We’re going back to the old days of stock market speculation and investment. There will always be high flyers and the latest hot stock, but I think that both institutional and individual investors who want to be buying stocks in the future will focus their attention on solid companies that pay dividends.
The return of the dividend will be king in a slow-growing economy and a slow-moving equity market. Warren Buffett will be very pleased.
Right now, there are all kinds of solid, blue-chip stocks that have been terribly beaten up in the most recent correction. This has improved equity yields and added a real advantage to long-term investors.
One sector of the stock market offering excellent dividend yields is the financials. This is no big surprise considering how battered most of these stocks have been. Bank of America offers a yield of over five percent and Citigroup’s yield is over eight percent.
Once the dust settles, if Bank of America’s purchase of Merrill Lynch goes through, then I think there will be the makings of a real powerhouse of a financial stock with excellent growth prospects going forward.
Even pharmaceutical stocks like Pfizer and Merck are offering attractive yields of over five percent. I’m convinced that once more certainty returns to capital markets, investors will devote much more time to considering large, dividend-paying investment opportunities. We’re going back to the fundamentals in the investment business and it can’t come quickly enough.
It’s really time that Wall Street and government regulators take a hard look at what is known as “financial engineering.” The whole system needs to be reined in. If it takes a physicist to create a derivative financial instrument, there’s no way we can expect a government agency to regulate it. There just aren’t that many mathematical whiz kids around. No, we’ve got to get back to the simple fundamentals of investing — just like Warren Buffett practices.
The latest financial crisis in capital markets is a serious warning of how financially engineered securities can be created and sold around the world, without a real knowledge of the underlying risks to holders. It’s time for the complex derivatives market to be seriously regulated and it’s time for new, higher standards for all our financial institutions.