If you haven’t heard already, dividend payments are going up. A number of large-cap companies recently announced dividend increases and it’s another positive trend for the stock market. We’ve got low-interest-rate certainty, improving economic news and stock market leadership from the technology sector. This is a good recipe for higher share prices. Let’s enjoy it while it lasts.
I think it’s fair to assume that dividend payments are going to keep rising this year; corporations have to put their excess cash somewhere. We are seeing some increased spending from corporations on new plant and equipment, but it isn’t robust. Just like individual investors, large-cap companies are reticent about making big bets in the U.S. and abroad. The uncertainty in the global economy is still a major factor in the huge cash hoard that corporations have accumulated.
But, this reluctance to invest in new fixed costs has produced very healthy balance sheets. If a company invests millions into new plant and equipment and there’s another recession (which is likely), shareholders will be angry. So, instead, corporations have an incentive to return all their excess cash in the form of dividend payments. (See Must-haves for Your Stock Market Portfolio.) As we know, dividend payments always make shareholders investors happy.
The stock market right now is due for correction, but it also has some decent underlying strength. The news lately has been good: upwardly revised gross domestic product (GDP) in the fourth quarter, fewer jobless claims, and companies announcing higher dividend payments. The only weak economic news recently was in durable goods orders and this can always be a one-period anomaly. The stock market is ticking higher and, with reasonable valuations across the board, I think it’s fair to expect more capital gains over the near term.
All of this, however, does not mean the stock market is in a new bull market. One substantial piece of bad news or a shock like a Greek debt default, and sentiment will sour. I’ve always contended that the S&P 500 Index has a good chance of completing its blatantly apparent right shoulder formation. With the election coming up, this is the year the index will likely do this. As for the aftermath, it’s anyone’s guess.
What the stock market needs to keep going in a sustainable manner is a big improvement in the U.S. employment picture. This is the catalyst required to get through the housing glut. Corporations are doing their part. They have great balance sheets, corporate earnings are decent, and dividend payments can only go up. My near-term outlook for the stock market remains positive and I’m certain we’ll get more announcements from large-cap companies about increasing dividend payments to shareholders. All things considered, the stock market is in good shape right now.