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Buy 5 Best Dividend Mutual Funds For Enticing Returns

A Fed rate hike seems off the table in June as companies scaled back hiring in April. Not only was the increase in hiring the slowest since September, the labor force participation rate also declined, which could mean that people found it a bit more difficult to get jobs. The Fed is already cautious about raising rates in the near term as the U.S. inflation rate in the first quarter came in way below its desired target. Possibility of a rate hike receding in the near term makes investment in dividend-paying mutual funds more alluring. As economic growth stalled in the first three months of the year, with a slew of data from consumer spending to manufacturing in April neither painting a solid picture, it will be prudent to stay invested in such funds. Dividend-paying funds generally remain unperturbed by the vagaries of the economy. Rate Hike Improbable in June The latest report on weak job creations in April made the Fed cautious about raising rates sooner. The U.S. economy created a total of 160,000 jobs in April, significantly lower than the consensus estimate of 203,000. The tally was also considerably lower than March’s downwardly revised job number of 208,000. The unemployment rate in April was in line with March’s rate of 5%. However, more people dropped out of the labor force. The participation rate fell to 62.8%, declining for the first time in 7 months as 300,000 individuals quit jobs or gave up job searches. An impending threat with regard to job additions continues to haunt the economy. Companies’ profits are getting squeezed, so they could look to stabilize their labor costs by reducing hiring further. Fed officials were already harboring mixed feelings about raising rates in June. The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, increased 0.1% in the first quarter, below the consensus estimate of a 0.2% gain. This is also way below the Fed’s desired target level of 2%. Economic Data Disappointing As businesses and consumers turned cautious with their spending, the U.S. economy posted its weakest quarterly growth in two years between January and March. The U.S. economy expanded at an annualized rate of 0.5% in the first quarter, way below last quarter’s growth rate of 1.4%, according to the Commerce Department. Into the second quarter, things aren’t looking bright either. Consumer spending that weakened in the first quarter may have further experienced a slowdown in April. The Reuters/University of Michigan consumer sentiment index declined to 89.0 in April from 91.0 in March. Compared with year-ago levels, the index plummeted 7.2%. The battered U.S. manufacturing sector did stabilize a bit in April, but is yet to regain full health. The ISM manufacturing index dropped to 50.8 in April from 51.8 in March. Top 5 Dividend Mutual Funds to Invest In Diminishing chances of a rate hike soon, calls for investing in dividend-paying mutual funds. Dividend payers suffer when rates are rising as investors focus on safe bonds. Add to this a flurry of weak economic reports and we all know why investing in such top-notch dividend funds won’t be a bad proposition. Companies that pay dividends persistently put a ceiling on economic uncertainty. These companies have steady cash flows and are mostly financially stable and mature companies, which help their stock prices to increase gradually over a period of time. Moreover, dividends are less taxed as compared to interest income, help your portfolio to grow at a compounded rate and offer protection from earnings manipulation. We have selected five such mutual funds that offer a promising year-to-date dividend yield, have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear. Vanguard Dividend Growth Fund Investor (MUTF: VDIGX ) invests primarily in stocks that tend to offer current dividends. VDIGX’s year-to-date dividend yield is 1.88%. VDIGX’s 3-year and 5-year annualized returns are 10.5% and 11.9%, respectively. The annual expense ratio of 0.33% is lower than the category average of 1.01%. VDIGX has a Zacks Mutual Fund Rank #2. Fidelity Strategic Dividend & Income Fund (MUTF: FSDIX ) invests the fund’s assets with a focus on equity securities that pay current dividends. FSDIX’s year-to-date dividend yield is 2.71%. FSDIX’s 3-year and 5-year annualized returns are 7.1% and 9.3%, respectively. The annual expense ratio of 0.75% is lower than the category average of 0.82%. FSDIX has a Zacks Mutual Fund Rank #1. Vanguard Dividend Appreciation Index Fund Investor (MUTF: VDAIX ) seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. VDAIX’s year-to-date dividend yield is 1.95%. VDAIX’s 3-year and 5-year annualized returns are 8.7% and 9.9%, respectively. The annual expense ratio of 0.19% is lower than the category average of 1.01%. VDAIX has a Zacks Mutual Fund Rank #2. Fidelity Dividend Growth Fund (MUTF: FDGFX ) invests primarily in companies that pay dividends or that Fidelity Management & Research Company believes that these companies have the potential to pay dividends in the future. FDGFX’s year-to-date dividend yield is 1.38%. FDGFX’s 3-year and 5-year annualized returns are 8.9% and 8.3%, respectively. The annual expense ratio of 0.68% is lower than the category average of 1.01%. FDGFX has a Zacks Mutual Fund Rank #2. Vanguard High Dividend Yield Index Fund Investor (MUTF: VHDYX ) employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index. VHDYX’s year-to-date dividend yield is 2.9%. VHDYX’s 3-year and 5-year annualized returns are 10.2% and 12.1%, respectively. The annual expense ratio of 0.16% is lower than the category average of 1.1%. VHDYX has a Zacks Mutual Fund Rank #1. Original Post

