“Your Investment Guide For The Second Half of 2016: 11 Best Funds To Buy,” by Ky Trang Ho, Forbes.
1. SPDR S&P Dividend ETF (SDY)
By David Sadkin
While this summer is likely to see an uptick in volatility, there are reasons to be cautiously constructive on the market. The risks are well-documented: Brexit, the potential for the Federal Reserve to raise interest rates, uncertainty over the U.S. elections and China. The likelihood of recession, however, remains low.
Overall, economic data points to a continuing period of 2% gross domestic product growth. The longer-term trend in employment is positive, manufacturing and the service sector remain firmly in expansion, housing numbers are good, and auto sales are robust with sales above 17 million units annually, which is a good indication of high consumer confidence. Household balance sheets are healthier than they have been in decades with consumer debt service at about 10% of disposable income vs. 13.2% before the financial crisis.
Yet this remains an unloved rally. The latest American Association of Individual Investors, AAII, U.S. Investment Sentiment Bullish Reading is at 25.35, which is a multi-year low. History shows that when this number is low, markets rally. Other bullish indicators include the broad market participation since the February lows and the fact that equities markets tend to rally in the second half of presidential election years as uncertainty diminishes. Together, these factors validate a constructive view on the markets.
Stick to the tried and true: large-cap, blue-chip, U.S. stocks. While the U.S. market is arguably fairly valued at 16x this year’s earnings, the multiple is actually reasonable given the low inflation rate. Historically, low-interest rates and low inflation outlooks have supported multiples of 18x-20x, which translates to between 2,124 and 2,360 for the S&P 500 Index (SPY). Even without multiple expansion, modest earnings growth could result in a mid- to high single-digit total return.
In addition, the average dividend on the S&P 500 Index is 2.1%, which is significantly higher than the yield on 10-year Treasuries. For long-term investors, the combination of a nice dividend and the opportunity for capital appreciation should be much more attractive than owning bonds.
The Dividend Aristocrats is a good strategy for what is expected to be a prolonged period of slow economic growth. The Aristocrats is a basket of high-dividend paying S&P 500 stocks with a track record of continuously raising their dividends over the past 20+ years. The high dividends provide both a source of current income and reduce volatility in down markets. Consider investing through an ETF such as SPDR S&P Dividend ETF (SDY).
David Sadkin is senior vice president of Bel Air Investment Advisors in Los Angeles with $6 billion under management.
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