prudentinvestor

5%+ Dividend Yields in the S&P 500

Fully agree that the best investments are those with stable, growing dividends. I still own stocks purchased several decades ago that have paid a stream of dividends whose total has greatly exceeded their initial purchase price, not to mention that their value has appreciated as well.

However, many of the names listed above have unsustainable dividend payout ratios, and the last thing any investor needs is to buy a stock because of its high dividend, only to find that dividend decimated, followed shortly thereafter by the stock price tanking. As one example, the list includes AEP, which used to pay over $2.5 in annual dividends and trade for $40 many years ago, and now it pays $1.64 and trades for $30. Another example is Goodyear Tire (GT), which many years ago paid a handsome dividend and traded in the 30's, now it pays no dividend and trades in the teens, and the list of such situations is long and ugly.

The trick is guessing which of the issues listed in the table will lead to similar dead-ends, so buyer beware, and remember that the market is discounting these issues for a reason.

Is the Market Reversal Already Happening?

You are quite right. However, regarding the statement "..I find it hard to fathom that the average investor would accept risk without reward...", I think it is worth noting that the average investor in US equities is at the mercy of the mutual fund industry that invests his 401K on his behalf, whilst paying itself handsomely out of his savings.

The inevitable long-term outcome of the bursting of the two-decade-long stock market bubble will be the shrinkage of the mutual fund and financial services industries, as savers discover the disservice which these oversized industries have done them.

I hope our authorities recognize, sooner rather than later, that a return to fundamentals, free of asset bubbles, and without a megasized and subsidized financial services industry sucking the air out of the real economy, will be the first step to a resumption of stable growth and prosperity.


On Nov 22 06:33 AM User 410955 wrote:

> With all the recent predictions by some leading economist regarding
> the "new normal" of 4% return on equities in the future, will the
> average investor want to remain in equities? If the average return
> of 10% during the past several decades was an anomaly due to the
> U.S. having been in a sweet spot of prosperity sans global competition,
> this means that risk will not be rewarded given what portends for
> our economy due to all this debt and job loss.
> I find it hard to fathom that the average investor would accept risk
> without reward. Why invest in equities when conservative fixed income
> vehicles will provide equal or near-equal returns?
> The incredible market rally of late makes no sense to me given the
> lack of fundamentals, but the market is always driven by emotion
> and those that can manipulate a good spin to the general public.
> I would not be surprised if investors start to realize that they
> have only recouped half of their losses despite this rally of epic
> proportion and might decide to take those gains and revisit their
> strategy, especially all us boomers who cannot take another hit due
> to our timeline.
> If the spread between equities and fixed income investing will be
> as predicted going forward (no spread), who would want to have a
> downside risk of 50% or greater versus maybe a 5% - 15% ? If this
> school of thought prevails, a massive exodus of equity investors
> will occur regardless of stock P/E's or any other measure of value
> regarding equities.

The Twenty Year Stock Bubble Is Still Inflated

John, I fully agree with your article, and since I am much older than mid-40's, I've been saying (and am still convinced) that 750 +/- is the appropriate fair valuation when you discount the bubbles era.

Market Cap/GDP is a simple, yet meaningful metric. Some argue that because interest rates are artificially low, we can justify a market cap that is artificially high. True while it lasts, but artificially manipulated valuations are inconsistent with a free market, so, eventually we either stay with a free market and artificial valuations collapse, or we become a centrally-planned economy like the former Soviet Union.

For now, current policy is to maintain the stock market above its intrinsic value for a prolonged period, based on low interest rates and unbounded liquidity. Although I believe this sort of manipulation is unsound and will end badly, it is a fact of life for now, and this argues for tip-toeing out of the party, locking in some gains, but not jumping off completely and missing further upside, artificial or not.

7 Dividend Stocks to Prove Buy-and-Hold Isn't Dead

After decades of "Buy and Hold" of high quality, dividend-paying stocks, the past decade has taught me to "Buy, Hold, Sell (high), and Buy again", and this has worked much better.

9 Dividend Stocks Sending More Cash to Shareholders

Interesting to see a company which has a dividend yield of 0.37% described as a "Dividend Stock" !

Memo to Senator Dodd: Financial Reform Need Not Be Complicated

Perhaps it will prevent the crash of 2012!


On Nov 11 03:25 PM woollyB wrote:

> Glass-Steagall was passed in 1932-33 (actually 2 acts) to prevent
> the market crash of 1929, and it was repealed in 1999, just in time
> for the next big turn down. If we reinstate it in 2010 to prevent
> the crash of 2008, we'll end up repealing it again once we get into
> a long enough uptrend for everyone to believe that the Act is inhibiting
> growth and profits.
>
> P.S. to MyrEnforker, when was banking ever for the public good? Not
> in any banking history I've ever read.

Memo to Senator Dodd: Financial Reform Need Not Be Complicated

The only "regulations" we need are:

(1) Public should not bail out any failed private enterprise. If its failure threatens our security, it should be nationalised with its shareholders losing out and its bondholders taking a haircut. This is what gov't did with GM & Chrysler, and this is what should have been done with any bank, no matter how large. No amount of regulation will work as long as the upside goes private and the downside goes public.

(2) Stop manipulating interest rates and let markets set them based on equilibrium between willing lenders and borrowers.

(3) Institute an "Alternative Maximum Tax" that ensures creative entrepreneurs, the true engine of our economy, don't choose "early retirement" and "spend more time with family" ......, when they really mean "I've earned enough money, and the incremental after-tax income is not worth the extra effort" !

Capitalism and free markets have brought us prosperity, and the only "regulations" we need are to stop distorting them.

Equities Update: Energy, Financials Derail Dow's Run

Not yet.


