Large-cap companies are the way to go if you want to be a buyer in this stock market and those with a track record of increasing dividend payments have the advantage. We’ve had some revenue and earnings warnings from some well-known dividend paying stocks lately.
For example, Intel Corporation (NASDAQ/INTC) surprised the stock market saying that its fourth quarter would come up short due to shortages of hard-disk drives from Thailand (here’s an investment theme to consider—solid-state drives [SSDs] are beginning to take off in popularity). This brought down the entire semiconductor sector; although it’s reasonable to conclude that Intel’s dividend payments are secure.
We also had E. I. du Pont de Nemours and Company (NYSE/DD) cut its 2011 forecast, but then the company announced that it would beat 2012 consensus earnings.
So, like the rest of the stock market, it’s a mixed bag of performance out there. Even though expectations for 2012 corporate earnings have come down, they are still robust enough to be attractive, especially once you factor in dividend payments.
This is the key to outperformance in this stock market, perhaps even for the rest of this decade. Dividend payments are the only reason why stock market index investors beat the rate of inflation over the last 11 years. The main stock market indices didn’t do a thing during this period.
I maintain a list of favorite large-caps that boast long-term track records of increasing dividend payments to shareholders. These are best in class, well-managed companies that have a tendency to produce more consistent rates of return, rather than try to hit home runs. These are the companies I want to invest in when their share prices are down.
There really isn’t a catalyst to do much in this stock market, but if you did want to create a new equity portfolio, you’d want to overweight it with dividend paying stocks. What many large corporations are doing in this economy is hoarding cash. They are equally afraid to invest in a marketplace with so many uncertainties. Instead of investing in new plant, equipment and employees, they’d rather play it safe and maintain their earnings. This is why it’s increasingly likely that we’ll see many large-cap companies announce higher dividend payments to shareholders next year. And it’s all because there’s no growth out there and interest rates are artificially low.
Right now, holding cash doesn’t pay and it doesn’t keep stock market investors happy. What do pay are common share repurchases and rising dividend payments. This keeps shareholders relatively happy in a slow growth environment with low expectations for capital gains.
Equity investment risk remains very high at this time, but oddly; the fundamentals for investing in blue-chips are improving.
(Recommended reading: How to Pick the Best Stocks That Pay Dividends)