Finding Solace In Non-Financial Dividends

By Aaron Levitt | August 10, 2011 AAA

The wake of slowing global growth and the debt problems facing Europe and United States, the market has begun to panic. Responding to these fears, many investors have started to bail on a variety of risk assets. Funds that track commodities or emerging markets, such as the Market Vectors Vietnam ETF (NYSE:VNM) have sold off heavily in recent weeks. For many investors, this shift from riskier assets to safer ones has meant loading up on dividend paying stocks. However, given the headways facing the economy, not all sectors may be desirable. (If you are looking to get into dividends, check out Build A Dividend Portfolio That Grows With You.)

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Continued Trouble
Many of the catalysts for the global meltdown and resulting credit crisis still exist. Europe's debt woes continue to plague the recoveries in those countries. Credit default swaps on debt from all the PIIG'S nations continue to surge to new highs. Currently, the cost for insuring these debts has risen above the levels seen last year as well as during the '08 financial crisis. In the United States, the recent debt ceiling battle has exposed the long-term fiscal problems within the country. Unemployment remains stubbornly high and the housing market continues to suffer.

Since the recovery began, the financial sector has struggled to match the broad market. The broad-based Financial Select Sector SPDR (NYSE:XLF) has underperformed the S&P 500 over the last two years. What is more impressive, is when you remove all the financial stocks from the S&P 500, the non-financial stock index shows greater returns over the same period. The non-financial S&P also yields more the regular index by over 1%.

The allure of dividend investing is simple to understand. These regular cash payments from stocks can provide much needed retirement income, enhanced returns via dividend reinvestment and ultimately keep away the cold hand of inflation. However, as many of the same problems that caused the financial sector to hemorrhage during the credit crisis remain, those looking for income or steady dividend streams could be in a world of hurt if the economic situation gets worse. Even broad-based equity income funds like the PowerShares Hi-Yield Equity Dividend Achievers (NYSE:PEY) include a hefty dose of financial stocks. The sector currently makes up 23% of PEY's holdings. (For more important issues with dividends, read Your Dividend Payout: Can You Count On It?)

Look Beyond the Financial Sector
With financial sector looking shaky for the foreseeable future, investors may want to focus their dividend efforts elsewhere. Exchange-traded-fund-provider WisdomTree offers the WisdomTree Dividend ex-Financials (NYSE:DTN). The ETF tracks 89 different high-yielding non-financial stocks and currently yields about 3.3%. The firm also offers an international version in the WisdomTree International Dividend ex-Financials (NYSE:DOO). For those looking for individual stocks, here are a few of the ETFs top holdings that make great picks.

While its bread and butter business may be boring, Waste Management (NYSE:WM) continues to move into higher margin specialized businesses. The company remains a leader in landfill gas and waste-to-energy applications and has recently begun partnering with Oil E&P firms tapping into the Marcellus shale for water treatment/disposal. The company has continued to raise its dividend and currently yields to 4.5%.

Providing the tastes and smells for a host of products, International Flavors & Fragrances (NYSE:IFF) is an interesting way to play the global consumer. Over 75% of its 2010 sales were located outside the United States, with 45% coming from emerging markets. The company should continue to benefit from the growing middle classes around the world. IFF recently raised its quarterly dividend and now yields 2%.

Finally, tobacco stocks remain a great place for investors to look for income. Both Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI) offer yields at or above 5% and represent great defensive plays for any market uncertainty.

The Bottom Line
With the recent market maelstrom, investors have once again begun the flight to quality. However, with many of the problems still in place from the Great Recession, the financial sector remains a point of contention. For investors, adding a dose of non-financial dividends could be exactly what the doctor ordered. The previous ETFs along with firms like utility NiSource (NYSE:NI) make great picks. (To learn more on dividends, see The Power Of Dividend Growth.)

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