Over the years, I’ve seen a lot of wacky things in the stock market, from spectacular capital gains to equally spectacular wealth destruction (often from the same companies). Even the best companies on the stock market that offer rising dividends can crash. Remember the dot-coms? Those stocks shot straight upward in value for no other reason than they were just going up. Most became “dot-bombs.” Then there were the outright frauds—a lot of them, from gold miners to big-name companies to Chinese stocks (most with a big seal of approval from auditors). I know a person that was so scared, so outright certain that the financial world was going to end in 2008, that she just couldn’t take it anymore. She sold every security she owned for cash. She still won’t touch the stock market.
My grandmother also hated the stock market. She thought it was too risky. Of course, living through World War II and the Great Depression influenced her views. For her, nothing counted as much as cash. After the war, times were tough, but they slowly got better. She and my grandfather worked hard, and they saved their money—or rather they didn’t spend. Even in retirement, with no mortgage, she wouldn’t buy fresh bread—too expensive. She just didn’t spend; she saved, because that was her investment philosophy.
Nowadays, cash is still king, but it doesn’t pay any returns. I’m sure there are plenty of seniors who would love to have more of their savings allocated to cash, but artificially low interest rates can’t even beat inflation. A lot of people who are either saving for retirement or are already retired need to have some exposure to the stock market, even if it’s just for the dividends.
I have no idea what’s going to happen to the stock market this year. Looking at recent trading action, there’s probably more upside in the near term. Because corporations are in great shape, we’re likely going to keep seeing increased dividends. This year, there could be another war. There’s the sovereign debt crisis in Europe and the U.S., the potential for currency wars (central banks are now repatriating their gold), and our not knowing how exposed we are to global financial derivatives. Investment risk is high—but life must go on.
There are companies out there that are very good at making money for shareholders. And they pay increasing dividends, which can be reinvested, used for income, or both. Here are some of them: Colgate-Palmolive Company (NYSE/CL), Oracle Corporation (NASDAQ/ORCL), Pepsico, Inc. (NYSE/PEP), International Business Machines Corporation (NYSE/IBM), Canadian National Railway Company (NYSE/CNI), Johnson & Johnson (NYSE/JNJ), Bunge Limited (NYSE/BG), 3M Company (NYSE/MMM), Bank of Montreal (NYSE/BMO), The Procter & Gamble Company (NYSE/PG), Wells Fargo & Company (NYSE/WFC), and The Walt Disney Company (NYSE/DIS). These are the kind of businesses that have proven themselves over time, and I think are worth considering when they’re down in price on the stock market. (See “Dividends from Blue Chips the Only Game in Town This Year.”) They are great brands that are professionally managed, pay good dividends, and represent underlying businesses with real staying power.
Of course, not every investor looks to the stock market for dividends, and that’s fine. Speculators just want short-term capital gains, so dividends aren’t necessary. All I know is that the business cycle is going to play itself out regardless. In every correction or crash in the stock market, we still need to brush our teeth, eat, and use more essential products and services, such as financial services—and a computer keeps track of it all. But to add to this, corporations need to keep investors interested—that’s what dividends are really for.
Warren Buffett is correct when he advocates that investors should build positions in the stock market over time in good companies that they understand. I like companies that pay increasing dividends, because there is a lot of security there. Plus, reinvested dividends compound wealth faster than you might think. Saving and investing doesn’t have to be complicated. The marketplace has proven that it will reward good, dividend-paying, well-managed businesses. That’s really all you can ask for as an investor.