On the subject of blue chips, I think dividends are going to account for a very large portion of investment returns from the stock market this year. I’m hopeful for the U.S. economy in its recovery, but whatever transpires this year, I just don’t see real gross domestic product (GDP) hitting over three percent, with the eurozone in recession and all the headwinds with taxes, sovereign debt, and government spending. If we see real GDP over two percent, we will be lucky.
Blue chips are, for the most part, in very good financial shape these days. Borrowing costs are low and cash balances are high. So from my perspective, one of the most reliable types of investment returns (the only real certainty is death and taxes, as the saying goes) is going to be the dividends received from corporations. I think we’re going to get another round of increased dividends this fourth-quarter earnings season and, with cash balances being so strong, more share buybacks to keep stock prices afloat.
The reason why cash balances among many blue chips are so high is that corporations are afraid to invest in this marketplace. They feel the same uncertainty we all do, so in order to keep shareholders as happy as possible, many companies are choosing to return their excess cash in the form of dividends and share buybacks over investing in new plant and equipment.
To be very frank, the only way for more “certainty” to be created in this marketplace is for policymakers to take more action on all the debt and spending problems we have in the majority of Western countries. In my view, the lack of reasonable, measured, and thoughtful policy action regarding these issues, both in Europe and in the U.S., is the reason why the U.S. economy isn’t growing at the rate that it could be. Instead of brinkmanship, the marketplace wants an action plan that irons out how these issues are going to be dealt with. This is what the stock market and corporations want to see happen. More “certainty” through policy action will be a catalyst for corporations to make new investments in the economy.
Getting back to blue chips; I fully expect yields to go up this year, and while I don’t believe in making stock market predictions, I don’t expect anything from the market this year. Any capital gains from blue chips or the rest of the market will be pure gravy over dividends. The structural problems in the global economy are that bad. The increase in yields will be a combination of rising dividends and flat or declining share prices. (See “Dividends Going Up Because Companies Don’t Want to Invest.”) Blue chips have been the place to be ever since the financial crisis in 2008/2009, and dividend-paying blue chips will continue to be more attractive on a relative basis.
Dividends don’t give you much more than the rate of inflation (the real rate of inflation), but they are better than nothing. Investment risk is high among all asset classes, although the recovery in the U.S. housing market is reassuring. I wouldn’t really be buying this market; I’d be waiting—waiting for the best blue chips to correct for an attractive new entry point. I’ll buy this market, just not right now.