The U.S. economy continues to have significant headwinds (e.g., high unemployment, European credit contagion, weak housing market, high debt levels, etc.) and the year-end "relief rally" is likely to be short-lived.
The global economy is being weighed down by a debt problem that took over two decades to create. Given the significant build-up in peace time debt, we believe that the debt problem will take years to sort out, providing significant uncertainty and market volatility. The leverage that has been built up in the system will not unwind for years to come.
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Our central belief is that in a low interest-rate world, retirees are experiencing dwindling incomes from their risk-free assets (e.g. government bonds and cash equivalents). With ultra easy monetary policy the Federal Reserve will continue to pick the pockets of savers by keeping rates low. We do not foresee interest rates at the short end of the curve rising any time soon as the debt burdens of sovereign governments as well as consumers are simply too high.
Stable Income Streams
As central banks drive down short-term rates to deal with high debt levels and low growth rates, investors have been flocking to dividend stocks in search of yield.
That said, any pullback in the market should be an opportunity to add to your low-beta dividend stock positions.
In the current market environment, it is important for income investors to choose their dividend stocks wisely as they are putting new money to work. As volatility increases (especially downside volatility), income investors may want to add some low beta stocks to their holdings to help dampen portfolio volatility. In general, companies with low betas will tend to be less volatile than the general market.
With a diversified portfolio of high-quality dividend paying stocks (like the ones on the list below), retirees can generate a stable income stream that will perform well in bull or bear markets.
While this is not an exhaustive list of high-quality dividend stocks, this sample portfolio would yield 6.2% with an average beta of 0.44. In addition, all of these stocks are in defensive industries and they have P/E ratios below 20.
Note: All of the stocks above are on our "Top Dividend Stocks for 2012" list. Over the course of the next several weeks, we will be providing a detailed analysis for each our top picks for 2012. Click on the links for our completed analysis of MO and WM.
Due to the current market rally (which we believe will be short lived), investors should consider waiting for a pullback in these stocks to enter a new position or to add to an existing position.
Most of the stocks above are currently in a positive uptrend. As such, investors should be looking for near-term areas of support as potential entry points. Below are a couple of examples [click to enlarge charts]:
Kinder Morgan Energy Partners (NYSE:KMP) has been in a very strong uptrend since breaking out in mid-October. While we think that this up trend will continue, the stock is technically overbought right now. That said we would be a buyer on any meaningful pullback. The 50-day moving average ($77.81) should provide near-term support and we think that the $78.00-$80.00 range would be a good entry point in the stock.
While AT&T (NYSE:T) has been range bound the past few months, the stock recently traded back above $30 for the first time since July. We think that AT&T will continue its long term uptrend and we would be a buyer on any dips. The 50-day and 200-day moving averages are converging around the $29.00 level and we think that the stock will get very strong support here. Our near-term "buy" zone is $28.75-$29.25.