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Dividend investors sometimes get discouraged or even scared by the market, particularly when it expresses high volatility. We’ve seen in 2010, 2011 and 2012, the stock market have its good moments, where it looks as though the US economy is finally righting itself and proceeding with an economic recovery, then some event has derailed this. The various catalysts for volatility have been the Japanese earthquake and resulting tsunami, as well as the financial tsunami that is Europe. The eurozone seems to be expressing volatility in an ebb and flow of concern. The Greek debt crisis, which was not really new but was new to the headlines, re-ignited concerns and volatility last year after the Japanese tsunami aftermath had died down. While some of the worst of the concerns about the eurozone were quelled, temporarily, last fall, after a promising first quarter this year, a series of things from European elections to eurozone high unemployment to the bank worries that grew into major concerns about the Spanish banking system, knocked down investor confidence and the market averages again.

McDonald’s Five Year Chart

So What’s The Good News?

Dividends. That seems like a boring, even trite, comment. But it’s true. Here’s why: in this market, with the exceptional volatility we’ve seen over the last few years, with so many stocks finding their way down rather than up, dividend stocks as a group offer some cushion from this.
A recent Bloomberg article pointed out that in 2011, stocks that didn’t offer a dividend lost an average of 7.1 percent, while those that paid a dividend gained 1.4 percent. Now, we realize that 1.4 percent isn’t a great capital gain, but in the context of some of the rough markets we’ve had the last few years, this has to be appreciated by investors. If nothing else, the dividend paying stocks kept a floor on the downward direction of share prices, in many cases preventing a loss.

It is axiomatic, almost to the point of boredom to repeat it, but in the last half-century, almost half the return on equities has been due to dividends. More striking, the entire 2.1 percent positive return on the S & P in 2011was equaled by the average dividend return. So although the 2.1 percent dividend yield on the S & P last year was considered historically low, you can make a case that it was dividends that really bailed stocks out, if anything did, in 2011.

Also, as an added note, the recent Bloomberg report that pointed out that the largest dividend payers gained 5.7 percent in the market in 2011, as opposed to 20 companies who piled up their cash and equivalents and whose stocks dropped an average of 15 percent, so this shows that dividend stocks have something going for them, and many investors responded accordingly.

Selected Stocks Versus The Averages

Where Is Growth?

One of the byproducts of the goings on in Europe is that it has deflected attention from reasonable growth in the US. Understand this is reasonable growth on a relative basis. Europe is either in a recession or about to descend into what may be a very deep recession—some would say a deep hole if it doesn’t get its arms around its structural financial problems—and the rest of the world, including the global bright spot among economies, China, is slowing down. The US, however, has clawed its way out of the last recession—with agonizingly slow speed, admittedly, but it has clawed its way out nonetheless. Recently, Fed chairman Ben Bernanke projected GDP growth at about 2.15 percent for this year, down from previous predictions of 2.65 percent. Two percent growth isn’t a lot, but in the face of the European crisis, for a developed economy that is just emerging from its worst recession since the Great Depression of the 1930s, it’s not bad.

That Cash Pile

We have seen corporations in this very slow economic recovery become cautious about capital expenditure and hirings, instead choosing to hold onto the profits they are able to earn. Many companies, particularly those of tech stocks, have become well known for hoarding cash and having so much that it appears they’re not sure what to do with it. Apple (Nasdaq: AAPL), most famously, recently relented and began paying a dividend out of the roughly $100 billion pile of rainy day cash and investments it holds. Some of the other tech stocks have been doing this as well. Investors prefer a cash return—and should—over stock repurchases and questionable investments. Those of you who remember your Peter Lynch lessons and his comments about corporations investing their cash in questionable things. He called it “diworseification,” and it had been the undoing of many companies. So there’s a reason that the dividend payment, real money paid to the shareholder, gives shareholders something tangible and a further incentive for holding onto shares, something wrongly de-emphasized in today’s market advice. One of the dividend edges that investors get is cash in hand, rather than potential growth that may never come for a stock.

Bank Of America Five Year Chart

Source: Yahoo Finance

Growth, Value And Dividends Related

We’ve seen in the last few years especially, further demarcations between growth, value and dividend stocks, as well as the compressing of holding periods to, at times, almost nothing. The distinction between growth and value, however, is a blurry one, more so than most commentators are willing to admit. McDonald’s (NYSE: MCD) has been a dividend stock, yet if you bought it for growth, you certainly would have achieved that as well over the years. Yet it’s a stock that the professional money managers and analysts seem far less enamored off than, say, Bank of American (NYSE: BAC). Yet for dividend investors, had you chosen dull McDonald’s over derivative and subprime player BAC, you would have made out in every way possible comparatively and saved yourself a lot of pain. That can be the dividend edge, too.

Committed to your Global Profits,

Jim Trippon
Chief Investment Analyst