During periods of market uncertainty and heightened volatility, investors and traders alike often turn to income-generating assets such as dividend-paying stocks. As we head toward the final months the year, traders often look for candidates to add to their portfolios for the year ahead and determine where they will most likely place buy and stop orders.
- The lucrative risk/reward setup on the chart of the iShares Select Dividend ETF (DVY) suggests that dividend-paying companies could be in focus during the final months of 2020.
- Clearly defined levels of support and resistance will greatly influence the placement of buy and stop orders over the months ahead.
iShares Select Dividend ETF (DVY)
Most traders interested in niche market segments such as dividend-paying stocks often turn to exchange-traded funds (ETFs) such as the iShares Select Dividend ETF. As you can see from the chart below, the price has recently broken beyond the resistance of a descending trendline as well as its 200-day moving average.
The breakout and recent period of consolidation suggests that the bulls are in control of the short-term trend and that the bias will likely remain in the favor of the bulls until the price closes below $83.88 or $80, depending on risk tolerance and investment horizon. Based on the height of the pattern shown on the chart, followers of technical analysis will most likely set their target prices near the psychological $100 mark.
International Paper Company (IP)
Given it is one of the top holdings of the DVY ETF, many active traders may want to consider analyzing the chart of International Paper Company (IP). As you can see below, the price of the stock rebounded nicely from the March lows and has recently surpassed the resistance of its 200-day moving average.
The strong price action in recent weeks has also triggered a bullish crossover between the 50-day and 200-day moving average, which many followers of technical analysis will use to mark the beginning of a major long-term uptrend. From a risk-management perspective, stop-loss orders will most likely be paced below $39.85 or $36.31, depending on risk tolerance and investment horizon.
Historical evidence suggests that a focus on dividends may amplify returns rather than slow them down. For example, according to analysts at Hartford Funds, since 1970, 78% of the total returns from the S&P 500 are from dividends.
LyondellBasell Industries N.V. (LYB)
Another top holding of the DVY ETF that active traders may want to take a closer look at is LyondellBasell Industries NV (LYB). As one of the prominent players in specialty chemicals, its market position allows for a hefty dividend. As you can see from the chart below, the stock price is currently trading within a defined ascending triangle pattern.
Recent closes near resistance have many traders wondering whether the price will be able to break higher. For many traders, the bullish crossover between the 50-day and 200-day moving averages could be used as a leading indicator of a major move higher. Based on this pattern, many are likely buying in advance of a move toward target prices near $100, which is equal to the entry point plus the height of the pattern.
The Bottom Line
Dividend-paying companies will likely be the focus of many traders over the remaining months of 2020 and for the start of 2021. Based on the charts discussed above, traders will most likely look to take advantage of lucrative risk/reward setups by placing buy orders as close to current levels as possible and protect against a sudden shift in fundamentals by placing stop-loss orders below noted support levels.
At the time of writing, Casey Murphy did not own a position in any of the asset mentioned.