How Today’s 2.46% Dividend Yield Could Destroy Your Wealth

The higher this rally goes, the more you’ll hear that another bull market has started, says underground investor Chris Weber. But Chris is warning investors not to be fooled.

Chris, who edits the Weber Global Opportunities Report, started investing while in high school and made so much money he hasn’t had a “real” job in his life. He’s an investor’s investor. And that means when he makes a call, we listen.

Chris says all the great starts of bull markets have certain things in common. And these can all be summarized with the words “Great Values.” Most important, new bull markets offer investors great dividend yields and low price-to-earnings ratio on most stocks.

Right now, the dividend yield on the S&P 500 is 2.46% — lower than the 3.58% yield the index offered was when this rally started in March.

At every start of a real bull market, dividend yields were much, much higher than just 3%. They were over 6% in 1982, over 7% in 1949, and over 10% in 1932. Those were the beginnings of real bull markets. The kind of markets that if you got in early and just held, and reinvested your great dividends, they made you rich.And that is why I have urged that everyone who participates in this rally use trailing stops. These stops can be staggered: some as low as 3%, others as high as 50%, and every gradation in between.

Yes, if the Dow reaches 10,000 or 12,500, or the S&P goes back to 1,000, or 1,100 or 1,200… there will be great rejoicing and optimism that the worst is over. But I will be looking at both the dividend yield and the price-to-earnings ratio on both indices. And from where I sit, if stocks do indeed go that high, it will only be a signal to tighten my stops. Bull markets begin with stocks trading at great values. And those values are not yet here.

Comments

[sticktoitiv...:]

Stop loses, yes. But the problem with valuing the market with dividend yields is that there is a anti-dividend movement that took up steam in the late nineties that is still relevant today. They think that all profits should go toward growth. Many companies have embraced this shift in thinking and have failed to raise their dividends.

May 30 04:39 AM

[Dave Wrixon:]

For yields to go up Corporate Earnings need to be recovering.

The only examples of this happening to date can largely be attributed to a return to Mark to Myth accounting.

But I totally agree, any rally that is not based on improving fundamentals is deeply flawed. This market should be heading for S&P of 500 not 1000.

The truth is that any Green Shoots that are out there are going to perish as interest rates rise on the back a collapsing dollar.

May 30 04:52 AM

[jacflash:]

I agree with both of the above commenters -- dividends are in decline for reasons other than economic, which means that your comparisons to past periods aren't useful, BUT you're right that the fundamentals aren't improving and we're all but certain to go right back down before a real bull is born.

May 30 06:37 AM

[fatcat:]

If oil and commodity prices continue to rise,the consumer will be further pressured and corp. earning will be murdered.

How bout that for a wilted sprout...

May 30 07:38 AM

[Big K:]

More important than the current yield is the rate at which the company increases the dividends. Take ABT for example. It currently pays a 3.6% yield, but just raised its dividend by 11%. If you had reinvested these, you would have a 15% higher dividend this year than last. Keep this up for a few years, and then you've got a great yield. Few jobs give you a 15% raise every year. It takes some time and patience to get a fat dividend, but the important thing is reliability of the dividend and its rate of growth.

May 30 09:54 AM

[rperrin:]

" if stocks do indeed go that high, it will only be a signal to tighten my stops"

Oh, so Chris the Boy Wonder will have been long between now and then. Long in what, pray tell? The thrust of the initial paragraph is that he doesn't believe the rally. Ok, so what is his equity exposure today, 0%? 50%?

If anyone is 100% long now and collects a 2.46% yield between now and the time the DJIA is 12500 their yield will be more than 25% if it takes 2 years to get there. So we are being warned to avoid this strategy in favor of doing what?

May 30 10:03 AM

[David Van K...:]

Once again, the folly of using market-wide statistics to make individual-stock investing decisions is exposed. In addition, this article mashes two totally different investment objectives--capital appreciation and dividend growth--together as if they were the same thing. They are very different strategies.

