I have posted the majority of my blogs dealing with the market downturns and the ways to profit from them by shorting. However, I am breaking away from the short mentality for a bit to bring attention to some of my favorite long ETFs . This blog entry is suited to those that "buy and hold", if there are any of you out there. For those looking for a quick buck, go ahead and click that -3 star up above and move on. No offense taken.

If you have ever read any of my other entries, you know that I do not think the market has a lot of upside right now. My overall view of the market is that I believe we are at the beginning of a sustained market downturn that could last for 18-24 months. In that period of time, there will be opportunities to grab companies on the cheap and make solid profits in the next 5-8 years and beyond. What is a buy and hold investor to do, especially in the tough times? With thousands of companies to choose from, how do we know what's good and what isn't? If past performance doesn't guarantee future results, should we just flip a coin? No way!

Picking a great company to invest in is like picking a wife. A good one will make you advance in many ways (whether you like it or not); a bad one can wreck you physically and emotionally while leaving you on the road to ruin. Two traits that all good wives possess are loyalty and dependability. It isn't about "if" bad times will come, it is "when". And when those bad times do come, you need to know your mate won't jump ship at the first leak. The same goes for a good company. The rough times will come, and when they do, good companies are loyal to their shareholders and are dependable enough to navigate the crisis. How do you identify these companies? Past performance, that's how.

I challenge the oft-repeated mantra about past performance. Most of the time, it is used as a cover when columnists spit their game, unless they are legally required to regurgitate the chant. It's like Miranda rights; we all have heard the line and can probably repeat it, but it stops there. If I had a nickel every time I heard a talking head say the mantra . . . well, you know the rest.

Past performance does matter, and it does guarantee future results when viewed correctly, in the proper context, and with appropriate time periods. Sure, some executives can rob the shareholders blind and destroy the company, which sometimes is the cost of doing business in a risky world. Past performance of the company and executives minimizes that risk. If past performance doesn't matter, how would we know when to "buy on the dips"? Why pick a fund based on the fund manager? A company's history will tell you a lot about their approach to tough times. How did a particular company perform in the last market downturn? What about the market downturn before that one? How did the company do after the crash in '87? Was it even around in '87? Mediocre companies can see their stock price go up during a market bull. It's the companies that can weather bear markets with minimal damage that are long lasting and profitable. That is one reason I will be focusing on at least 6 ETFs in the coming months for buying opportunities; ETFs made up of companies whose past performance, like a loyal wife, is solid in good times and bad. I am focusing on Dividend ETFs, particularly SDY, which tracks the S&P Dividend Aristocrats. Solid wives pay long-term dividends, and the Aristocrats do the same.

Michael Sivy of Money Magazine actually beat me to the punch when it comes to Dividend yielding ETFs. I started working on this blog several weeks ago, but I have devoted my attention toward the shorts. Sivy highlights dividend yielding stocks and SDY in his article "High Yield Stocks for Retirement". His article offers several perspectives at why you may want to buy. I focus on the history of the companies.

What are the Dividend Aristocrats and why should you care? The Dividend Aristocrats are made up of companies that have increased their dividends for the past 25 consecutive years. In the S&P 500, there are 61 companies that fit the bill as of September of this year. Not only have these companies increased their dividends year after year, they also have done it through rough times. How many news stories have you read about a company cutting its dividend? WaMu anyone? The Aristocrats have history on their side when it comes to toughing it out. What bad times have we experienced in 25 years? In '82 we we had double digit interest rates and the "misery index". At the end of '87, we were gobsmacked by the crash. After the Gulf War, we dealt with a recession. In '98 we had the panic and bailout of LTCM, rescued by the FED. In 2000 it was the bursting of the tech bubble and in '01 it was another recession, coupled with the terror attacks in NYC and DC. The credit crisis of '07 and '08 may be the next thing to add to the list. Add to that mix all of the corrections, and the crises in foreign markets and you have economic shock and awe. Through it all, these companies have remained strong and steadfast. They have gone up and down with the tides of the market cycles, and have weathered the storms. A new storm is coming, but it doesn't have to be scary. The Dividend Aristocrats have seen it all before. The past performance of these companies put them at the top of the heap for loyalty and dependability, and SDY allows you to be diversified into all of these companies, providing a safety net in case a company breaks the streak.

Countless articles have been written on the benefit of reinvested dividends. Several trading strategies are based on dividends and dividend yield, to include the favorite (and oft criticized) Dogs of the Dow. No doubt there are articles churning off the presses about how people will park their money in those "mega-cap, dividend yielding, safe companies" until this scary ride is over. Do your homework first; not all companies (or ETFs) that pay a dividend are created equal.

There are a few downsides to SDY. The first is that it is boring. You won't have high-flying returns that you can brag about at cocktail parties. The path to profit is slow and steady. For those that look at the stock market as an extension of Reno or Vegas, look elsewhere. This downside is actually an upside for the buy and hold group. There are several comfortable retirees that did it the boring way.

Another downside of SDY right now is that some of their constituents have been damaged by the credit crisis, specifically Bank of America and Fifth Third. I am very pessimistic about financials, and I will continue to be pessimistic until at least February, if not longer. A little over 27% of SDY consists of financials, and I am also worried that a recession will pull the price down further. This is one reason I am in a wait and see mode. SDY peaked at $66.02 in May and then bottomed at $55.13 only a couple weeks ago. During that time it roller coastered down 10.6%, then rose 5.9%, then dropped 12% again. Its now going back up. Dividend ETFs are not immune to market swings, but again, for long term investors, the above swings are just blips on the long-term map.

For more information on the Dividend Aristocrats, you can go to the following link:

http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_dai/2,3,2,2,0,0,0,0,0,0,0,0,0,0,0,0.html

Several other Dividend ETFs include DVY, PEY, PFM, PHJ, and VIG. Each employs a different methodology to suit your tastes. Though the above list is by no means an all-inclusive list, it serves as a good start for research.

There's only a few days left until the game is done. I believe I am too far out of reach to contend, but it has been fun.

--Jonathan

Comments: View Comments |  Wednesday December 12, 2007