Dividends Income: From Bubbles to Crashes, It Always Wins in the End

Dividends IncomeIn recent history, without dividends, stock market investors would generally be losing money. And this doesn’t include losses relative to the inflation rate. It’s been such a difficult stock market for the last decade, and the extreme volatility serves to illustrate just how risky equity securities can be.

In the 80s and the 90s, the best bet in town was the technology sector. The bull market was so strong that you didn’t need to bother with individual stock picks; you could have just invested in the NASDAQ Composite and done well. Dividend paying stocks were less valuable during those years because the bull market was so strong that the probability of capital gains far outweighed the certainty of dividends income.

It took about five years for the stock market to fix itself after the technology bubble burst. Then we experienced another mini-bull market, tied to low interest rates and big money being made in real estate. Always during a bull market, dividends income is less attractive. As we know, the bubble burst in real estate, and it almost brought down the global financial system.

We’re in a period now where the stock market is trying to fix itself once again after two over-leveraged bull markets collapsed. Since 2009, the best bet in the stock market has been (and continues to be) blue chip, dividend paying stocks. Just pull up a stock chart on International Business Machines Corporation (NYSE/IBM). In the age of artificially low interest rates, high sovereign debt, austerity measures, and slow economic growth, dividends income is now the most attractive asset out there. In my view, dividends from blue chip corporations are the only certainty in the global financial marketplace.

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Today’s stock market is basically without trend, and there is no rush to consider new positions. This is a market, however, to be identifying and waiting for attractive entry points in the best dividend paying stocks the stock market has to offer. The U.S. economy is likely to experience difficulty for another year or two before a new business cycle begins. I firmly believe that we will have a new up cycle in the economy, and the foundation for a new bull market is slowly being created. Another great new entry point will present itself (March 2009 being one of the best in recent history), and stock market investors can do just fine choosing from blue chip, dividend paying stocks.

I think the main stock market averages are exactly where they should be, considering the earnings that corporations are generating. If you eliminate the extreme bubbles from the index charts, you can see the stock market’s reasonable progression over time. For a huge new bull market to develop, we need a catalyst in the form of a major technological innovation or big geopolitical event. In the absence of this, I think the best bet is dividend paying blue chips. They’ve worked fine so far.