(PFM) - PowerShares Dividend Achievers - Don Dion, Fidelity Independent Adviser newsletter

Don Dion, editor of the Fidelity Independent Adviser newsletter, explains that investors have been satisfied enough with the news lately. Read this featured expert’s commentary to find out what he is talking about. Then discover Dion’s thoughts on oil prices, the housing market and the Fed. Afterward, take a look at his Portfolio Spotlight profile. Don’s Outlook from October 26 Click here to find out more! Investors have to be warming up to the Ben Bernanke era at the Federal Reserve Bank. For the third time in a row, the Fed under Bernanke chose not to raise interest rates. Sure it’s true that the hard-core optimists were hoping that the Fed might actually reduce rates to jumpstart the economy and support the housing sector. But this was a lot to expect. And the fact that the three major indices all posted modest gains after the announcement that rates were not changing shows that investors were satisfied enough with that news. The Dow Jones Industrial Average continued to lead the way, with an intra-day record high before closing above 12,134. More notably, 22 of the Dow’s 30 components were up yesterday. The Dow has been pushing its ceiling higher for the past two weeks, and the 12,000 barrier seems to have been broken with confidence. But the Nasdaq and the S&P 500 were also up yesterday and have been trending upward recently as well. Support for stocks appears to be solid and earnings so far in the third quarter have been satisfying, even though expectations were high. One area of concern may soon be oil prices. They were holding to levels under $60 per barrel, despite promises from OPEC that it was going to cut production. But yesterday, crude futures rose by more than $2 per barrel to $61.40 a barrel on the New York Mercantile Exchange after a weekly Energy Department report showed an unexpected drop in crude inventories. The spike in oil prices sent stocks such as ExxonMobil higher. Meanwhile the increase, combined with negative quarterly news, sent stocks such as General Motors and Boeing lower. Economic data will continue to play a role in investor confidence, but certain things are already factored into market prices. For example, there was little negative market reaction this week to news from the National Association of Realtors that existing home sales declined 1.9 percent, marking the slowest sales rate since January 2004. Apparently investors have already resigned themselves to the slowdown in the housing market and they have factored that into their decisions. The Fed is at a bit of a crossroads now. The slowing housing market has caused 30-year home loan rates to decline in recent weeks. But the banking and financial sectors can’t keep lowering rates to stimulate business without cutting into profits. If the economy starts to slow down, the Fed may have to act to reduce rates. That could help stocks, but a slowing economy won’t. Remember that it has been several months now that the yield on short- and long-term bonds has been basically flat, a condition that has led to recession in the past. The fourth quarter should be interesting, especially for retailers and other consumer segments, who depend on the fourth quarter to make or break their entire year. Portfolio Spotlight PowerShares Dividend Achievers (PFM) Any investor who has followed the stock market during the past half-decade knows that small- and mid-cap stocks have absolutely crushed large caps. Indeed, the Russell 2000 Index of small shares and the Russell Mid Cap Index posted annualized gains of 9.44% and 10.89%, respectively, during the five years through August 23. Meanwhile the largest stocks flat lined, with the Russell Top 200 Index of giant caps returning an annual average of just 2.41% per year. Furthermore, lower-quality stocks generally performed best during that period, as low interest rates and strong economic growth improved prospects for weak firms, helping their stocks—which had dramatically trailed blue chips during the late ’90s—earn higher valuations. Those market trends appear to have begun to change. Slower economic growth and rising interest rates make large, high-quality stocks more attractive than smaller, weaker firms, in part because blue-chip firms rely far less on short-term borrowing than their littler cousins. Big, strong companies also boast income streams that are diversified both geographically and by industry, helping them maintain growth when an economic expansion slows. Investors as a result tend to reward such stalwarts during the latter stages of an economic cycle. Stocks that throw off strong dividend payments become especially appealing during such an environment because the payouts provide a measure of protection against losses. Market analysts and pundits have predicted a return to blue chips for some time now, but May’s flight from risk and the volatility that followed appear finally to have kick-started that trend. The Russell Top 200 lost just 0.82% between May 9, when the market peaked, and August 23—while the largest 50 stocks gained 1.77%. Meanwhile the Russell Mid Cap Index fell 6.19%, and the Russell 2000 plunged more than 10%. PowerShares Dividend Achievers increases investors’ exposure to the market’s dividend-paying Goliaths. PFM invests in shares of firms that have increased their dividend payouts for at least the past ten consecutive years. That requirement restricts this exchange-traded fund to the stock market’s most financially powerful firms. Indeed, a look at its recent top five holdings—Exxon Mobil, General Electric, Citigroup, Bank of America and Procter & Gamble—confirms that shareholders here will gain exposure to the bluest of blue chips. PFM recently held a total of 319 stocks, with an average market capitalization of almost $65 billion. (Compare that to the $48 billion average market cap of stocks in the S&P 500.) Its dividend requirements typically focus the fund’s portfolio in the value box, since growth-oriented companies generally reinvest profits into their businesses rather than distribute funds to shareholders. As a result, the fund recently held three-quarters of its assets in value stocks, according to PowerShares.com. The dividend mandate also tends to lead to high concentrations in the financials, consumer staples and industrials sectors—recently 29.8%, 20.3%, and 12.1% of assets, respectively—with correspondingly low allocations to technology (3.3%) and consumer discretionary (6.1%) stocks. Those characteristics make PowerShares Dividend Achievers a terrific vehicle when large, defensive stocks lead the market. For example, the fund was flat between May 9 and August 24, even as the S&P 500 lost 2%. That said, the fund’s concentrations in various market-cap sizes and sectors make it a less-than-ideal core holding, so it is important to take that into account when selecting other solid funds to complete your asset allocation. This article highlights the commentary of Don Dion for the Zacks.com audience. Don Dion provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Fidelity Independent Adviser" newsletter. Try it free for 30 days and see if you can improve your investment performance. Learn more about "Fidelity Independent Adviser" and 30-Day Free Trial. And get immediate access to current issues and special reports. Click here now. Here’s How You Can Profit from the Pros Find out what other leading experts are saying about the market. And what stocks they are recommending. For free. Just sign up for our free email newsletter, Profit from the Pros, where we’ll give you the commentary, advice, and insight from those rare few experts who consistently beat the market year in, year out. | Blog Home| VitalStocks Home