C-Tracks Miller/Howard Dividend Reinvestor: New Strategies for Elevated Markets
Instead, new investors must do their research and implement a strategy that is appropriate for the current market environment.
Reinvestment as a Dividend Strategy Alternative
For those considering alternative dividend strategies, I believe one of the best positioned instruments is the Citigroup C-Tracks ETN Miller/Howard Strategic Dividend Reinvestor (DIVC), which provides tradable access to the Miller/Howard Strategic Dividend Index. Miller/Howard offers a wide range of investment products and portfolio strategies in a number of different asset markets (in areas like master limited partnerships, dividend growth, and energy infrastructure investments), and its position in the industry is firmly established.
The Miller/Howard Strategic Dividend Index tracks the performance of 30 US stocks selected using fundamental factors and quantitative criteria that is updated quarterly. These factors include elements like dividend yield, yield sustainability, expected capital growth, and current valuations relative to book value. In addition to this, the stock selections are vetted base on high returns on invested capital relative to P/E ratios and 26-week momentum trends in the underlying stock price.
When we look at the specific stock selections that can be found in DIVC, some interesting trends start to become apparent. One trend in particular can be seen in the focus on energy markets, with names like Exxon Mobil (XOM), Ford Motor Co. (F), and Valero Energy (VLO) rounding out the list. These are companies that stand to benefit from potential reversals in energy markets -- areas have seen significant weakness over the last year. If we start to see sector changes here that are more in line with the historical trends, DIVC could benefit given its strong exposure in energy markets. Additionally, these stocks are some of the most stable performers in the dividend space, so there is potential for enhanced returns via more than one route.
Miller/Howard's strict selection process helps to ensure that only the best performers in the dividend category make it into the fund. This is important, given the fact that the current low-interest rate environment makes suitable choices in this category more difficult to find: “Currently, dividend yields in the S&P 500 are seen near 1.9%,” said George Mahshigian, CEO at Trade2Live. “This is well below the historical average of 4.4% for dividend yields in the S&P, so there are clear deviations between what is seen now and the long-term averages.” For dividend investors, this is important information because there is still no real indication of when the US Federal Reserve will start raising interest rates and this makes it much more difficult for investors to capitalize on yield-producing assets.
Since it began trading, the C-Tracks ETN Miller/Howard Strategic Dividend Reinvestor has shown dividend yields above 3% -- well above what can be captured by investors that are looking to invest in benchmarks like the S&P 500. It should be remembered that these cash dividends are not paid out directly, and instead are notionally reinvested back into the index. In this way, positions are designed to grow as a reflection of the elevated dividend payouts associated with each stock in the Miller/Howard Strategic Dividend Index. This conservative approach to dividends offers a new and incentive method for investors to generate returns in stock markets that are trading near record highs. Overall, the outlook for DIVC remains positive given its advantages over most of the commonly employed stock strategies and I expect solid returns into the second half of this year.
Published on Apr 13, 2015By Richard Cox