How Are You Going to Earn in the Age of Austerity?

market indicatorThe U.S. economy is generating economic growth, but not consistently and not all sectors are experiencing the same level of business activity. Parts of the industrial economy are holding up well, the financials are improving, and the technology sector has led the stock market. But what you might not know or have heard about is that Wall Street analysts are lowering their earnings outlooks. The trend took hold in the fourth quarter last year and it’s still happening. The continued reduction in earnings expectations reflects the current economic reality and it’s a key indicator to me that the stock market will have a difficult time accelerating higher from its current level.

This is why I continue to harp on the dividends investment theme for most stock market investors. Dividends are critical in a slow growth environment and in the age of austerity. As consumers, we all know that the price inflation we experience is higher than the government reports. You might not have to spend more to buy a t-shirt, but you sure do for a good loaf of bread and a tank of gasoline. With declining expectations all around the world for economic and corporate earnings growth, dividends are one of the very few options available to investors, just to beat the prevailing inflation rate. And what you want to own are companies that not only pay a good amount of dividends to begin with, but also are increasing their dividends per share on an annual basis.

To me, a high-flying stock with upward price momentum is as attractive as a big, well-established company that has a track record of increased dividends to shareholders. Having seen so much volatility and irrationality in the stock market over the last 20 years, long-term consistency of performance is just as attractive in my mind as short-term out performance.

A great stock market example of this is The Southern Company (NYSE/SO), which is the large-cap electric utility based out of Atlanta. I don’t own shares in the company, but I wish I did. This stock has weathered many storms and it has appreciated with remarkable consistency, especially during many stock market crises. But the real kicker for investors is the increased amount of dividends paid to shareholders. This past March, for example, the company paid $0.475 per share in a quarterly dividend. This coming June, the quarterly payment goes up to $0.49 per share. In March of last year, the company paid $0.455 per share as its quarterly dividend and $0.4375 per share in March the year before that. In March of 2007, the company paid $0.3875 per share in quarterly dividends. When the company pays its next regular dividend this upcoming June 6, 2012, it will be approximately 27% higher than the quarterly dividends it paid five years ago.

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Consistency of investment returns on the stock market is very desirable from my perspective, because it’s the one thing that the stock market isn’t good at producing. And, nowadays, consistency of income is just as important a goal, because interest rates are so low. (See PC-01-11-12 When There’s No Stock Market Catalyst, Market Leaders Win Every Time.)

I believe the stock market today is fairly valued. But expectations for corporate earnings are declining, so I find it difficult to see how the stock market can advance materially over the near term. The age of austerity has taken hold around the world and that’s why dividends income is an equity investor’s best friend. It is a difficult environment to be a new buyer in this stock market. It’s always difficult trying to buy the best stocks at a great price. You usually have to wait for another recession.