The Shanghai Composite has fallen by approximately 37% since its high of 5,128 on June 12, 2015. The dramatic two-month decline has sent international investors scrambling for safety.
The Global Markets Respond in Fear
Global markets have felt the decline in the Chinese markets and have shuddered in response:
- (USA) DJIA: -8.03%
- (USA) S&P 500: -5.88%
- (Japan) Nikkei: -4.76%
- (Germany) DAX: -9.57%
- (China) Shanghai: -37.87%
Figures from June 12, 2015 to August 23, 2015.
Safety in Assets and Cash Flow
During times of extreme fear in the markets, investors rotate their money into assets with stable prices and low risk. There are a few places places investors historically look to during such times: cash, bonds, commodities, REITs, MLPs, and strong dividend stocks. These asset classes have values that are linked to tangible cash flows or goods, making the value of the assets easier to value and thus more predictable.
Let’s take a look at a few examples:
Cash: Investors typically rotate into a money market account, which offer extremely low returns and low risk. The current annual return on a money market account is 1.1%.
Bonds: Fixed-rate high quality bonds are also popular. LQD, the largest high-grade corporate bond ETF, has increased by 0.71% since June 12, 2015.
Commodities: Some investors enjoy having hard assets, like gold, that have historically increased in value during risky times. GLD, a gold ETF, has decreased by 1.85% since June 12, 2015.
Real Estate Investment Trusts (REITs): Another form of an income-producing, asset-backed investment is an REIT. VNQ, the largest REIT ETF, has increased by 1.96% since June 12, 2015.
Master Limited Partnerships (MLPs): MLPs allow investors to become a “partner” in the parent company, capturing a portion of the generated profits as dividends. AMLP, the largest MLP ETF, has decreased by 10.86% since June 12, 2015.
Strong Dividend Stocks: These dividend payers are the most stable and are historically less risky than the market at large.
- Consolidated Edison (ED )
Return Since 06/12/2015: +15.93%
Dividend Yield: 4.03%
- Southern Company (SO )
Return Since 06/12: +9.55%
Dividend Yield: 4.9%
- Duke Energy (DUK )
Return Since 06/12/2015: +6.93%
Dividend Yield: 4.48%
- Entergy Corp. (ETR )
Return Since 06/12/2015: -0.67%
Dividend Yield: 4.94%
- Pepco Holdings (POM )
Return Since 06/12/2015: +1.16%
Dividend Yield: 4%
- PPL Corporation (PPL )
Return Since 06/12/2015: +9.12%
Dividend Yield: 4.72%
- AT&T (T )
Return Since 06/12/2015: -2.38%
Dividend Yield: 5.72%
The Bottom Line
As you can see from the returns since June 12, 2015, the market has clearly been shifting away from risky emerging markets and towards safer asset classes. Dividend stocks represent a clear way to mitigate market exposure while still generating a return on investment through dividend payments. Now is the time for investors to take a serious look at dividend-paying stocks, protect their annual gains, and settle into a long-term strategy of income generation through dividend yield.