Stocks Aren’t Bad, They’re Just Not Good

When we’re doing our due diligence on an Alternative Investment, one of the first questions we ask managers is what are the market environments in which the program struggles to find returns. And once we get into when they’re likely to do poorly, we then analyze just what that poor performance looks like. In essence – how bad is it when it’s bad? Does everyone/anyone who tracks the stock market with low cost index tracking ETFs do the same? With stocks all but flat since mid-way through 2014, some investors are starting to question where the returns are, rightly so. But the stock indices aren’t human. We can’t tell them to try a little harder. Or go for a moonshot. Or shake off the rust and get back into the game. No, the stock indices are a rule-based investment model. So while pundits and economists are grasping at straws to identify the problem, we’re more apt to ask the manager of the investment model “Why is the current market making it difficult for your trading model to find returns?” We’ve said this before, but it bears repeating, stock indices like the S&P 500 are a trading system; or if you prefer a set of investment rules or stock picking model. Look no further than Winton Capital’s CEO on the matter. We really couldn’t have said it better. Harding: “The S&P 500 is a trading system. The S&P 500 is a set of rules for buying and selling stocks. And by the way… not a very good one! Think about this for a second. If you took the S&P 500’s monthly returns and put them under some sophisticated sounding hedge fund name, everyone would tell you the drawdowns are too large and last too long, while the annualized volatility is too high for the performance it generates. There would be a Bloomberg article demonizing the system for large drawdowns and for tricking investors. And what’s worse, this model is a one trick pony. It’s solely focused on one asset class, and only makes money when that asset class goes up. Of course, it does have the Fed doing everything in its power to avoid a 20% drawdown in the markets at the cost of creating a future bubble. Not to mention buybacks are preventing real growth while 3 companies make up 10% of the market’s capitalization . Put that all together and the S&P 500 is nothing more than an investment model that is high reward-high risk. We dare say, it’s a very basic equity focused hedge fund, choosing which stocks to “own” and which to avoid. To paraphrase Captain Barbossa, “You better start believing in hedge funds Ms. Turner – you’re in one !” There’re bouts of volatility, drawdowns, and low risk-adjusted returns. But that doesn’t make the most beloved system in the world a bad investment. By all means, take a look at it. There’s a lot to like. Chief among them is probably choosing to align yourself with the majority of investors out there; the government and a huge industry hell-bent on seeing it go up year after year. The S&P 500 isn’t a bad investment, it’s just not a good one. It will test your nerve, and then test it some more. As a recent post by Reformed Broker noted: Just because it’s cheap and easy to get exposure to stocks these days, that doesn’t mean it’ll be mentally cheap and easy to stick with them.

The Upside And Downside Of Market Capture With Alternatives

By Richard Brink Over the long run, alternative investments have outpaced traditional 60/40 stock/bond portfolios with lower volatility. What’s the secret? Gaining more in up markets than they lose in down markets. The Upside/Downside Capture Ratio Successful alternative strategies are managed to capture some part of the equity market’s upside and an even smaller part of the market’s downside. The concept is to win by not losing, and it’s reflected in the up/down capture ratio. Let’s take a strategy with an up/down capture ratio of 50/20. When markets are doing well, it delivers 50% of the upside; when markets are down, it delivers 20% of the downside. Capturing only half of the equity market’s gains in an up market with an alternative strategy may not sound too appealing on the surface. But what’s the flip side? In bear markets, investors experience only 20% of the downside. Alternatives vs. Equity: The Tortoise and the Hare Let’s compare a hypothetical $10,000 investment made in 1995 – for 20 years – in the S&P 500 equity index with an equal investment in a hypothetical alternative strategy with a 50/20 up/down capture ratio (Display). It ends up looking a lot like the fable of the tortoise and the hare. The S&P 500 – the “hare” in this scenario – got off to a fast start. During the tech bubble buildup in the late 1990s and early 2000s, the equity market dominated – and the gap between the two investment approaches widened. But then the tech bubble burst, and the S&P 500 lost major ground. The 50/20 alternative strategy – the “tortoise” – which had been steadily, if modestly, plugging along at “half-speed” until the sell-off, pulled ahead. As we know, markets eventually stabilized and US equities resumed their upward march. But just as the S&P 500 started to catch back up, the 2008 financial crisis sent stocks reeling again. The S&P 500 lost 51% of its value by early 2009, while the 50/20 declined by only 10%. The importance of that is found in the time needed to recover the losses. In the recovery that followed, the 50/20 was back to its previous peak in nine months. The S&P 500 took more than three years. Indeed, despite very strong US equity market performance over the past several years, the S&P 500 has still not caught up. Over a 20-year span of this tortoise and hare battle, the alternative strategy would have ended up delivering dramatically higher returns than the S&P 500 – but with less than half of the stock market’s volatility. Pretty crafty turtle. Click to enlarge The Insurance Perspective Why doesn’t everyone find an alternative strategy with 50/20 up/down capture? After all, this isn’t just hypothetical – the average up/down capture ratio of the entire HFRI Equity Hedge category, for example, is 65/32. In large part, it likely has to do with the investment experience. In other words, some investors would rather simply fire a manager who delivered just 50% of the market’s upside in a rally. When that frustration sets in, it’s easier to dismiss a strategy’s effectiveness in bear markets. This was magnified in the past few years by a central bank-supported “beta trade,” with strong performance and generally short-lived downturns. That appears to be changing, but investors need to be diligent in searching for a strategy that fits their long-term needs. It helps to think of a strategy’s up/down capture ratio as an insurance policy. For the strategy with 50/20 up/down capture, the difference between the market’s gain and the strategy’s up capture – in this case, 50% of the full market gain – is the insurance premium you pay in terms of sacrificed upside potential during up markets. The “down” capture of 20% can be viewed as a deductible – you experience a loss of 20% on the alternative strategy before its “policy” kicks in and protects the downside. Finding the Right Fit Alternative strategies come with many different combinations of upside and downside market capture. We think the best way to approach the choice is by following three steps: 1) Find a strategy with a level of upside capture you’re comfortable with 2) Make sure there’s a complementary downside capture 3) Gain confidence that the manager can continue to deliver that experience consistently It all comes back to a point we’ve emphasized before: Investors should know what they want when they’re looking for an alternative strategy. And they should identify the right manager who can consistently deliver the return experience they’re looking for. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management team s Richard Brink, CFA – Managing Director-Alternatives and Multi-Asset