On the subject of blue chips, I think dividends are going to account for a very large portion of investment returns from the stock market this year. I’m hopeful for the U.S. economy in its recovery, but whatever transpires this year, I just don’t see real gross domestic product (GDP) hitting over three percent, with the eurozone in recession and all the headwinds with taxes, sovereign debt, and government spending. If we see real GDP over two percent, we will be lucky.
Blue chips are, for the most part, in very good financial shape these days. Borrowing costs are low and cash balances are high. So from my perspective, one of the most reliable types of investment returns (the only real certainty is death and taxes, as the saying goes) is going to be the dividends received from corporations. I think we’re going to get another round of increased dividends this fourth-quarter earnings season and, with cash balances being so strong, more share buybacks to keep stock prices afloat.
The reason why cash balances among many blue chips are so high is that corporations are afraid to invest in this marketplace. They feel the same uncertainty we all do, so in order to keep shareholders as happy as possible, many companies are choosing to return their excess cash in the form of dividends and share buybacks over investing in new plant and equipment.
To be very frank, the only way for more “certainty” to be created in this marketplace is for policymakers to take more action on all the debt and spending problems we have in the majority of Western countries. In my view, the lack of reasonable, measured, and thoughtful policy action regarding these issues, both in Europe and in the U.S., is the reason why the U.S. economy isn’t growing at the rate that it could be. Instead of brinkmanship, the marketplace wants an action plan that irons out how these issues are going to be dealt with. This is what the stock market and corporations want to see happen. More “certainty” through policy action will be a catalyst for corporations to make new investments in the economy.
Getting back to blue chips; I fully expect yields to go up this year, and while I don’t believe in making stock market predictions, I don’t expect anything from the market this year. Any capital gains from blue chips or the rest of the market will be pure gravy over dividends. The structural problems in the global economy are that bad. The increase in yields will be a combination of rising dividends and flat or declining share prices. (See “Dividends Going Up Because Companies Don’t Want to Invest.”) Blue chips have been the place to be ever since the financial crisis in 2008/2009, and dividend-paying blue chips will continue to be more attractive on a relative basis.
Dividends don’t give you much more than the rate of inflation (the real rate of inflation), but they are better than nothing. Investment risk is high among all asset classes, although the recovery in the U.S. housing market is reassuring. I wouldn’t really be buying this market; I’d be waiting—waiting for the best blue chips to correct for an attractive new entry point. I’ll buy this market, just not right now.
Dividends from Blue Chips the Only Game in Town This Year was last modified: March 11th, 2013 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)