On Nov 12 08:55 PM LaChic wrote:

> well, we had the job report and to some this was great news, and
> the market went down, which brings me to my question? is this is
> it?

Are Stocks Making a Major Top?

Archman,

You are absolutely right.

Markets detached from fundamentals in the mid-90's due to excessive liquidity from Fed. As time went by, investors lost sight of basics like dividend yields which have to be high enough above risk-free yields by a premium. Shills started justifying overvaluations by using "Earnings Yield", ignoring the fact that earnings are based on creative accounting (such as not deducting cost of executive options, etc...). The notion took hold that you can buy any stock at any absurd price and just hold it for a while, and a nice guy will then pay you more for it. This is not investing, but a Ponzi scheme, and many who bought into it have started to see the consequences

Over the next decade, market participants will slowly re-learn old fashioned investing fundamentals, and yes, they imply an S&P in the vicinity of 750 about now, or its inflation-adjusted equivalent in a couple of years.


On Nov 13 06:45 AM Archman Investor wrote:

> Absolutely.
> The market is nothing more than a FED liquidity driven market.<br/>S&P
> 500 should be at 750 or so which would be at its 25 year continuation
> trend line. I have no idea when it gets there, but knowing that it
> should be there, is what counts. Average Americans have no clue about
> anything, that is why they continue to lose in the markets over long
> periods of time. Just ask the average American who's portfolio is
> at 1999 levels when it should be at 2009 levels.
>
> www.compdivplan.com

Stocks Soar, Unemployment Rises, Dollar Slumps

Unfaire, Very good observation, yes simplistic, but realistic too!

The true disaster with the USD is not its inevitable depreciation against the Yuan or the Reais, which can be viewed as a natural appreciation of the latter, rather than a decline in the USD. It is the continued erosion of USD against other developed economy currencies, such Euro or others. It was not that long ago (twelve years?) that the USD bought 1.2 Euros, so it is now approaching a drop of 50%. I remember in the mid-1980's, one USD bought you 2.1-2.3 SFr, now it is 1.

Appreciation of undervalued currencies of growing economies like China, Brazil, India, etc, is natural, but dollar collapse against the currencies of other developed countries is a sign of deep trouble.

On Nov 09 07:15 AM unfaire wrote:

> Ricard, yes, your are right.
> Just look at what happened to Japan. I remember a time when it was
> 360 Japanese Yen to 1 US dollar. It is somewhere around 100 or less
> to 1 now. In the meantime, we 300 million or so of use raised the
> standard of living of 100 million or so of Japanese.
> In other words, the US dollars develued to 1/3 relative to Japanese
> yen with a population ratio of 3/1.
> Now, the Chinese population is about 1.3 billion or about 4 times
> ours. A simple math would tell us the US dollars would have to devalue
> 1/12 againist the Chinese RMB to reach some kind of balance. That
> would be about 0.6 RMB to a US dollar in the next decades or so.
>
> I know things are not this simple. But, this is the direction where
> the US dollars are going.

Stocks Soar, Unemployment Rises, Dollar Slumps

Tom, Yes, 9.5% annual increase in productivity, but how is it defined. Correct me if I am wrong, but I believe it is GDP per hour worked, and GDP includes government spending.

So, when you drive past a "stimulus" road construction site at night, and see a dozen parked state police cruisers with their blue lights on permanent flash, and the officers sitting inside listening to music @ $100/hr overtime, this counts towards GDP growth. Extrapolate this to the majority of our stimulus spending, and you get 9.5% growth in "productivity". But is it real ?


On Nov 09 05:14 AM Tom Armistead wrote:

> Where are you getting your productivity figures? I went to the BLS
> and the most recent quarterly figure is 9.5%.

Tuesday Outlook: Commodities, Global Markets

I must confess to being jealous of these courageous folks who fly as seen in the video. Ditto for the duantless who buy at today's levels!

IMHO, what we have begun is a multi-year return to fundamentals, in which investors will slowly relearn that the value of equities is really based on dividends, and the liklihood of their increase with time, not "accounting earnings" and their liklihood of increase; and not on the presumption of a greater fool down the line paying more for a stock that pays no dividend. As this realisation becomes mainstream, it may result in averages close to current levels ten years from now.

Hold the champagne before celebrating China's economy, says the American Enterprise Institute's Michael Auslin - there's an asset bubble and resource-allocation problems on the underside that make the country look a lot like '80s Japan.

China looks more like 1960's Japan than 1980's Japan; and barring socio-political collapse, still has two decades of strong growth before it stalls.

We know about the laws of supply and demand, but what if economics violates the laws of physics? Some academics are arguing that a model for consistent economic growth ignores diminishing energy supplies. As one professor puts it: "Neoclassical economics is inconsistent with the laws of thermodynamics."

Whilst I lack formal credentials in economics, I have been a successful investor for several decades, obtaining returns much better than market averages over time. My background is in physical sciences, especially thermodynamics.

The paradigm of indefinite and exponential growth of consumption is physically impossible, and none who comprehend the exponential function would dispute this obvious reality. The question is when, not if, this paradigm breaks down. Neoclassical economics presumes that "when" is far enough into the future, that we need not worry about it now. My own opinion, for what its worth, is that the limit to this paradigm is impending, within the lifetimes of many of our younger people, if not due to energy supply limits, then due to environmental degradation effects.

John Meriwether Is Back - Risk Must Be Too

So why should'nt investors pour billions into a fund run by a known failure? After all, shareholders keep re-electing directors and CEO's who nearly bankrupted their companies; politicians keep re-appointing treasury secretaries and fed chairmen who created financial calamities; and the public keep re-electing politicians who passed laws that had disastrous consequences.

We have sadly reached a point where failure is routinely rewarded, and productivity and prudence routinely penalised.