Modest Dividends Point to Delayed Recovery

By Eric Roseman

The lack of dividends today will probably delay a full recovery for the stock market.

Historically, dividends are responsible for about half of the stock markets’ total return equation.

But in the go-go days of the 1990s, dividends became insignificant as investors lunged after technology and other growth stocks; CEOs ploughed cash back into buybacks at the expense of dividend hikes for the most part. And as the market skyrocketed that decade the dividend yield as a percentage of the markets’ total return shrank.

By 2000, dividends as a percentage of the markets’ total return dwindled to just 10%.

The chart below is probably one of the most telling explanations on why dividends matter…

If an investor bought the Dow Jones Industrial Average at the peak in 1929, he would have waited 29.25 years to break-even or until 1958.

But…with dividends reinvested…the Dow managed to recover its 1929 peak in just 7.25 years! That’s an incredible statistic. But remember, back in 1932 the Dow yielded more than 10%; at the low on March 9, 2009, the Dow yielded just 4.1%.

Right now the yield on the Dow at 3.63% is about 64% lower than it was in 1932. This suggests that stocks could take longer to recoup their October 2007 all-time highs…because the power of reinvested dividends is much less today than back in 1932.

So Where Can You Find Worthwhile Yields?

The big problem with dividend investing today is that many companies are cutting or eliminating dividends altogether.

That’s especially the case with the distressed financial services sector, where dividends have been almost entirely cut or substantially reduced since last year.

Just how the market can recover much quicker without bank dividends – a big chunk of the Dow – remains to be seen.

A better way to ride a recovery…if you feel bold enough…is to buy convertible bonds instead of common stocks.

Your upside, of course, won’t be as snazzy as equities, but at least you’ll have some income to cushion any drawdown. Convertibles suffered their worst year in history in 2008 – crashing almost 40% – but have gained more than 10% in 2009.

My favorite convertible bond fund remains Vanguard Convertible Securities Fund [VCVSX]. The Fund has employed the same manager since 1996 and has the lowest expense ratio in the business. In 2009, the Fund has gained 15.5% compared to 1.3% for the S&P 500 Index. Not a bad show.

Comments

[cretin snif...:]

Dividends will pick up soon. The cheap dollar has really put a boost into our porn industry. Porno jobs are booming, its the US's greatest growth industry. As foreigners start to realize this, our porn industry will start spinning off significant profits in the form of dividends.

Porn and alcohol will power us to a new era of unlimited growth.

May 14 08:40 PM

[Big K:]

Since the Dow is an arbitrary selection of stocks, the yield on the Dow now is of no relevance when comparing with the 1930's. I could choose a Dow now that has a higher yield, if that were the criterion. Currently the Dow contains badly mismanaged companies like GM, or scam companies who steal their shareholders equity, like AIG. When you choose companies run by creeps and incompetents to represent your average, you don't do so well. Hence, this article has no reason to exist. Instead, the author of this article should watch and learn from the professionals in this field who follow the S&P 500, and mostly ignore the Dow.

The author missed an important point when he says "CEOs ploughed cash back into buybacks at the expense of dividend hikes for the most part.". Actually, CEOs plowed the money back into their own pockets with unethical pay raises, undeserved bonuses, and sham backdated stock options. That's the reason to avoid most companies on the market today. I stick with companies that have a fair dividend (3% or greater) with a long history of increasing dividends. Afterall, many of the wealthy in this country did so by holding high quality dividend aristrocrats for decades and are now receiving dividends equal to 100% or more annually based on their original investments. Such companies that could have brought you wealth had you bought them decades ago, especially if you re-invested dividends, include KO, PG, CL, CLX, KMP and ABT. These managements, and others, reward their shareholders rather than steal from them.

May 14 11:55 PM

[ain't no fo...:]

Those stock option exercises and share flips were total robbery of shareholder equity by the "C" level guys and their BoD's. Then they did the share buybacks to make people think they were trying to support the share price. It was a multi- multibillion dollar scam and many of those guys should have been prosecuted.


On May 14 11:55 PM Big K wrote:

> Since the Dow is an arbitrary selection of stocks, the yield on the
> Dow now is of no relevance when comparing with the 1930's. I could
> choose a Dow now that has a higher yield, if that were the criterion.
> Currently the Dow contains badly mismanaged companies like GM, or
> scam companies who steal their shareholders equity, like AIG. When
> you choose companies run by creeps and incompetents to represent
> your average, you don't do so well. Hence, this article has no reason
> to exist. Instead, the author of this article should watch and learn
> from the professionals in this field who follow the S&P 500,
> and mostly ignore the Dow.
>
> The author missed an important point when he says "CEOs ploughed
> cash back into buybacks at the expense of dividend hikes for the
> most part.". Actually, CEOs plowed the money back into their own
> pockets with unethical pay raises, undeserved bonuses, and sham backdated
> stock options. That's the reason to avoid most companies on the
> market today. I stick with companies that have a fair dividend (3%
> or greater) with a long history of increasing dividends. Afterall,
> many of the wealthy in this country did so by holding high quality
> dividend aristrocrats for decades and are now receiving dividends
> equal to 100% or more annually based on their original investments.
> Such companies that could have brought you wealth had you bought
> them decades ago, especially if you re-invested dividends, include
> KO, PG, CL, CLX, KMP and ABT. These managements, and others, reward
> their shareholders rather than steal from them.

May 15 12:32 AM

[Dividend Gr...:]

Despite the fact that Dow yielded 10% in 1932, the dividend payment was very volatile at the time, whereas the current dividend payment is less volatile.

May 15 02:09 AM