/
  8. TNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TNP
  9. ISH: http://studio-5.financialcontent.com/investplace/quote?Symbol=ISH
  10. SEA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SEA
  11. GSVC: http://studio-5.financialcontent.com/investplace/quote?Symbol=GSVC
  12. closed-end fund: http://slant.investorplace.com/2013/08/facebook-stock-gsv-capital-gsvc-fb/
  13. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  14. PZI: http://studio-5.financialcontent.com/investplace/quote?Symbol=PZI
  15. In a recent article: http://investorplace.com/2013/08/why-debt-collection-is-such-a-great-business/
  16. PRAA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRAA
  17. ECPG: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECPG
  18. PSCF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSCF

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