Relative Strength In This Sector Continues To Pay Dividends
High dividend stocks have continued to display relative strength – even during market weakness.
We have written many times in these pages about the hallmark of our investment selection philosophy: relative strength. That is, when selecting where to be invested, we want to concentrate on those areas of the market that are performing the best. Of course, the trick is to have a process that can successfully identify such areas whose relative strength is likely to persist rather than merely being a flash-in-the-pan. And by the way, relative strength can work in both good market and (most) bad markets. A case in point is today’s Chart Of The Day, which highlights a sector whose relative strength has played out recently in good and bad markets: high dividend stocks.
Relative strength can mean performing better than other areas during good markets, either on an absolute or risk-adjusted basis. It can also mean holding up better, or losing less, in bad markets. Dividend stocks have displayed both characteristics over the past few years. Witness one dividend ETF, specifically: the First Trust Morningstar Dividend Leaders (ticker, FDL).
FDL has consistently scored new highs (adjusted for dividends) during the stock market rally over the past few years, with relatively low drawdowns. And during times of turbulence over the past 6 months, the fund has been relatively very resilient. Note the 2 arrows on the bottom right of the chart. While during the January selloff, the market at large dropped down near the vicinity of its lows of last August, FDL held well above that level. Likewise, when the market tested those January lows in mid-February, FDL again held well above its initial low. This relative strength, even in periods of overall market weakness, can be a good indication of forthcoming, or continued, superior performance in a sector. And if the market’s current bounce is to continue further, this relative strength should bode well for FDL.
Lastly, the fund was able to hit a milestone today. Closing at 24.49, it became one of the first equity funds to recover all the way back to a 52-week high following the recent selloff (even unadjusted for dividends). Those areas of the market that are able to accomplish that first following a correction will often be among the leaders in a subsequent rally.
Thus, excuse the wordplay, but this area could continue to pay dividends for investors in the near future.
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More from Dana Lyons, JLFMI and My401kPro.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
