I hate to say it, but there is a really strong case to be made for avoiding the stock market almost entirely in terms of an investment strategy. I’m a big believer in owning select, higher dividend paying stocks, but if you consider the stock market’s returns over the last decade, the track record is terrible.
The S&P 500 Index is currently trading around the same level it was in 2008, 2006, 2001 and 1999. While there are always some big winners (including a number of dividend paying stocks), 1999 to 2012 is a long time to go without any material capital gains from equities. With dividend payments, owners of the Index are basically flat considering inflation.
The stock market did outstandingly well from the mid-80s to 2000. This 15-year period emboldened an entire new generation of equity investors—not really with dividend paying stocks, but with higher growth companies, mostly related to technology. The stock market over the past 12 years is eerily similar to the trading action experienced from the mid-60s to late 70s. During this period, there were no overall capital gains for equity investors.
For medium- to long-term stock market investors, I feel that higher dividend paying stocks are the only way to go. And I’m not saying this as part of a conservative investment strategy, but as one that will outperform the rest of the stock market. History is seemingly repeating itself and I think we have several more years of economic and equity market stagnation. With inflation around the corner, dividend paying stocks are the only way to go. For speculators and traders, an overweighting in resource-related opportunities seems reasonable, as the commodity price cycle is still in mid-swing.
The stock market today is not particularly attractive as an asset class. The U.S. real estate market now offers a better chance of achieving material capital gains over the next few years. Dividend paying stocks are attractive, but I won’t fool myself; the expectation for capital gains in these kinds of securities is limited.
Traders can speculate in stocks, bonds, currencies, futures, options and some other kinds of derivatives. But for traditional equity investors, there are declining expectations for economic growth and corporate earnings. Goldman Sachs’ latest research report for the stock market in 2012 is titled, “Strategies For Stagnation.” This makes the point perfectly.
I want to reiterate my view that stock market investors need to be extremely cautious over the near term (the next three months). (See Stock Market’s Forming a New Base, in Spite of Volatility.) Politicians are now the leading influence in capital markets and this is never good. I’m an advocate for higher dividend paying stocks as the opportunities arise; aside from that, those looking for material capital gains should look somewhere other than the stock market.