I noted in my last article that the market may be transitioning into defensive/lower beta equity sectors in anticipation of a broader equity correction in the near future. Specifically, looking at the performance of Consumer Staples (NYSEARCA:XLP), Healthcare (NYSEARCA:XLV), and Utilities (NYSEARCA:XLU), leadership does appear to be emerging on both up and down days. If there is a common theme across all three sectors, its that investors generally position into them not for the hope of substantial capital appreciation, but rather for the income and dividend component.
If the pendulum is indeed swinging away from capital appreciation and more to dividend/income once again, its worth taking a look at the iShares S&P U.S. Preferred Stock Index ETF (NYSEARCA:PFF). Preferred stocks are somewhat of a hybrid between stocks and bonds, whereby shares are actually paid a guaranteed dividend. Preferred shares gets a first crack at a company's dividends, given their priority over common shares.
Take a look below at the price ratio of Preferreds to the S&P 500 (NYSEARCA:IVV). As a reminder, a rising price ratio means the numerator/PFF is outperforming (up more/down less) the denominator.
What I want to point out here is that Preferred stocks have underperformed the S&P 500 since late-August of last year, and that the price ratio appears to be at a relative support level. With a yield pushing 7%, investors interested in some relative safety and attractive dividends might want to consider moving up the capital structure here from common stock to preferred in an effort to reduce overall volatility and capture some income.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.