Several months ago Jeremy Siegel and Jeremy Schwartz wrote an Op-Ed piece in the Wall Street Journal that stated (not for the first time) their feelings that Treasury bonds are in a bubble, and they suggested that dividend-paying stocks are the answer to a Treasury bond market that they feel is dangerous. I heard from a number of investors in the dividend-paying Camelback Fund, and thought I’d summarize the article since it is only available to subscribers.
Financials gave dividend payers a bad name
It should be noted that one of the primary points of the article is the authors’ acknowledgment that a subset of investors has avoided dividend-paying companies because the big banks and related financial companies pretty much all cut their dividends in 2008. Their share prices also crashed. With few exceptions, they haven’t returned to pre-crash levels. Siegel and Schwartz don’t think financials will have the same impact if we see a repeat performance, as they now make up only 16% of all dividends in the S&P 500, and dividend-paying companies in every other sector have rebounded nicely. They point out that, aside from financial companies, dividends for other stock sectors actually grew in the period from 2007-2009. While it felt to many like the stock market was imploding, investors in non-bank dividend-paying companies were able to bide their time and actually see an increase in cash flows if they simply stuck to their strategy.
Some other highlights from the article:
- Corporations are more profitable than ever, and those that pay dividends are generally better able to pay them than they’ve been in a long time. The average payout ratio of less than 30% provides a “huge cushion” for companies to continue paying their dividends even if a double dip recession materializes.
- The dividend yield for S&P 500 companies is now more than 2%. That means that simply investing in a decent S&P 500 index fund will provide exposure to capital appreciation as well as income that stacks up very nicely against Treasuries. Of course, a more focused strategy will pay considerably more than that.
- Dividends for S&P 500 companies have grown at a faster pace than inflation over the past 50 years, in periods of low inflation as well as high inflation. A lot of people are flocking to gold to protect against impending inflation. (Others don’t actually know why they’re flocking there, except that it has been going up lately). In fact, it’s hard to say when we’re going to see higher broad-based inflation. Dividends will outpace it if we do, and they’ll outpace it if we don’t see it any time soon, based on the historical record. What’s not to like?
- Dividends in the S&P 500 have grown by 10% over the last 2 years, as corporations are holding record amounts of cash, and many are “rightly” returning some of it to shareholders. One of the key points that seems to have been forgotten in the recent market turmoil is the fact corporations have been turning in record profits, and those profits have generated record cash hoards. More and more companies are choosing to return to the old ways by distributing at least some of this cash to its owners.