The stock market rally continues, and it’s great; that is of course, if you own the right companies. For the most part, the best wealth creation over the last few years has come from large-cap, dividend paying stocks that are the brand names we all know. I’d never thought I’d be singing the praises of mature, blue chip companies (and dividends), but it’s always in the tough times that large-cap companies really shine.
With the expectation of slow or stagnant economic growth in 2013 (and possibly 2014), today’s best performing stocks are likely to keep on leading. I would say, however, that no other large economy on the planet is better able to right itself after a bubble or recession like the U.S. economy. So while the expectation for economic growth isn’t robust, the stock market’s fair valuation combined with dividends can still give low double-digit returns. U.S. corporations are in excellent health, and this is part of the reason why institutional investors are buying right now.
I’ve really been focusing on large-cap companies and their dividends ever since the stock market crash in 2008/2009. When you have such a shock to the entire financial system, you don’t need to find the fastest growing micro-cap stocks—you want to own what institutional investors are buying, and that’s been dividend stocks.
Stock market returns from the 2009 March low have been excellent, and the right shoulder formation on the S&P 500 Index looks like it will soon be complete. As I’ve written before, the long-term chart on the S&P 500 is quite ominous; the peaks make you really wonder how the stock market is going to play out. (See “The Policies We Have Today Will Hurt Us Tomorrow.”) Investors are buying fairly valued stocks in this market, and they’re also buying dividends.
Cisco Systems, Inc. (NASDAQ/CSCO) announced a huge dividend increase, which was exactly what that stock needed. No doubt, company management recognized that they had to up the dividend ante if they were going to get the company’s stock market price off its 52-week low. I think we’ll see many more dividend increases in the third- and fourth-quarter earnings seasons, because larger corporations can afford it, and it’s exactly what the stock market wants.
All three of the stock market’s major indices are looking good right now. Trading action has been choppy all summer and volume is light, but there’s been decent momentum to share prices as things have quieted in the eurozone, and there’s no other place for institutional investors to put their money and beat the inflation rate.
Countless dividend paying stocks in the Dow Jones Industrial Average are making new 52-week highs in this market and many are getting close to their all-time highs. There remains fragility to the stock market today and rightly so—investment risk is high considering all the potential shocks out there. There is a lot of doom and gloom out there, yet the stock market is going up and dividend stocks are outperforming. The stock market never ceases to amaze. We certainly are living in interesting times.