Ever since the stock market collapsed in 2008 and bottomed in March of 2009, the best performing stocks, given the risk, have been large-cap stocks, many of which pay dividends. Large-cap stocks have specific advantages during slow economic times: big companies can squeeze their costs to keep earnings afloat, they can tap into large cash resources if required, and they can sell off non-core businesses for capital gains. The advantages for stock market investors are generally less investment risk and the potential for income from dividends. In a bear market, or rather, a recovering stock market, large-cap stocks are just as likely to advance in price compared to smaller capitalized companies.
Institutional investors have been piling into large-cap stocks over the last three years, mostly for the security and the dividends. Even though the S&P 500 Index is still trading at the same level it was back in 1999, the dividends have helped tremendously, especially if that income went into acquiring more shares.
I think large-cap stocks are going to keep outperforming for the next several years, and the dividends they produce are the reason why so many of these stocks are trading now at their 52-week highs. In addition, institutional investors don’t really have anything else in which to invest. Bonds and cash don’t beat the inflation rate, and commodities are unpredictable and don’t generate any income. This earnings season, the takeaway so far is one of stability. Corporate earnings certainly are managed, and that’s why corporate visibility is so conservative for the rest of the year—to make it easier for companies to not disappoint.
As I wrote before, I’d be a buyer of select large-cap stocks that pay higher rates of dividends and have already done well on the stock market the last few years. (See “The Stock Market and Investor Sentiment Tank—QE3 Anyone?”) Current stock market leaders are best poised for further outperformance, especially if there is a recession next year.
With the eurozone an economic basket case, I really think that stock market investors need to keep their holdings as domestic as possible. Business conditions in North America certainly could improve, but the picture here is far better than abroad. Blue chip, large-cap stocks that pay dividends are the best bet if considering new positions. Some of the stock market leaders to date include: International Business Machines Corporation (NYSE/IBM), Colgate-Palmolive Company (NYSE/CL), Union Pacific Corporation (NYSE/UNP), PepsiCo, Inc. (NYSE/PEP), and the Southern Company (NYSE/SO) to name a few. In a market like this, you want consistency and income from dividends, and you can get this by owning the right large-cap stocks.
It is difficult to be enthusiastic about the stock market with the economic news we’re getting. The prospect of a U.S. recession in the not-too-distant future would be a great buying opportunity, just like it was back in 2009. Smaller companies are more nimble and can adjust faster to the business cycle, but what they don’t offer is the staying power and the income. Today, the prospect for capital gains from the stock market is weak; therefore, dividends from large-cap stocks are far more attractive.