Because the Federal Reserve created an environment of artificially low interest rates, investors both large and small are craving income. You can’t get any real return from cash and the opportunities in bonds just barely cover the inflation rate and have long durations. Real estate investment trusts (REITs) can yield a greater amount of income, but a lot of investors are wary of these securities. This is why large-cap, dividend paying stocks have done so well lately, because no other asset class generates any material income for investors. Dividends are an income stream, but also provide security in a very uncertain world.
When the Federal Reserve announced several months ago that it would keep interest rates low and stable for an extended period of time, the stock market was handed a big gift. Institutional investors have been very active, pouncing on shares of companies that announce increased dividend payouts, and I think we’re going to see many more positive dividends announcements in the near future. I will be very surprised if we don’t.
This is why I’m much more bullish on large-caps as a stock market group. (See Must-haves for Your Stock Market Portfolio.) Big companies that pay dividends are the best bang for your buck in the age of austerity and high sovereign debt. We’re not in a stock market environment at this time that rewards speculative investing. Commodities continue to prove their inherent volatility and smaller companies aren’t being pursued by institutional investors. There are always good trades out there, but with stock market valuations reasonable, a large-cap dividend paying stocks can move just robustly as any small-cap.
If there were no dividends, holding the S&P 500 Index over the last 12 years would have lost you money. More so than in the past, big investors are buying stock market dividends; this is a trend that I think has real staying power over the next several years. Positive dividends news is going to move large-cap companies significantly this year and these are events on which you can trade.
With the large-cap companies that I’ve seen announce increased dividends payouts over the last four quarters, the resulting share price surge lasted. This is news to look for in this kind of stock market and it’s a very positive development.