Dividend Payment Downtrend

By now, everyone and their mother knows the US stock market is a losing bet. The big indexes went nowhere over the last decade, absolutely plummeted in the last few years and now even the 2009 snap-back rally is officially kaput.

Thus, a logical question: Is it time to start buying stocks again?

Dividends in the S&P 500 now yield 2.11%, a mere 50 basis points from the 10-year Treasury note’s dismal 2.6% coupon. In other words, the S&P’s yield is 78% of the 10-year’s.

The historic average, says research out his week form brokerage firm Brockhouse Cooper, is 42%. There have been just 50 occasions since 1973 when this ratio was greater than one standard deviation from that average, as it is now. After each of those instances, the S&P 500 returned an average 12% over the next year.

And that’s not including dividends.

“In today’s stock market, dividend payers offer the closest thing to security,” Agora Financial’s income analyst Jim Nelson declares, “but not every dividend is created equally.

“If you had bought one share in every dividend-paying company in the S&P in January 2009, you’d have expected to receive about $28.39 in total dividend payments, because that’s what you’d have received just one year earlier. But by Dec. 31, 2009, you would have actually received only $22.41. The drop comes from 78 different dividend cuts or suspensions in the S&P 500 during 2009. To put that in perspective, there were only 12 total cuts in 2007.

Dividend Changes Since '08

“You can see that during 2009, the rate of dividend decreases skyrocketed. By the end of the year, most of the companies that planned on cutting already did. So the number of decreases subsided. This chart shows the percent change, not the actual number. To be fair, there were only a few months when the number of dividend cuts outweighed the number of dividend hikes.

“So if we are headed for further crashes, which some think is inevitable, dividend payers in general aren’t too much safer than nondividend payers. The right ones, however, are.”

Addison Wiggin
for The Daily Reckoning