With the recent market action presenting the beginning stages of a modest correction, now is a perfect time to start building your dividend equity buy list and to begin to set your price targets. It remains to be seen whether this slight pullback will morph into something greater, however, planning for future volatility will enhance your chances for establishing new equity positions at attractive levels. Proactive income investors that have reduced equity exposure over the last several months or even investors that missed the 2013 rally should be diligently planning their next moves.
The first step in assembling your watch list is to scan the areas of your portfolio that you may not have exposure to or are underweight. These sectors can include: preferred stocks, REITs, common stocks, international stocks, MLPs, and other dividend-paying securities. Once you have clearly outlined your needs, you want to scan the list of available fund offerings to determine the ETFs that fit into those categories.
For broad-based dividend paying equities, the funds on my watch list include:
iShares Select Dividend ETF (DVY)
iShares High Dividend ETF (HDV)
First Trust NASDAQ Technology Dividend Index (TDIV)
iShares MSCI US Minimum Volatility Index (USMV)
All four of these exchange-traded funds represent specific segments of the market that I feel offer excellent opportunities for long-term capital appreciation. In addition, they will provide your portfolio with healthy quarterly dividend streams and balance when paired with quality fixed income.
DVY has just pulled back to its 50-day moving average, which is the healthiest decline we have seen all year long. It will be important to watch how this ETF reacts at this level in order to determine your entry point. A correction from the high all the way down to the 200-day moving average would represent a pullback of approximately 12%, however, it remains to be seen if DVY will extend that far. You may be better served by starting with a small position and averaging into it on any additional weakness to increase your allocation size.
For alternative income sources, the funds on my watch list include:
iShares US Preferred Stock ETF (PFF)
First Trust Multi-Asset Dividend Income Fund (MDIV)
Guggenheim Multi-Asset Income Fund (CVY)
Both MDIV and CVY represent diversified portfolios made up of common stocks, REITs, preferred stocks, and MLPs. The advantage of these ETFs is that you get instant exposure to all of these sectors with just a single position. Typically these funds will have higher income streams than traditional dividend-paying stock funds because of their allocations to these high yield sectors. The recent volatility in REITs and preferred stocks may be presenting an opportunity for new money into these ETFs if you have missed the rally over the last six months.
Specifically, the iShares US Preferred Stock ETF has recently plowed through its 50-day moving average and appears ready to test the 200-day moving average for the first time in over a year. This income sector is becoming increasingly attractive as it works off some of its overbought momentum.
No matter what asset class or sector you are looking for exposure to, there is probably an ETF that can fulfill your needs. As a proactive investment adviser, I am looking at this pullback as an opportunity to start new ETF positions or add to existing holdings for my income clients with available cash.
Right now, it is too early to know how deep this correction will be, which is why I recommend starting new positions quite small with the strategy of averaging into them over time. No one will be able to perfectly time the bottom, however, you can initiate starter positions that will allow you to increase your allocation and lower your cost if the market continues lower. Conversely, if the market takes off, you at least have some exposure to ride the tide higher.
Read more from David Fabian, Managing Partner at Fabian Capital Management:
Do Income Investors Have Anywhere To Hide?
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Don't Let Conviction Destroy Your Portfolio