The U.S. and global economies are entering very troubling times, which is promoting the value of dividends. China is a big driver for worldwide growth, but China is having its worst year (slow growth) in more than a decade as it copes with a leadership change. Part of the reason for sluggish growth is the European situation, which is going from bad to worse. Besides sovereign debts issues, Europe is suffering from a recession, which is hurting the global economy including the U.S.
This year, GDP in the U.S. has been limping along at a sub 2% annual growth rate, which will probably continue for the balance of the year. Unemployment remains around 8%, and new jobs added each month are around 100,000, inadequate for reducing unemployment. Making matters worse is a lack of fiscal discipline coming from DC. The fiscal cliff of automatic tax increases and government cutbacks starting on January 1 are causing companies to hesitate about capital investments and adding workers. There is no government resolution in sight until the end of 2012, at the earliest. In addition, the debt ceiling problem has not been solved. The Treasury is expected to reach its borrowing capacity again within a few months. These difficulties are enormous, and uncertainty about how the government intends to solve these problems is causing businesses to delay expansion plans.
The stock market has had its own level of uncertainty since 2000 when capital appreciation has been limited. The Dow Jones Industrials began 2000 at 11,497 and has risen to 13,328 in 12 years. In the past, capital appreciation has supplied 2/3 of investment gains with dividends contributing the balance. But the importance of dividends has grown because of uneven capital appreciation for some of the most famous stocks.
Companies best equipped to absorb whatever comes when the fiscal cliff arrives (even if it brings a recession) are Dividends Aristocrats, which have raised annual dividends for a minimum of the last 25 years. Growing dividends from these companies will make it easier for investors to get through uncertain times ahead.
Below are two groups of Dividend Aristocrats, one with an emphasis on current income and the second one largely for capital growth. The first includes eight stocks with high yields and all have raised dividends for the last 50-56 years placing them in the top dozen of company streaks in the U.S. While enduring numerous recessions, including some of the most difficult ones in history, they have continued increasing dividends for decades.
Johnson & Johnson (JNJ)
Emerson Electric Co. (EMR)
Procter & Gamble (PG)
Genuine Parts (GPC)
The second group is for investors interested in growth from capital appreciation.
VF Corp (VFC)
WW Grainger (GWW)
CR Bard (BCR)
These Dividend Aristocrats have moderate yields and also raised annual dividends for the last 29-41 years, still very impressive. While the yields are lower than above, capital appreciation has been outstanding for more than a decade. BF-B and SIAL have had the "weakest" performances because their stocks have tripled. Others are up as much as eightfold at a time when many famous stocks have declined or only managed modest gains. All indications are that past drivers of growth will continue even if next year is difficult.
The Dow peaked on September 14. Since then it has stuttered and pulled back slightly because investors are nervous about earnings season and what will happen to economies around the world. While these stocks will be affected by global macro-trends, financial strength will keep dividend increases coming and the low-yielding ones should continue to outperform stock market averages.