First: The market may be yielding "only" 2.5% right now. But one doesn't buy the whole S&P 500 to profit from dividends. One buys individual stocks, the best dividend-growth stocks one can find. Big K's comment is absolutely correct: An individual stock like ABT (Abbott Laboratories) yields 3.6% right now, just raised its dividend 11%, and looks to be a terrific long-term investment for the collection (and perhaps re-investment) of dividends. To be a Sensible Dividend Investor requires stock-by-stock analysis, not a glance at what the whole S&P is yielding.

Second: A wholly different strategy for profiting from stock investing is to aim for capital appreciation: Buy low, sell high. More trading concepts are involved in this strategy. Portfolio turnover is generally higher. Sell-stops have more of a place. There is little overlap between this strategy and a dividend-growth strategy. It is true that the market's current dividend yield can be a clue as to whether the market is overvalued or undervalued at the moment. But it is just one of many data points. Historical comparisons can be valid sometimes but misleading other times. As has already been pointed out, the market's yield right now has been decimated by the massive dividend cuts of many banks, who used to pay high dividends but are now trying to conserve capital. Also, dividend trends tend to wax and wane over the years. Speaking generally, "all" stocks paid higher dividends in 1932 than they do now. Another difference in recent years is that companies making payouts are far more likely to channel some of that money into share buybacks rather than dividends, thus lowering the market's overall dividend yield.

One last point. I would caution dividend investors about thinking that banks will no doubt restore their dividends. I don't think it is possible to predict when or even whether banks will become the dividend-payers they once were. We have already witnessed the devastating effect of the recession on banks (who brought most of their woes on themselves, but that's another story). The influence and effects of TARP money, higher capital requirements, stronger government involvement, and the like have not yet played out. New, tougher regulations are probably in store. We may be witnessing a changing definition of what it means to be a "bank." Given all this, I consider all banks to be speculative investments right now (that is, maybe suitable for a risk-taking capital appreciation investor), but certainly not suitable for an investor following a dividend growth strategy.

May 30 11:14 AM

[Tomcat101:]

This ain't 1932.

Obama doesn't like throwing away money on dividends to shareholders when it can be given away to someone who won't work or has bad credit instead.

May 30 11:14 AM

[bigtime99:]

You can't state that dividends on the S&P in 1982 were averaging 6% withut mentioning that interest rates were double digits...divs needed to be that high to attract capital - who would invest in risky stocks at that time when you could invest in the money market and make 10%?
Today money market funds are yielding 1% and therefore S&P dividens yields look rather juicy although numerically lower...

May 30 11:35 AM

[Missing_Link:]

On May 30 11:14 AM David Van Knapp wrote:

> Once again, the folly of using market-wide statistics to make individual-stock
> investing decisions is exposed. In addition, this article mashes
> two totally different investment objectives--capital appreciation
> and dividend growth--together as if they were the same thing. They
> are very different strategies.
>
> First: The market may be yielding "only" 2.5% right now. But one
> doesn't buy the whole S&P 500 to profit from dividends. One buys
> individual stocks, the best dividend-growth stocks one can find.


I think you're missing the point entirely. He's not making a point about whether dividend stocks are a good idea. He's making a point as to what dividends tell us about whether we are in fact in a bear market rally.

May 30 01:51 PM

[TLassen:]

"He’s an investor’s investor. And that means when he makes a call, we listen"
Now what the heck does that mean?
I read this article, and I respectfully state this is pure nonsense. Ad hoc analysis at best.
David Van Knapp's comments above are more valuable than this article: now there is someone worth listening to

May 30 03:30 PM

[E Nuff Sed:]

I agree that "depression" level values are not here but this is a not a depression.

Compared to long term interest rates forwards P/E are reasonable and div yields are not bad.

May 30 04:05 PM

[eternitus:]

You have to look at PE... payout ratios have changed over time. Stripping out financial companies, the market was at a PE of less than 10 in March... that's very very low historically.

May 30 04:48 PM

[Living4Divi...:]

Compelling argument.

However, the truth is that dividend yields are low, because dividends have been out of favor for the past couple of decades. The dividend payment has been replaced by stock buybacks.

May 30 08:35 PM

[MexCom:]

I believe you have to compare dividend yields to bond yields. The ratio of stocks over bonds is unusual right now. Most times bonds yield more than stocks. As long as the Fed keeps rates low, this rally has a long way to go.

