Are Dividend Stocks A Safe Investment?
The stock market crash from 2008 changed investor confidence in the stock market and now people want investments that are rock solid. Investors are more concerned with protecting their money and the low interest rate environment make safer investments like GICs and the Bond market unappealing.
So where does the average investor put their money in this low yielding market environment?
Many investors have flocked towards Dividend Stocks because they perceive them to be safe investments and they offer higher yields than the bond and cash markets. Dividend stocks offer the potential for capital appreciation and tax preferential dividend payments.
As a result, Dividend stocks are in high demand. There use to be a day when Dividend Stocks were comprised of stable and boring Blue Chip, Insurance, Financial, Utility, Consumer Staples, Energy corporations that no one would talk about.
Now these Blue Chip stocks have broken out of there stable price patterns into the world of the growth stocks and the industry can't stop talking about them.
Is the current craze about Dividend Stocks a good thing?
Have Dividend stocks become the latest fad, the hot potato, the sector where all the money is flowing?
The sector in-play eventually becomes the most volatile and the fast appreciation is always followed by a sharp sell-off. These moves take time and when we start talking about stocks we normally don't talk about, it shows a change in sentiment in those stocks. That is the first warning signal.
When the stock chart of a stock looks like the angle of ascent in the Cliff Hanger's Price is Right game then the stock will eventually crash down to earth and end around the price of the previous launch point.
The team at BehindWallStreet.com is warning you that the Dividend Stock Sector is flashing the signs of the typical bubble. We are simply giving you a heads up to warn you that the price move from the 2009 low to the 2013 is unsustainable.
Remember the housing bubble, the tech bubble, the silver and gold, well all those players who fueled those bubbles have shown up in the Dividend Sector. How funny is that, no one would suspect that a bubble forming in the most stable dividend paying stocks in the world.
Let's take a look at the Weekly XLU (Utilities Select Sector SPDR), does it remind you of the Cliff Hanger game from the Price is Right. Go ahead and hum the song in your head, it is very catchy after all.
When we scale down to the Daily XLU chart you'll notice that the Volume is picking up on the DOWN days and that the current price action is hovering the in the Fibonacci 61.8% retracement area. That's not the ideal technical set up of a rising market.
So what does all of this mean for Dividend Stocks?
Expect extreme volatility and a massive price depreciation or we will continue on the upward ramp until the move finally gives out. The market tried to force it down from the May 6 move but it wasn't the right time for XLU to die as it made 2/3rds of the move back towards the highs.
As you already know, timing is everything in the markets and in life. It will be ready when it's ready and no sooner than that. So be cautiously patient.
The main lesson is when any asset moves from boring to being the talk of the town, has a price pattern that is ascending without pullbacks like the Price is Right Cliff Hanger game, when there are only reasons for that asset to go up (even the negative reasons push up the stock) then that asset class is IN-PLAY and that it is moving into bubble territory.
Remember that any asset that is IN-PLAY seems very safe at the beginning because it only goes up but it is followed by pure carnage and it happens so fast that you won't have time to take your profits.
Be very careful with the Dividend Stocks because they aren't as safe as you think they are.
If you would like to know how we would create a trading strategy for XLU, a dividend ETF play, then check out the ETF Total Return Newsletter. Or we can teach you in a one-on-one coaching session how to create the ideal risk reward trade for this ETF.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.