My case for dividend and emerging market stocks

Last month, I laid out my basic investment strategy for 2014: I am overweight Europe and emerging markets as well as dividend-paying U.S. equities. On the flip side, I am underweight non-dividend-paying U.S. equities.

With one month down, dividend-paying stocks are performing well relative to the broader market. My Dividend Growth model is essentially flat year-to-date through February 5 (down 0.2%) vs. a 5.1% loss on the S&P 500. In a down market, you win by not losing.

Bond yields continue to moderate—at time of writing the 10-year Treasury yields 2.7% after falling below 2.6% in early February—which, in my opinion, makes “bond substitutes” like mortgage REITs and conservative triple-net equity REITs look attractive.

Triple-net equity REITs are a major component of my Dividend Growth portfolio, and my Dividend Growth, Global Macro and Tactical ETF models all currently have exposure to mortgage REITs.

Will dividend-focused investment continue to outperform throughout 2014?  Only time will tell, but within the broadly-overpriced U.S. markets I consider them the most attractive option.

My Tactical ETF portfolio is modestly outperforming year to date (3.9% loss vs. 5.1% loss on the S&P 500), though its exposure to Chinese equities has been a drag on performance. My Global Macro model has modestly underperformed year to date (5.6% loss vs. 5.1% loss on the S&P 500) due primarily to its exposure to emerging markets.

As we get deeper into 2014, I expect to see emerging markets recover and possibly assume market leadership. As I wrote recently on my blog, emerging market equities as an asset class are very inexpensive, and the chances of a true emerging market meltdown, such as the one that spread across the globe in 1997-1998, is extremely small.

Outside of a few “problem countries” such as Argentina and Venezuela, most emerging market countries have flexible floating exchange rates and manageable debt levels.

Turkey is in the midst of a political crisis, and South Africa has a degree of political uncertainty due to upcoming elections that show the African National Congress facing real competition for the first time since the fall of Apartheid.

But any continued weakness in either country should be viewed as a buying opportunity. And even in Argentina, a country that seems to take pride in perpetually violating all laws of economics, I see real opportunity this year.

Disclaimer: All investments involve risk and various investment strategies will not always be profitable. REITs may be affected by economic conditions including credit and interest rate risks, as well as risks associated with small- and mid-cap investments. International investing involves special risks, such as political instability and currency fluctuations. Past performance does not guarantee future results.

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