May 31 06:39 AM

[milkchaser:]

Perfectly stated. Apparently he does not seem to like bondholders either (witness GM).


On May 30 11:14 AM Tomcat101 wrote:

> This ain't 1932.
>
> Obama doesn't like throwing away money on dividends to shareholders
> when it can be given away to someone who won't work or has bad credit
> instead.

May 31 11:46 AM

[milkchaser:]

True, since buybacks are not taxable until the capital gain is realized. However, this trend moderated when tax rate on dividends was lowered.


On May 30 08:35 PM Living4Dividends wrote:

> Compelling argument.
>
> However, the truth is that dividend yields are low, because dividends
> have been out of favor for the past couple of decades. The dividend
> payment has been replaced by stock buybacks.

May 31 11:48 AM

[rdd:]

One of the things that I am looking for over the next couple of years is a refocusing on dividends.

There has been a big push towards stock buybacks and M&A for cash use by companies. This can give a sharp short-term boost to the stock price which is what the executives are looking for to goose their bonus pools tied to stock price or to cash out their option awards.

When we see corporate America focusing on paying and increasing dividends annually and investing in R&D is when we will have turned the corner and will have a great bull market.

May 31 11:53 AM

[milkchaser:]

Really? Even in the face of unleashed inflation? Granted, inflation is low, but the inflation risk is real. A dividend strategy depends on buy and hold. Buying when inflation is low becaue the yield seems attractive is equivalent to betting that inflation will not take overtake dividends when they eventually are paid. That's a bet that would make me nervous today.

On May 30 11:35 AM bigtime99 wrote:

> You can't state that dividends on the S&P in 1982 were averaging
> 6% withut mentioning that interest rates were double digits...divs
> needed to be that high to attract capital - who would invest in risky
> stocks at that time when you could invest in the money market and
> make 10%?
> Today money market funds are yielding 1% and therefore S&P dividens
> yields look rather juicy although numerically lower...

May 31 11:55 AM

[User 422955:]

stomarkt is another Cetin pseudonym.

May 31 07:51 PM

[Ken P:]

More and more people are putting their money in gold and silver, the traditional places people put their money to preserve capital. If the dollar continues to drop or inflation kicks in as a result of growing deficits and debt monetization, then gold should continue to increase in value.


On May 30 09:25 AM dividendmachine wrote:

> I liked the article but feel that investing is 50% art and 50% science
>
>
> Mr Weber is correct about the dividend yield but there are 2 variables
> that if were mentioned ,were not mentioned in this article
>
> 1) Many of the banks that cut or eliminated their dividends will
> no doubt restore them given that one of the steepest yield curves
> ever will inflate bank profits
>
> 2) Where else is anyone going to put their money
>
> Real estate which was the choice after 9/11 when interest rates were
> last this low is in shambles and makes many nervous
>
> Money markets rates are pitiful and many who prefer the safety of
> cash can not live with 1% T bill rates much longer
>
> Buying a dividend paying stock,many of which exceed 3 % will eventually
> be the alternative IMO
>
>

May 31 10:40 PM

[map:]

I do strongly agree with the author.

For those that say "well people have to invest their money somewhere" well you are right -- and history tells us that despite that, virtually all asset classes can go down at the same time! Remember way back, to say October?

Things are not "different" or "special" this time. Well, except that things are actually much worse than usual. Think:
1. we're still in a stock market bubble based on price to dividend, growth rates, historic (100 years) returns, and the following
2. the world is still in a real-estate bubble based on the fact historic real estate returns have been less that 1 percent over inflation. who but the well-off can afford to buy a home now?
3. consumers will finally learn to tighten their belts, and keep them that way
4. painful deflating of the credit bubble
5. painful increase in social security and medicare spending
6. painful increase in the U.S. debt will for a generation or more hinder the economy

Give it a few months or a year, and people will realize this (how many of us are still in denial?) and this will pull down stock and real estate markets once the "doom and gloom" sets in again.

Corporate bonds look good to me right now.

Jun 08 10:33 PM