2012: Already the Year of the Mighty Dividend

It’s Already Begun—2012’s a Year Defined by DividendsYou think your portfolio has problems, what if you were like the many big-cap companies with large cash positions and nowhere useful to put it? What to do with all that cash? As one of these big companies, you could invest in new plants and equipment. You could even hire and train new employees. But why spend the money if the economy goes south or the euro currency collapses? Why take the risk?

There’s no money to be earned by investing in money markets, so big corporations have no other strategy left but to return the cash to shareholders. The year 2012 is likely to be unremarkable for the stock market, but for income-seeking investors, this year might just be coined the “Year of the Mighty Dividend.”

The stock market has decent potential for a low, double-digit gain this year, reflecting a reasonable valuation and the expectation for about 10% earnings growth. Dividends will only add to the returns, and for many stock market investors, they will be difference between mediocrity and outperformance.

Last year saw institutional investors migrate to large-cap companies that pay dividends, largely because of the uncertainty in the world and low expectations for capital gains from the rest of the stock market. The trend towards increased dividends has already begun this year with Macy’s, Inc. (NYSE/M) increasing its fourth-quarter profit forecast and doubling its dividends. The company also said that it would increase its share buyback program by $1.0 billion to $1.6 billion. No wonder this stock just hit a new 52-week high. The stock market isn’t rewarding new business investment. Investors are happy to have their cash back.

I’ve learned over the years that good timing is perhaps the most important determinant in generating investment returns from the stock market. Naturally, it’s one of the most difficult things to get right. Right now, I wouldn’t be an advocate for investing in stock market index funds or index ETFs. There’s just not enough upside potential. I would advocate the slow creation of a conservative equity portfolio that is heavily weighted towards earning higher than average rates of dividends. If the broader stock market does well, then these kinds of blue-chips will also do well. If the stock market does poorly, then I’m relatively assured of beating the rate of inflation with dividends. A company like Bristol-Myers Squibb Company (NYSE/BMY) is the perfect example. Pull up a chart on this higher-dividend-paying stock and you’ll see its success in an otherwise very difficult environment. (See All Global Investment Risks Point to a Steady Dollar & Mediocrity in Stocks & Metals.)

Regardless, it’s my view that the stock market will continue to reward companies that are increasing their dividends and buying back their own shares, along with generating reasonable rates of growth in revenues and earnings. Institutional investors want one thing in the current environment and that’s certainty. Unfortunately, we aren’t likely to get much of it this year. With investment risk in equities very high, companies with increasing rates of dividends are likely to be better rewarded than those that continue to sit on their cash positions.