Review & Outlook

Our take on the investing, financial, & economic themes of the day

One For-Real Stat On Stocks

5 September, 2012 by Ben O'Brien in Commentary

Our weekly review of financial news turns up this “for- real” stock market statistic with clear and positive implications for stock ownership in the months ahead.  (Later in this comment I will offer a not-for-real piece of stock market analysis without much merit.) In any event, as regards the former, American companies listed in the S & P 500 paid out more dividends in the month of August than in any single month ever before (the actual amount was $34 billion).  Whereas stock prices can–and do–go up and down in a here-today gone-tomorrow seesaw, dividends once paid remain in your pocket.  So, while companies can–and do–restate earnings and fiddle with shareholder’s equity, once dividends are in your pocket, they are yours to do with as you please. Period.

The implications of this statistic are positive for stock ownership in the months ahead.  That’s because the record payout in the month of August did not put a dent in corporate cash reserves.  In other words, there’s a lot more where that came from.  Historically companies pay 54% of their income out as dividends.  At the present time companies are paying out 33% of their income as dividends.  So the real and permanent part of stock returns, namely dividend yield, is growing very nicely.   From the present time to a year from now, dividend income, on average, looks like it is going to increase 14%.  At a time when the yield of the10-year Treasury note has shrunk to 1.5% and the yield of a 30-year Treasury bond has shrunk to 2.7%, stock investors can take comfort that at least  dividends are moving in the other direction.   It’s historically rare for dividends to exceed Treasury bond yields, as they do today; it appears the trend is accelerating.

Not all stats that appear in the financial press are as useful.  One such piece of not-for-real  analysis, which one sees a lot of in the Wall Street Journal and elsewhere,  runs this this way:  negative economic news from Europe, China and India along with continuing economic weakness at home is actually good news, goes the story line,  because signs of global and domestic weakness will cause central banks, like the Federal Reserve, to cut interest rates “to help bolster growth…”.

Wow.  I wouldn’t bet the ranch on that one.  If there’s one lesson to take away from recent years, it is not to place much faith in the capacity of central bankers to fix economies by pushing interest rates around.


Mark O’Brien