Are dividend stocks overvalued?

A dividend strategy that includes a low volatility screen may help ease investors’ valuation concerns

Boccellari_Thomas_sm_lowrezRecord-low interest rates have pushed some income-oriented investors into risky asset classes as a means of increasing both yield and total return. This has helped equity market valuations reach levels not seen since the recession of 2008. The chart below depicts the forward price-to-earnings (P/E) ratio for the S&P 500 Index over the trailing five years through Aug. 31, 2016.

Equity valuations climbing

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Emerging market bonds: Are you being compensated for currency risk?

Fixed income investors may experience less risk by investing in US dollar-denominated emerging market bonds

Boccellari_Thomas_sm_lowrezAs one of the best-performing market segments so far this year, commodities appear to be in the early stages of another seven-year cycle. With the International Monetary Fund expecting emerging market economies to expand by 4.1% in 2016, and many of these same countries dependent on commodity exports, fixed income investors may be considering diversifying their bond holdings into emerging markets.1 Currency risk – the risk of an investment’s value declining due to foreign currency fluctuations – can be a concern for investors making the plunge into emerging markets. In my view, however, there are ways to mitigate this risk — with the right tools.

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In search of yield: The case for senior bank loans

Senior bank loans may offer high yield potential with limited exposure to risky energy credits

Boccellari_Thomas_sm_lowrez2015 was a tough year for energy producers. Non-investment grade energy shares were down 30% on the year – with the lowest-rated oil, gas and coal producers dragging down the sector as a whole.1 Although commodity prices have rebounded nicely thus far in 2016, smaller energy producers continue to default at rates not seen in decades.2

Investors seeking yield opportunities, but wary of assuming undue levels of risk, may wish to consider senior bank loans. Senior bank loans typically have limited exposure to the riskiest energy producers and rank high in a borrower’s capital structure, giving lenders first claim on a company’s assets and earnings in the event of a default. They also feature floating rate coupons that can adjust upward as rates rise.

Limited exposure to the riskiest energy credits

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Repurchasing confidence: The potential benefits of stock buybacks

Firms that repurchase shares have tended to outperform the broader market

Boccellari_Thomas_sm_lowrezThere’s no substitute for a well-run company with solid fundamentals, steady earnings growth and a seasoned management team. But investors in even the most profitable firms are always looking to add value. Two commonly used methods for bolstering corporate shareholder value are dividends and stock buybacks.

A company may decide to repurchase outstanding stock for many reasons — to telegraph confidence in the company’s financial future, return cash to investors in a tax-efficient manner (shareholders typically pay taxes on dividends) or simply to reduce the number of shares outstanding. In some cases, buying back shares just makes good financial sense – particularly when a company’s stock is trading at a discount .

A positive buyback performance track record

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Avoiding the equity income “dividend trap”

Investors should be wary of dividend stocks offering yields that aren’t sustainable over the long term

Boccellari_Thomas_sm_lowrezIncome-oriented stocks can provide investors with numerous advantages – including the potential for high recurring income, a possible inflation hedge and added portfolio diversification. And while diversification does not ensure a profit or protect again loss, dividend stocks can serve as a significant source of investment returns. In fact, over the past two decades, dividends have contributed more than 40% to S&P 500 Index investors’ total returns.1

In today’s low interest rate environment, investors are seeking yield anywhere they can, and high-yielding dividend stocks may seem like an ideal solution. But these same investors may inadvertently be wandering into a “dividend trap.”

Beware “dividend traps”

A dividend becomes a trap when investors are lured by high dividend yields that are misleading or not sustainable. For example, a company’s stock price may be in decline because of financial struggles, which may cause a company’s management to rethink future dividend payments. Dividends are often paid out quarterly, however, and unsuspecting investors can be trapped by taking a position in the stock before the dividend has actually been cut.

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