After the financial crisis of 2008, the Federal Reserve began its campaign to lower interest rates and provide liquidity to the markets and by extension to the economy. Whether it worked or not is for a different discussion. And whether it was smart or not is definitely not for me to decide.
What I can say is that the interest rate on the benchmark 10-year Treasury note (INDEXCBOE:TNX) has only offered a stingy 1.5% to 3.0% over the past six or so years. And money market interest rates now hover near the ¼ of 1% level. That is not much for entice savers to save and it certainly created a burden on people who needed to invest for income.
Part of the reason the stock market has been so strong over the past few years is that investors were forced to take more risk. Instead of a certificate of deposit (CD) they might have bought a blue-chip stock fund. Instead of corporate bonds, they might have given the stock of those same companies a try. Capital gains made up for the lack of income.
Of course, capital gains are not guaranteed and capital loss, when the market goes down, is always possible. However, there are stocks that offer reasonable dividend yields for income and are fundamentally or technically sound to limit losses during corrections.
Many of them come from three sectors – utilities, real estate investment trusts (REITs) and energy. Here they are illustrated using popular exchange-traded funds to represent the broad sectors. Look for stocks within each group that have similar trends and reasonable valuations and dividend yields. Just because a stock is in one of these groups does not automatically make it a good investment.
Dividend Yield in Utilities
Utilities used to be considered “widows and orphans” stocks because they were in predictable businesses and usually offered a steady dividend income. While these companies have diversified and theoretically created a higher risk profile for investors, their role as a source of steady income has not wavered. We see that today with many of them offering beefy yields greater than 4%.
The chart shows the Utilities Select Sector SPDR exchange-traded fund (NYSEARCA:XLU) in a solid rising trend since last November. It traded at all-time highs on Sept. 11 before backing down a bit.
Currently, the ETF offers a nice 3.1% dividend yield. And it has outperformed the Standard & Poor’s 500 all year, even with this week’s dip included.
Dividend Yield in REITs
The general category of REITs is quite diverse and some are much better than others. For example, those that focus on shopping malls are quite bearish thanks to the dominance of online retailing. They offer big dividend yields but we have to wonder if they are sustainable.
There are REITs in office buildings, hospitals and healthcare, housing, mortgages and hotels but unfortunately there are no ETFs that cover down to this sub-sector level.
The Vanguard REIT Index Fund (NYSEARCA:VNQ) is a diversified ETF but it only has a 20% weighting in retail.
This ETF have been flat all year with a slight upward bias since last year. This is actually a good condition because we can feel comfortable with its healthy 4.4% dividend yield. A good dividend can be erased with a declining stock price.
Dividend Yield in Energy
The energy sector did not fare well this year and while it is now starting to turn its trend around for the better it still offers a nice selection of good dividend payers. The Energy Select Sector SPDR (NYSEARCA:XLE) broke through its declining trendline this week and appears to have changed its trend. Because the ETF tracks stocks from integrated companies to driller to services it also hides some of the better dividend choices. It’s 2.5% dividend yield still beats the yield of the 10-year Treasury note but investors can do better with some of the major oil companies.
Look for stocks that are already showing some moxie with rising trends and strong inflows of money. Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and Occidental Petroleum Corporation (NYSE:OXY) fit these criteria.