DIVO - DIVO: Buy Dividend Stocks For Q4? Nope Not This Time

2023-09-21 03:55:24 ET

Summary

• Back in March, I said I thought DIVO would underperform risk assets, and it has.
• DIVO has historically performed well in the last three months of the year, but current sentiment suggests that growth-oriented stocks may outperform.
• Sentiment is too negative, and I prefer being bullish on risk assets rather than DIVO.

I've maintained my bullishness throughout 2023, and so far so good. Bull markets have ups and downs, and since July, we've seen some protracted selling. However, we're almost through the very tough month of September, which is generally very weak for equities. Now that we're getting through it, I think there is evidence that we're ready to move higher once again.

Back in March, I wrote an article that said dividend stocks were not the place to be. I'm in search of the best place for investment capital, and that means evaluating the relative return potential of asset classes. When I said the Amplify CWP Enhanced Dividend Income ETF ( DIVO ) was not the place to be, I was referring to its potential against the broader market.

Since then, DIVO is up 2%, plus 2.4% of dividend payments. The S&P is up almost 11%, and the Nasdaq is up about 19% since then. In other words, I was looking for marked underperformance from DIVO, and that's what we've gotten.

That's fine, but what about now? We're actually entering the time of year when funds like DIVO perform their best on a relative basis, but at the same time, sentiment suggests equities are ready to move up in a potentially big way. If that latter part comes to fruition, seasonality that favors defensive sectors won't matter and growth is likely to lead again.

A refreshed look at DIVO

DIVO owns a very defensive list of stocks, as you'd expect. I covered the full rundown of DIVO's characteristics in the linked article above, so I won't repeat how the fund works. However, let's have a refreshed look at the fund's sector holdings.

Financials, staples, and health care make up almost half the fund, which is why it performs well in the last three months of the year on a relative basis. Below is the past five years of outright performance of DIVO, and we can see it averages 2.2% gains in October, 3.5% in November, and a fractional loss in December.

Those aren't huge numbers, obviously, but progress is progress. Now, let's look at the same chart against the Nasdaq, as measured by the QQQ.

On a relative basis, DIVO outperforms by 2.5% in September, 1.3% in October, and 1.1% in December (November is a slightly worse month). We've already seen the relative performance of DIVO in September (as you'd expect given this data), so looking forward, history suggests DIVO is set to outperform growth-oriented stocks.

The thing is that, as I mentioned in the open, we're at a spot in the equity markets of extreme pessimism, and if this bout of pessimism resolves like the other recent examples have, growth and high beta stocks are likely to be quite strong and leave DIVO behind.

Before we get to that, let's take a look at DIVO's price chart to get an idea of how it looks before we head into the year-end period.

DIVO has traded weakly since July, as all equity indices have. However, it's a bit in no-man's land at the moment, as it's made a lower low, but also held support. That support level is just over $35, and it's important that DIVO holds it. The technical outlook here isn't great because the momentum indicators are showing the bears are in control, and the shorter moving averages are below the longer ones, which simply indicates that the short-term trend is worse than that of the long-term trend.

Where things get really interesting for DIVO is the blue trendline I drew in, which is only about 2% below current price right now. If selling is not contained within the blue trendline, look out below. Regardless, I don't particularly like this chart and am steering clear, but if you insist on owning it, that blue trendline is critical.

This time may just be different

I just spent a few paragraphs telling you that DIVO is historically likely to outperform growth assets in the next three months, and that's true. However, this particular year-end may be different in that we have extremely negative sentiment among equity traders.

My preferred sentiment measure is the equity-only put-to-call ratio, or CPCE. This measures the volume of puts and calls traded on equities, and turns it into a ratio. Investors tend to buy lots of calls when sentiment is too bullish, and lots of puts when it's too bearish. That makes the CPCE a tremendous contrarian tool, and that's why I like it. Now, the daily value of CPCE is extremely volatile and generates a lot of noise. However, we can smooth out those daily oscillations by plotting a 5-day moving average, which is below.

The current 5-day MA CPCE value is north of 0.80, which is fairly rare, I've marked the other three times this has happened in the past ten months or so, and in the bottom panel we have DIVO against the QQQ on a relative basis.

The December instance resulted in a relative underperformance of almost 16%. The March instance was about 6%, and the May instance was again almost 16%. Does this guarantee this time will be exactly the same? Of course it doesn't. However, getting defensive in the face of this sort of evidence is not for me.

Sentiment is an extremely powerful indicator, and right now, it's telling me I should be bullish risk assets, not funds like DIVO.

Wrapping up

If we put a bow on this, DIVO has a tendency to perform better than risk assets in Q4, but there's enough evidence from a sentiment perspective that it looks to me the risk of continuing to own risk assets is the way to go. Each investor can make their own determination, and maybe I'm wrong and we get a big selloff in Q4. I think sentiment is far too negative for that, and I am maintaining my stance that DIVO is not the place you want to be.

Of course, DIVO is an income fund, so it's worth looking at the yield.

DIVO does have a nice yield of 4.77% against the S&P 500's 1.47%, and that's a big premium. However, remember DIVO has vastly underperformed the broader market since my March article, even including dividends. If I'm right that Q4 has a rally in store, DIVO's going to underperform again, and the 3% yield premium won't mean anything.

Will DIVO finish the year higher than it is now? I think that's likely. Will it outperform the S&P 500 or Nasdaq? I still think the answer is no.

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