Dividend Yields Going up—the Outlook for Stocks, Not So Good
Dividend yields are creeping higher, and in a lot of stocks, they are pretty darn hefty. The problem, of course, is that as a stock market investor, you have no idea what’s going to happen to your capital. The dividend income is secure, but the stock market isn’t.
The way I look at this stock market and the global economy, I figure an equity investor with a diversified portfolio can really only expect a rate of return just slightly above dividends earned. That is to say, with all the current information, I don’t expect the stock market to advance materially in 2013. It could easily be a down year for the main stock market indices.
E. I. du Pont de Nemours and Company (NYSE/DD), otherwise referred to as du Pont, just broke the four-percent dividend yield barrier, as the company’s share price recently tumbled after reporting a tough third quarter. According to the company, its 2012 third-quarter revenues fell nine percent to $7.4 billion. About half of this decrease was due to changes in currency values. Earnings dropped significantly to only $10.0 million, or $0.01 per diluted share, down from $452 million, or $0.48 per diluted share. The company has instituted a new restructuring plan to control costs. Management reduced its 2012 full-year earnings-per-share (EPS) outlook to between $3.25 and $3.30, down from the previous range of $4.20 to $4.40 per share. In the first quarter of this year, du Pont increased its regular quarterly dividend by five percent to $0.43 per share. The company’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
You might say that it’s a good time for an income-seeking investor to be buying stocks with dividend yields so strong; but like I say, you can’t really expect much more return other than the dividend itself, because there’s so much uncertainty in the stock market.
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Of course, the one way to increase your wealth with dividend paying stocks is to reinvest those dividends in the form of new shares. Most large-cap, blue chip companies offer some form of a dividend reinvestment plan, which allows you to buy new shares without paying commissions. If you don’t require the income, this is a good way to build wealth. More shares equal more dividends, and your investment return compounds over time.
Right now, with so many brand-name technology stocks trading down on the stock market, dividend yields are very attractive. Intel Corporation (NASDAQ/INTC) for example is now yielding over 4.5%, which is quite exceptional. In May, this stock hit a high of just over $29.00 a share; now, it’s just over $19.00. (See “Intel’s Share Price Says It All.”)
Dividends will become a much more important component of stock market returns going forward, because I don’t expect the stock market to go up next year. Despite the attractive yields, I still wouldn’t be buying in this market.