How to Get Outperformance
in this Kind of Market

Relative strength in the stock market is important these days, because there’s no real trend. While there are lots of standouts in the trading action, dividend paying stocks are showing real leadership, especially since the March 2009 low. Relative strength in the stock market is important these days, because there’s no real trend. While there are lots of standouts in the trading action, dividend paying stocks are showing real leadership, especially since the March 2009 low.

You can see it in all sorts of names like Johnson & Johnson (NYSE/JNJ), Kraft Foods Inc. (NYSE/KFT), Intel Corporation (NASDAQ/INTC), The Coca-Cola Company (NYSE/KO), E.I. du Pont de Nemours and Company (NYSE/DD) and ConocoPhillips (NYSE/COP), to name just a few. The stock market is rewarding higher dividend paying stocks and I think this is a trend that’s going to continue throughout 2012.

Traditionally, the stock market universe has been divided between those investors seeking quarterly income and those searching for faster-growing companies in the hopes of greater capital gains. Now, with an economy and stock market that are so unsure of themselves, dividend paying stocks are the outperformers, as institutional investors and individuals seek more certain rates of return on their equity investments. This, in my view, is a very positive trend and it reflects a seemingly old-fashioned way of doing business in the stock market. You can bet that business is pretty good for more conservative money managers, whose focus is on income and preservation of capital; this is in contrast to overleveraged hedge funds that don’t have many bandwagons to jump onto.

What we know is that many large, dividend paying stocks with long tracks records of increasing dividend payments to shareholders are outperforming, both sectorally, and compared to the main stock market indices. While the S&P 500 Index has not quite doubled since the March 2009 low, stock in Caterpillar Inc. (NYSE/CAT) has more than quadrupled in value during the same time period—and this doesn’t include the company’s significant quarterly dividend payments to shareholders. This is just one example of many large-cap, dividend paying stocks that have actually performed like fast-growing technology companies.

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The fundamental outlook for the U.S. stock market is actually improving, but it’s lacking in investor confidence. Would you bet that dividend paying stocks like Coca-Cola or Johnson & Johnson would reduce their dividends to shareholders going forward? I certainly wouldn’t, and institutional stock market investors aren’t doing so, especially now that equity investment risk is so high

With many large-cap companies buying back their own shares due to growing cash positions, I think it’s fair to conclude that this coming fourth quarter and next year we’ll see material increases to dividend payments. Accordingly, dividend paying stocks will continue to lead a stock market that’s stuck in the doldrums.

Stock market investors actually have quite a large selection of dividend paying stocks from which to choose. Many of these stocks are trading close to their 52-week highs, so in this market you kind of have to consider what Warren Buffett did recently with his new position in IBM Corporation (NYSE/IBM); you have to think about buying high. There really isn’t any other way to get the income. The bank certainly doesn’t pay very much.