It’s Full Steam Ahead for Stocks…if There’s No War

dividend paying stocksIn terms of a base, I would consider the stock market to be in good shape if the S&P 500 Index can hold 1,350. It’s been doing so for about a month now and you can’t say that stocks haven’t been due for a small correction—the market’s run up solidly since the beginning of the year.

The NASDAQ’s been the real star of the show so far and my best guess is that the stock market will soon start another upward leg, around the beginning of first-quarter earnings season. That is of course, if there’s no war with Iran, Syria, or Greek bondholders.

There have been a lot of announcements lately about increased dividends and this was expected. Increased dividends are like free gifts for shareholders and I think it’s very reasonable to expect more dividends announcements from the best large-cap companies in the market. Even though the NASDAQ is outperforming now (which is good leadership for the rest of the stock market), dividends income has been and will continue to be the best investment strategy for equity investors in a slow growth environment. The stock market’s been in a bear market since the technology bubble burst in early 2000. Without dividends income, index investors would still be below water. With all the risks out there and the new age of austerity, the best investment play is dividend paying stocks for those not wanting to sit on cash.

There was a time when I wasn’t that keen on dividend paying blue-chips. Not to their exclusion, but during the technology sector boom, the information technology revolution combined with the Internet provided outstanding returns from non-dividend paying stocks. Because of the technology innovation, just owning a company like Cisco Systems, Inc. (NASDAQ/CSCO) was the right play. You didn’t need to consider a du Pont (NYSE/DD), because the business growth was so huge.

What the economy really needs now is a new technological innovation that acts as the catalyst for an entire new industry. That’s the only way the U.S.is going to get out of a slow growth environment. This new catalyst could be related to alternative energy, but it also could be related to agriculture. But, over the medium term, the best play in the stock market is large-cap companies that pay dividends. You need some exposure to resources, but dividends are the place to be.

The stock market is full of all kinds of examples of dividend paying companies that have also provided shareholders with excellent capital gains in recent years. (See The Winning Stock That’s a Positive Sign for the Economy.) The kicker is, they tend not to go down as much when the stock market corrects and, if we get Fed-induced price inflation later this decade, you shouldn’t lose purchasing power, because higher prices trickle down to higher dividend payments.

There’s been a regression going on over the last 12 years. The stock market got into such a bubble during the late 90s that it’s been trying to find itself a new equilibrium. It didn’t get the chance to do so because of subprime financial crisis. Even though current stock market valuations are reasonable, I still repeat my view that investment risk is high and that a conservative portfolio stance is warranted. That’s why I like dividend paying stocks above all others—the risk versus return ratio is now reversed from the glory days of the technology boom.