Markets in a Nutshell
April 26, 2010 Issue
Stocks were up last week with the Dow up 1.7%, the S&P 500 2.1% and the Nasdaq 2.0%. For the year the Dow is up 7.4%, the S&P 500 9.2% and the Nasdaq 11.5%. Foreign stocks are about flat for the year with the EAFE foreign index up 0.01%.
We have said before that we believe dividends will become a bigger part of investor stock return over the next decade (which means those companies with sound balance sheets who pay out higher dividends may perform better). This will be important to those of you who are retiring or will start withdrawing money out of your investments in the next decade. Currently the dividend yield on the S&P 500 is 1.8% (meaning on average, the 500 companies in the index pay a 1.8% annual dividend to shareholders). Since the low of 1.1% in 1999, dividend yields have been in the 1-2% range. This has been reflective of (up until more recent times) investors desire to buy riskier stocks to make more money from capital appreciation (a future bet on up prices) with little regard for current cash payments (dividends). Read on..
As analyst Doug Short (www.dshort.com) explains, the dividend yield has gone from 5% on average from 1871-1982 to 2.5% from 1982-2009. An article by Jason Zweig in the Wall Street Journal (3/13-14-10) titled “Why You Should Get a Bigger Slice of Earnings” tells of the starting trend of investors wanting larger dividends. The article ends with, “No investor can be certain that a company will be able to keep creating value in the future.. however you can be sure that a company can safely distribute value in the present. It is high time for companies to cut shareholders a bigger slice of the pie.” Right on. This is a reason why we will continue to hunt for higher dividend paying investments for our clients.
“Evidence Mounts Of Strong Recovery,” is the title of an another Journal article (4/15) and goes on to explain that the economic recovery is gaining ground with retail sales up 1.6% in March (up 7.6% from a year earlier). Other factors such as increases in home sales, durable goods and subdued inflation has led many economists to increase GDP (gross domestic product- the value of goods and services produced annually in the U.S.) forecasts to an average 3.1% in 2010. While it is good to see an economic recovery underway (better than the other way around), the article does point out that heavy debt burdens will likely keep economic growth from attaining the usual 7-8% coming out of deep recessions.