Dividends pay patience
Despite all the loud clamoring that accompanies stock market swings, investors may sometimes wonder where to find real gains. There are reasons for this wondering. The Dow Jones Industrial Average first touched 10,000 in the closing days of the prior century on March 16, 1999. Since then, it has wandered back and forth through this round number threshold 63 times and now stands only slightly higher than it did eleven years ago.
Before quitting the whole thing, investors should bear in mind that dividends will improve investment results as can staying with the right stocks rather than passive adherence to some index. Apple (AAPL-$260) is up 2700% since 1999, General Motors down 100%.
Looking even further back, the Dow first touched 1,000 in early 1966. It fell back as if scared, made a couple of feeble tries at 1,000 in the early ‘70’s but didn’t get above it to stay until later in 1989. The next ten years then saw a tenfold increase in the Dow to 10,000 as computers and the Internet lifted productivity, interest rates fell and a period of innovation and eased global trade developed.
That increase is a reminder to investors who are brooding about May of 2010 being an unusually rotten month that such down months are an anomaly. One reason smart investors always keep capital in the stock market is that these growth spurts happen periodically. I’m sure no financial columnist back in 1989 predicted a 1000% market gain over the next ten years nor am I doing so now. What I am predicting is that an investor fortunate enough to have capital to commit to the stock market will be rewarded by stocks in carefully chosen and occasionally pruned growing companies.
Apple certainly qualifies as do Google (GOOG-$498) and Amazon (AMZN-$127). None pays a dividend so the possibility of a stagnant market suggests pairing them with those that do. Alliance Global High Income (AWF-$13) and Credit Suisse Income (CIK-$3) currently yield 9% in monthly dividends from diversified bond portfolios. These hold second tier bonds but their high yield compensates for the minor default risk. Permian Basin Trust (PBT-$19) has a similar yield but its oil royalty distributions require an additional tax form that some investors find annoying.
Looking ahead requires taking note of the playing field or “pitch,” this being World Cup time. Interest rates and inflation, which held back stocks during both the ‘70’s and the ‘80’s continue at record lows. Sadly, unemployment seems stuck at unacceptable high levels and unlikely to get any help soon from the labor-intensive housing and construction industries. We can thus expect the Federal Reserve to continue to nurse the recovery along with low interest rates, probably for at least two years.
This policy will be good for the bond funds mentioned earlier. It will also favor companies in favorably positioned sectors where they can continue their recent earnings and dividend growth. Intel (INTC-$21) is one of my favorites in the innovative tech sector. Its stock pays a current 3% yield and the company has increased the dividend for 17 straight years. Intel recently increased its sales forecast for the current June quarter to $10.3 billion. Earnings will be way ahead of last year’s depressed figures and it will earn $1.85 to $1.90 for the full year, a very reasonable valuation for a dominant tech leader.
IBM (IBM-$130) is similar with a 2% yield and 15 consecutive years of dividend increases. DuPont (DD-$38) is more sensitive to the pace of the economic recovery but recently reaffirmed its forecast for 10% sales growth and 20% earnings growth through 2012. Earnings will be $2.50 to $2.70, another relative bargain, and the yield is 4.4% with 19 straight ups.
Rather than guess at market direction, investors should focus on the path to take. Stocks like these make all the difference.