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Sexy is overrated. Dividends rule!

March 25, 2014: 12:41 PM ET
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Momentum stocks are taking a beating in March. But dividend-paying blue chips like P&G and AT&T are doing just fine.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Is it time for investors to do their best impersonation of the Virginia Cavaliers basketball team and play some stifling defense?

Momentum stocks have had a miserable March. Just look at how poorly the Nasdaq and iShares Nasdaq Biotechnology ETF (IBB) have done.

Biotechs had gotten off to a torrid start this year but have plunged lately on concerns about valuations. Some have dubbed the sector the B word that rhymes with double. And on Monday, several hot Internet and social media stocks were swatted away by traders like Dikembe Mutombo blocking a shot. (Not today!)

mutombo

Netflix (NFLX) plunged nearly 7%. Facebook (FB) and LinkedIn (LNKD) each fell more than 4%. All three were among the biggest losers in CNNMoney's Tech 30 index.

But older and stodgier techs (i.e. they pay dividends) were spared from the sell-off. Apple (AAPL), Microsoft (MSFT) and IBM (IBM) all finished higher Monday.

In fact, several Dow stocks that are known for being more boring and safe have done well this month while momentum stocks have lagged.

Procter & Gamble (PG) and Coca-Cola (KO) are each up about 2% in March. Wal-Mart (WMT) has gained nearly 5%. And AT&T (T) -- which offers a big fat, dividend yield of 5.4% -- has soared more than 6% already this month.

Related: Yee-haw! The mechanical bull market

I think this is a good sign. Investors may be realizing that the market's hottest stocks could not continue to climb indefinitely without some sort of pause.

But this rotation to safer, more defensive companies also shows that investors are not completely giving up on the market or the U.S. economy. They're giving up on stocks with absurdly high price-to-earnings ratios.

"It's quite healthy that the speculation has been flushed out in the past week or so. You don't want to see social media and biotech stocks being the leaders for an extended period," said Hank Smith, chief investment officer of Haverford Trust.

Related: Risk averse? Think 'old' tech. Really.

Smith said he's gravitating more towards dividend-paying stocks that should benefit from a slowly recovering economy. Three that his firm has bought recently? Railroad Union Pacific (UNP), software giant Oracle (ORCL) and industrial equipment supplier W.W. Grainger (GWW).

It's also encouraging that investors are not flocking to Treasury bonds, which usually benefit in times of Mel Brooks-ian High Anxiety on Wall Street.

If the March pullback really was about legitimate fear that the bull market was over, you would probably expect to see Treasury yields plunge as investors bought more bonds. (Prices and rates move in opposite directions.)

But that hasn't happened, as the chart below clearly shows.

John Nichol, manager of the Federated Capital Income Fund (CAPAX), thinks this makes sense. He said that his fund, which owns both income-producing stocks as well as bonds, actually does not have any exposure to Treasuries right now.

He added that he and others at Federated think that the 10-Year Treasury could finish the year with a yield north of 3.5% ... and that the broader stock market will keep rallying. So he prefers to take on a little more risk with bonds as well as stocks because he does not think the bottom is falling out of the U.S. economy.

On the fixed-income side, Nichol said he owns more corporate bonds and high-yield bonds, which should do well if the economy picks up steam. He also likes several technology stocks that pay dividends, including Microsoft and Intel (INTC).

Related: A different take on dividends

He said the mistake investors sometimes make when looking at dividends is to focus on high yields. But it's more important to own companies that have strong enough balance sheets to keep increasing their dividends.

"Companies with yields that are growing are exciting," he said. "You want to own those cyclical stocks as well as economically sensitive bonds. We are positioning our portfolio for rising rates."

To that end, two sectors that are known mainly for gigantic dividend yields -- utilities and real estate investment trusts (REITS) -- haven't done much this month. The Dow Jones Utility Average (DJU) and SPDR Dow Jones REIT exchange-traded fund (RWR) are pretty much flat for March.

So don't freak out just because Netflix and biotechs are plunging. There's more to the market than momentum stocks.  And investing defensively doesn't have to mean boring.

While there may not be anything all that sexy about drug store chain CVS (CVS), railroad CSX (CSX) and health care conglomerate Johnson & Johnson (JNJ), guess what? These three stocks hit all-time highs Tuesday. Sexy is overrated. Dividends are much more exciting.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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