Income investments & that vertical drop-off thing that’s coming…

You’d have to have been living in a cave, or dry camping in the wilds for 6 weeks like I was until a few weeks ago, to not have been bombarded by the 2 words that I allude to in the title of this post. I’ll try and spare you and only say them a few times in the post. Needless to say the ‘fiscal cliff’ fears have taken a bit of a toll on income investments, in particular equity income investments that have performed well so far this year. I thought it wold be useful to take a look at this impact and what, if anything, we can glean from these events.

First lets take a look at the damage done so far. The table below shows some major income oriented ETFs and the SPY for comparison purposes. The table is sorted by the change from the ETF’s 52 week high based on closing prices as of today.


As the table show the largest damage has been done to ETFs that had done extremely well before this recent sell off began. As I discussed a while back mREITs (MORT) were on an amazing run this year and utilities (XLU) were trading at all time high valuations. Same goes for telecom stocks like T and VZ that make up the bulk of IYZ. The damage to MLPs hasn’t been any worse than to the broader market (SPY) and the big dividend ETFs (DVY, SDY, VYM, VIG)) have suffered less than the broader market as expected with dividends providing some downside protection in rough times. Finally, high yield bonds, or bond like sectors (HYG, PFF) have held up much better than stocks.

This drop in the major income ETFs hides some pretty big damage that has been done to some big income favorites. Starting in mREITs look at the charts of  NLY. AGNC, and TWO. In utilities look at SO and ED or a small cap utility like AT. T and VZ in telecom. BPL, WPZ, MWE in MLPs. Or in the more normal dividend stocks, MO, PM, LO have been hit pretty hard as well. Not to mention sectors like royalty trusts who have had a terrible year altogether give low commodity prices. There has definitely been a large penalty for aggressive yield chasing.

Now, there are tons of articles being published everyday on the reasons for the sell off with most of them blaming that potential steep drop-off thing I mentioned earlier which will cause a slowdown in the economy, destructive effects on dividend stocks, etc… Based on the relative sell off in these ETFs it seems most of the sell-off is due to concerns over the economy, some prudent profit taking in certain sectors, and not due to many dividend tax fears. Dividend stocks, in general, have held up better than the major averages. Now, its not a panacea either. There’s those articles (here and here for examples) that say there is nothing to worry about, the sell-off is over-done, dividends are havens. And I agree in the longer term. What these articles miss is that economics happens at the margin and that in the short term stock prices are driven by supply and demand. This short term uncertainty and the potential changes on Jan 1, even with a resolution to that steep thing, are increasing the supply of stock and reducing the demand which means lower prices for now.

As happens more often than not with financial markets, this sell-off will probably go to far, especially with the more than likely resolution to the steep thing. It’s a great time to start making a potential buy list and to be patient. Bottom picking is not worth it, wait for the markets to turn. In the meantime stay defensive and protect capital.

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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2 Responses to Income investments & that vertical drop-off thing that’s coming…

  1. J Carroll says:

    Nice post today, Paul; it was somewhat soothing. Being an income investor, my portfolio has taken hits of late and every move I have made over the last 3-6 months has produced pain (meaning capital losses exceeding the immediate additions to the income stream). I don’t recall your mentioning this in the past, but do you include bonds or bond funds in your portfolio. If yes, what quality and duration do you prefer? Thank you.

    • libertatemamo says:

      Hi J, yes I have some bonds as I’ve discussed in a lot of my portfolio update posts. I own several leveraged long term muni CEFs and have since the infamous Meredith Whitney call almost 2 years ago now. I continue to hold these.

      On my post, my point was that while longer term income investments are fine, the short term can be brutal. And as I said in my last portfolio update I’m down to only one stock position and mainly in cash. Preserving capital is key.


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