2 sectors I wouldn't recommend to my worst enemy

Often favored for their dividends, REITs and utilities are clear victims of the Fed's taper talk.

By InvestorPlace Jun 21, 2013 11:59AM

Arrow Down (© Kyu Oh/Photodisc/Getty Images)By Jim Woods

So the Federal Reserve just told us that it has decided it could start tapering its bond purchases later this year. And while I didn't think that was much of a surprise, what was a surprise was Chairman Ben Bernanke telling the world during his press conference that quantitative easing could end by mid-2014.

That potential chock-off of the printing presses during the next 12 months has traders running for cover and indiscriminately selling just about every asset class. Stocks have been slammed, but so have bonds and gold.

I suspect the current selling across the board is basically a risk-off overreaction trade caused by everyone trying to grapple with the potential aftereffects of a zero-QE vista.

Now, I actually think the Fed will continue its bond-buying program well past mid-2014, as I don't think the economic data are going to be good enough to justify the Fed's absence. Having said this, we cannot deny the reality that QE is going to be tapered and that it likely will cause a drop in bond prices and a spike in bond yields -- particularly in the benchmark 10-year Treasury note.

When bond yields spike, it also means interest rates spike, and that condition places interest-rate-sensitive sectors at particular risk for decline.

For dividend stock investors, the current market milieu means it's time to treat the sectors and the companies with the greatest exposure to interest-rate risk as an impediment to continued portfolio performance. More specifically, dividend investors will really want to shun sectors that don't have the ability to raise dividends because of either A) market conditions or B) regulatory constraints.

Two sectors that resemble this aesthetic perfectly are real estate investment trusts and utilities.

The color in the REIT space right now is such that even the best REITs would have a hard time raising rents in a rising-interest-rate environment. The logic here is that if the cost of capital is going up, this presumably would put pressure on the economy, thereby constraining REIT operators from hiking customer rents.

As for utilities, these stocks generally rely on the good graces of state regulators to allow them to increase payouts. Well, with many states around the country facing fiscal hardships, combined with the pressure of added borrowing costs, the last thing state utility commissioners are going to want to do is allow utility companies to boost dividend payouts.

Now, practically speaking, the two biggest exchange-traded funds to avoid here are the Vanguard REIT Index ETF (VNQ) and the Utilities Select Sector SPDR (XLU). These funds contain the biggest -- and arguably the strongest -- companies in their respective sectors.

Not surprisingly, both VNQ and XLU have seen significant selling since late May, when Bernanke first introduced the "tapering" meme into Wall Street's collective cortex. The charts here of VNQ and XLU show the breakdown in each sector -- a breakdown that has sent both funds cascading through support ledges at their respective 50- and 200-day moving averages.



If you own these funds, or if you are thinking about nibbling on them as a sort of contrarian value meal, I strongly recommend you rethink your position and either sell or avoid them, whichever course of action applies to you.

As for individual dividend stocks, here I would avoid marquee REIT names such as Simon Property Group (SPG), HCP, Inc. (HCP) and Avalonbay Communities (AVB) to name only a representative trio. In the utility space, it might be wise to avoid widely held stocks such as Duke Energy (DUK), American Electric Power (AEP) and Sempra Energy (SRE).

Bottom line: The time is right to treat both REITs and utilities as a pariah in your quest for profits ... despite their outsized yields.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

More from InvestorPlace

Jun 21, 2013 12:22PM
Why do REITs and utilities have to "raise" their dividends to be good investments?  Isn't paying the highest dividend rates available good enough?
Jun 21, 2013 12:56PM
To summarize....all the author had to say is this...
"Now, I actually think the Fed will continue its bond-buying program well past mid-2014, as I don't think the economic data are going to be good enough to justify the Fed's absence. Having said this, we cannot deny the reality that QE is going to be tapered and that it likely will cause a drop in bond prices and a spike in bond yields".

Is this rush to get out the door realistic or another situation of fantasy driven dynamics?
The only way to reasonably answer this is by posing another question...

Will short CDs yield anywhere near 5 percent anytime soon?

I rest my case.

Jun 21, 2013 1:13PM

yield protection?

diversification protection?


oracle another gap down cramer stock

gold at 1900

aapl at 700


this hack will cost you big....that's why he sells advice instead of investing for a living

Jun 21, 2013 1:16PM
The fast buck artists have been pushing REITs hard. 
Jun 21, 2013 1:25PM
beware........he is pushing huntington bank again....he has recommended this stock many times in the past 5 years and licked the ceo many times on his program.........watch out
Jun 21, 2013 1:19PM
He didn't say to avoid MLP's.    I'm holding onto my MLP's because they actually can and do raise distributions and the stocks can and do go up in value over time.   They do have the issue of rising rates when borrowing to fund projects, but many MLP's fund with new equity instead.
Jun 22, 2013 12:53PM
Sempra has made me a fortune. All it deals with is natural gas,the energy of the future. This guy is a short term Knucklehead.
Jun 21, 2013 2:02PM

Since "REI" is a clothing brand, what will we call REIT's once the trust aspect is removed and they pay taxes on vacant holdings with deductions or depreciation in offset? We need to get enterprise in that space not continue allowing bookkeeper scams to prevail. Maybe... REIK's as in Real Estate Investment Kiters. Get a clue... we're not going to wait 20 years to play out all the scams. All these off the wall accounting-based groups DIE as impediments and broad template policies replace them. There is no such career as financier. Business platforms and the scamming administrators who operate them are the target. Eat the rich... they are tender.



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