Austerity, Inflation, Sovereign Debt & Earnings Growth—An Investor’s Survival Guide

"The Stocks for Success Over the Next Few Years"It’s pretty amazing that the stock market gets the headlines it does considering that all of the principal indices produced virtually no capital gains since the beginning of the last decade. It’s been 11 years of significant turmoil in the stock market and, without dividends; investors would have lost money due to the rate of inflation.

If you pull up very long-term charts on the main stock market indices, it seems like the trading action over the last 11 years is one big correction trying to bring share prices back to their moving average. From the mid 1980s to 2000, the stock market produced incredible capital gains and the performance was so out of step with its historical track record. Today, we’re in an economy and a stock market that are trying to return to their long-run equilibrium, after major excesses. Accordingly, it seems very likely that we’ll continue to get lackluster returns from the stock market for several years to come. (See It’s a Large-cap, Dividend Paying Market—the Economy & Commodities Have Made It That Way.)

Since year 2000, history has revealed that owning commodities and flipping real estate have been the best plays. But, there were a number of individual companies that far outperformed the main stock market averages. And many of these companies were well-known, brand-name firms that pay significant dividends to shareholders. It’s my contention that, for the next three to five years, many of these stocks will continue to do well, while the rest of the stock market languishes.

One of the previous decade’s standouts is Caterpillar Inc. (NYSE/CAT). This company was trading at a split-adjusted price of around $20.00 per share in 2000 and proceeded to advance to over $116.00 per share, while increasing its dividends. This was an exceptional performance considering that this business is extremely capital-intensive. Like almost all stocks, Caterpillar saw its share price tank during the subprime mortgage meltdown. Then it more than tripled.

Apple Inc. (NASDAQ/AAPL) was a huge standout, particularly since 2005 when the stock proceeded to appreciate from under $50.00 a share to over $400.00. Like many pure-play technology companies, Apple didn’t pay dividends, but this could change over the coming years.

Another very successful company that doesn’t pay dividends but was a huge wealth creator over the last 11 years was Green Mountain Coffee Roasters, Inc. (NASDAQ/GMCR). This stock was an institutional favorite.

While paying growing dividends to shareholders, companies like United Technologies Corporation (NYSE/UTX), McDonald’s Corporation (NYSE/MCD) and Canadian National Railway Company (NYSE/CNI) were among many large-cap standouts. CNI managed to appreciate some eightfold over the last 11 years, in addition to paying dividends to stockholders. This is downright amazing considering that the company operates in the most mature of industries.

While there are always individual standouts in any stock market, owning the right large-cap companies that pay dividends will likely be the best strategy for the next three to five years. I hate to think about it, but austerity is being forced on the global economy after years and years of excess, both at the country and individual levels. Accordingly, the outlook for stock market capital gains is extremely muted. And, with the likelihood of rising inflation (which is already happening), just maintaining your wealth will become a more difficult chore. This is why dividends are so important to the equity market going forward. The stock market is still trying to balance itself out after its period of excess. If you don’t get dividends from your equity holdings over the next three to five years, your wealth is at risk.