Pullback Puts Dividend Stocks on Sale

Anyone who has been investing for any length of time knows that buying stocks that pay reliable dividends can be a key component in a long-term investing strategy when those dividends are reinvested.

For short term traders, the benefits of dividend-paying stocks – and ETFs that consist of dividend-paying stocks – are more muted. Holding a position for three, five or eight days often means that the trader will not be in possession of the stock or fund when dividend payout time comes around.

This, by the way, is important whether you are buying the dividend paying stock – and expecting a dividend payout – or selling the dividend paying stock short – and providing a dividend payout.

But just because dividend paying equities provide their greatest advantage to longer term holders doesn’t mean that they can’t play a role in a short-term trading strategy, especially when these funds are among the few trading in oversold territory above the 200-day moving average.

The Vanguard Dividend Appreciation ETF (NYSE: VIG), the PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NYSE: PEY) and the iShares Dow Jones Select Dividend Index Fund ETF (NYSE: DVY) all pulled back in trading on Thursday. For DVY, Thursday’s lower close marked the fund’s second lower close in a row (DVY closed lower on Wednesday, but finished in overbought territory). DVY will open oversold when trading begins on Friday.

Both DVY and VIG pulled back by more than 1%, while shares of PEY dropped by more than 2%. Like DVY, both VIG and PEY are set to open in oversold territory Friday morning. All of these dividend stock based funds have been trading around their 200-day moving average since mid-October, and have moved to trade above that level since the beginning of December.

Note that heading into trading on Friday, all three of the exchange-traded funds in today’s column have positive, short term edges. Those edges are strongest in the PowerShares High Yield Equity Dividend Achievers Portfolio ETF, which has a positive edge of just over half of a percent.

All of the ETFs in today’s report were available from research and data available through The Machine. To learn more, click here.

David Penn is Editor in Chief of TradingMarkets.com