By Carla Fried
Over the very short term the markets may well be whipped around by Washington inanity. On the government-shutdown front, S&P Capital IQ points out that during the 1995-96 shutdown the S&P 500 lost 3.7% but then gained 10.5% in the month following that bit of folly.
During the 2011 debt-ceiling imbroglio the S&P 500 fell 10% from late July to early August. There were more moving pieces to deal with in the summer of 2011 -- Europe was in the depths of its own debt problems -- but by year end the S&P had retraced nearly half that loss and by the end of the first quarter of 2012, it had snapped back with a 17% rise from the August 2011 low.
That's the long-winded way to suggest that whatever sell-off occurs will be short-lived and the markets will eventually get around to paying attention to fundamentals. And that's where things get really interesting. As dark as Washington may make the next few weeks, the expectation is that economic growth is on track to accelerate in the fourth quarter and next year.
Moody's Analytics forecasts GDP growth will accelerate from 1.9% this quarter to 2.7% in the fourth quarter. In 2014 Moody's expects GDP to expand 3.2%.
If that's indeed how things play out, that means the Federal Reserve will likely begin its stimulus taper in the coming months, which could put more upward pressure on long-term interest rates. As we all saw when taper talk began in May, that move is a loud signal that interest-rate sensitive sectors are especially vulnerable.
Sure, utilities, consumer staples, telecoms and REITS got a reprieve last week when the Fed decided not to begin the taper, but that's not expected to become a long-term re-rotation that favors defensive/interest rate sensitive segments of the stock market.
^SS3J data by YCharts
Rather, if you are on board that the economy will gradually accelerate its growth pace later this year and through 2014, that's an argument that more economically sensitive sectors will outperform. And that makes life a bit trickier for income-focused stock investors. There's obviously more implied cyclicality in sectors such as industrials, technology, consumer cyclicals and energy, which traditionally outperform when the economy picks up the pace. But you can't afford to invest in a highly cyclical company where the dividend and dividend growth aren't dependable.
In terms of dividend dependability, S&P's Dividend Aristocrats list is always worth a look-see. The list currently contains 54 stocks within the S&P 500 index that have managed to raise their dividend for at least 25 consecutive years.
One of the quirks of the Aristocrats methodology is that stocks with even the weakest (read: sub-inflation) rate of dividend growth can make the list.
So checking for how much the dividend grew is an important first step. All five stocks manage to easily outpace inflation over the past five years, though clearly the dividend growth of Lowe's and McDonald's stand out.
BMS Dividend data by YCharts
Given that Lowe's trades at 24 times its trailing 12 month earnings, it's not exactly screaming bargain these days. McDonald's has the lowest trailing 12 month PE ratio of the group at a shade below 18.
Among the Industrial sector, Automatic Data Processing (ADP), Illinois Tool Works (ITW), 3M (MMM) and Black & Decker (SWK) all grew their dividends above the rate of inflation for the past five years. Black and Decker delivered 56% dividend growth over that stretch and 3M was the weakest in the group with 27% dividend growth over five years. Illinois Tool Works has the lowest trailing 12-month PE ratio at 15.3, but Black & Decker and its strong dividend growth isn't far off at 16.7x.
Given the 25-year hurdle for dividend growth, technology is not well represented in the S&P Dividend Aristocrats. Emerson Electric (EMR) is the only tech aristocrat. Its 24% dividend growth over the past five years seems plenty strong; but in fact from 2009 into 2011 growth was below 5%. Moreover, a 32 trailing PE ratio is a recent jolt up from its much lower historic norm.
XOM Dividend data by YCharts
Neither is being bid up by an expectant market; Exxon Mobil's trailing PE ratio is just below 11 and Chevron is a tad less expensive at 10x. Chevron also offers the better current income proposition; its 3.2% dividend yield is higher than the 2.9% payout for Exxon Mobil.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.