A good mix of equities and fixed-income assets has helped provide attractive returns. However, it may be time to underweight bonds and lean toward stock exchange traded funds.
BlackRock’s chief investment strategist for fixed income, Jeff Rosenberg, said that he would bet on stocks over bonds for 2015, reports Amanda Diaz for CNBC.
“I’d be a buyer of the stock market, just because the risk and reward,” Rosenberg said on CNBC. “The issue with bonds right now is there’s a skew to the potential returns. The upside is quite limited, given how low yields are. The difference with the stock market is there’s a more balanced risk and reward in terms of the upside versus the downside.”
Looking ahead, Rosenberg believes that the weak economic data over the first quarter was seasonal and will pass, and the economy could gain momentum in the second half.
“When you see the economic data change, the narrative around the bond market and the stock market will change at the same time.”
As economic activity picks up speed, investors tend to become more risk tolerant, investing in equities over fixed-income assets. While bonds have enjoyed a great start to the year on low inflation and low rates in Europe, Rosenberg argues that a combination of an improving economy and potential Federal Reserve rate hike in September could trigger a sell-off.
Consequently, income-oriented investors who are wary about the potential risks in the bond market could switch over to dividend stock ETFs as an alternative. For instance, the Vanguard High Dividend Yield ETF (NYSEArca: VYM) has a 2.89% 12-month yield and iShares Core High Dividend ETF (NYSEArca: HDV) has a 3.47% 12-month yield. [Why Invest in Dividend ETFs]
VYM selects stocks based on annual dividend yield forecasts, excluding more sensitive areas like real estate investment trusts, master limited partnerships and micro-caps. The portfolio includes a collection of large-cap heavy names with an above average yield. HDV also screens picks to account for financially healthy, high-quality U.S. companies with relatively high dividend payouts.
Additionally, a number of high-quality dividend-paying stocks can be an attractive substitute to low-yield bonds, and in the ETF space, investors have many options to choose from. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and has a 2.13% 12-month yield. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 2.71% 12-month yield. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.24% 12-month yield. The ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) only includes companies that have increased their dividends for at least 25 consecutive years and offers a 1.63% 12-month yield. [Retirees May Need More Stock ETFs to Meet Income Needs]
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.