Bad Times Don't Deter 'Dividend Aristocrats'

By Gary Gordon for ETF Expert

Is a bad U.S. economy good for stock ETFs? It depends on the type of stock ETFs -- large, small, growth, value, foreign, domestic. It also depends upon whom you ask.

Some analysts believe that, at the end of the trading days, earnings are all that matter. In fact, if large companies are cautious with their cash in uncertain economic times, the lack of investment in human resources or research actually boosts productivity and profitability. We're seeing plenty of that now. And while that flies in the face of "You gotta spend money to make money," it keeps the " dividend aristocrats" on target to raise dividends through thin and thick.

Keep in mind, economic forecasts are unbelievably flawed. The U.S. Federal Reserve even talks about "unusual uncertainty" in predicting what'll happen next. Yet most feel fairly certain that companies from Automatic Data Processing ( ADP) to Johnson & Johnson ( JNJ) to Wal-Mart ( WMT) will raise dividends year after year.

Dividend investors should still use stop-loss limit orders to protect against a black swan collapse in equities. With that said, consider the S&P SPDR Dividend Fund ( SDY), which tracks the S&P High Yield Dividend Aristocrats Index. Another possibility is WisdomTree Large Cap Dividend ( DLN), which tracks a dividend-weighted index to reflect a proportional share of aggregate cash dividends by the component companies. The distribution yields are 3.5% and 3.25% respectively, seriously denting the idea of buying-'n'-holding a 10-year Treasury bond.

A bad U.S. economy can be good for another group of stock ETFs: foreign stock ETFs.

One can easily recall the sovereign debt crisis headlines that plagued European equities through the first five months of the year. Since then? European economies have exceded a low bar for GDP growth on a weak euro-dollar that benefited European exports.

With each terrible macroeconomic data point domestically, the U.S. dollar weakened and foreign stock ETFs demonstrated resilience. Vanguard Emerging Markets ( VWO) and Vanguard Europe ( VGK) have been stronger than the S&P 500 over the past three months. I can't pretend the threat of a double-dip recession isn't serious; I'm not prepared to say economic contraction couldn't drag stock assets into a bear cave.

Indeed, the most obvious and most adverse effects can be seen in the iShares Russell Microcap Fund ( IWC). While the large-cap mega-star S&P 500 finds itself comfortably above July lows, IWC isn't nearly so fortunate. In essence, the smaller the company, the more the local, consumer-based economy matters.

There is one more reason you'll hear some investment professionals cheer for terrible economic data. The prevailing sentiment is that the current political establishment is harmful to stocks. It follows that the uglier the near-term economic news, the greater the likelihood Republicans will wrest control of Congress away from the Democratic majority.

Why is this reason for investment pros to cheer? The most powerful bull markets have come when a Democratic president is in the White House and Republicans control Congress. Historically, this has been the prescription for an absence of legislation, regulation and restrictions deemed harmful to business.

In the short term, anyway. Then you get Great Recessions resulting from shaky-footed housing booms, which might entrap even the most sure-footed investor or business person, and the odd deepwater drilling leak. On April 20, BP ( BP) traded at $60.48 per share; after dipping to $27.02 on June 25, it's still down nearly 40%.

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ETF Expert, its parent company and clients may hold positions in the ETFs, mutual funds and index funds mentioned. The company receives advertising compensation from Invesco PowerShares Capital Management and Geary Advisors. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities.

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