There’s been a lot of news related to increased dividends and this is a very positive sign for the stock market. Even if there aren’t big expectations for capital gains from stocks, institutional investors are buying companies that announce higher dividends for shareholders.
Dividend news from JPMorgan Chase & Co. (NYSE/JPM) was icing on the cake. This sector has been hard hit (although they did it to themselves) and any recovery in the big banks is very helpful for the rest of the stock market. There haven’t traditionally been material stock market rallies without participation from the financials and the market today could certainly use this sectoral strength in order to keep its upward trend.
Dividends, in my view, are perhaps now the most important component to an equity investment. While the stock market has been strong since the beginning of the year, investment risk remains very high and outside factors like war and/or sovereign debt are very real possibilities over the next year or two. In an environment of extraordinarily low interest rates, dividends income is pretty much the only guarantee out there. Cash and bonds just don’t pay much, especially with inflation.
In the last week or so, we’ve seen the Dow Jones Transportation Average turn higher and it’s my hope that this is the breakout that will help the broader stock market. I do believe in Dow Theory and transportation stocks are an important component.
My bet is that the stock market will keep its upward trend for the next couple of weeks, and then consolidate in anticipation of first-quarter earnings. The stock market likes to bet in advance and then sell on the news. A lot of companies also announce their dividend payments with their earnings reports and I’m anticipating a lot of good news related to higher dividend payouts. Big corporations are still reticent to spend their cash on new investments, but they aren’t afraid to return excess cash in the form of dividends or share buybacks.
The right shoulder formation of the S&P 500 Index looks like it will be complete this year. (See Are We in a Sucker’s Rally?) This will be a major accomplishment considering all the crises of late. I’m still not terribly bullish on the stock market medium-term because of the serious structural issues facing the U.S. and European economies. Gross domestic product (GDP) growth is not going to be that robust over the next several years and that’s why dividend income should be tops when considering expected returns from the stock market. Being an election year, the age of austerity will mostly be delayed until next year. Then it will be severe.