Dividend Yields Going up—the Outlook for Stocks, Not So Good

Dividend YieldsDividend yields are creeping higher, and in a lot of stocks, they are pretty darn hefty. The problem, of course, is that as a stock market investor, you have no idea what’s going to happen to your capital. The dividend income is secure, but the stock market isn’t.

The way I look at this stock market and the global economy, I figure an equity investor with a diversified portfolio can really only expect a rate of return just slightly above dividends earned. That is to say, with all the current information, I don’t expect the stock market to advance materially in 2013. It could easily be a down year for the main stock market indices.

E. I. du Pont de Nemours and Company (NYSE/DD), otherwise referred to as du Pont, just broke the four-percent dividend yield barrier, as the company’s share price recently tumbled after reporting a tough third quarter. According to the company, its 2012 third-quarter revenues fell nine percent to $7.4 billion. About half of this decrease was due to changes in currency values. Earnings dropped significantly to only $10.0 million, or $0.01 per diluted share, down from $452 million, or $0.48 per diluted share. The company has instituted a new restructuring plan to control costs. Management reduced its 2012 full-year earnings-per-share (EPS) outlook to between $3.25 and $3.30, down from the previous range of $4.20 to $4.40 per share. In the first quarter of this year, du Pont increased its regular quarterly dividend by five percent to $0.43 per share. The company’s stock chart is featured below:

Dupont Company Chart

Chart courtesy of www.StockCharts.com

You might say that it’s a good time for an income-seeking investor to be buying stocks with dividend yields so strong; but like I say, you can’t really expect much more return other than the dividend itself, because there’s so much uncertainty in the stock market.

Of course, the one way to increase your wealth with dividend paying stocks is to reinvest those dividends in the form of new shares. Most large-cap, blue chip companies offer some form of a dividend reinvestment plan, which allows you to buy new shares without paying commissions. If you don’t require the income, this is a good way to build wealth. More shares equal more dividends, and your investment return compounds over time.

Right now, with so many brand-name technology stocks trading down on the stock market, dividend yields are very attractive. Intel Corporation (NASDAQ/INTC) for example is now yielding over 4.5%, which is quite exceptional. In May, this stock hit a high of just over $29.00 a share; now, it’s just over $19.00. (See “Intel’s Share Price Says It All.”)

Dividends will become a much more important component of stock market returns going forward, because I don’t expect the stock market to go up next year. Despite the attractive yields, I still wouldn’t be buying in this market.