High-dividend stocks: Are they really worth the price?

July 3, 2013

If there’s any indication that investors are still skittish about the markets, let this example add fuel to the fire. The following graph charts the popularity of Google searches for the phrases “dividend stocks” (blue line) and “hot stocks” (red line) from 2005-2013.

High Dividend Stocks

Is anyone surprised that investors are apparently flocking to what they perceive to be “safer” stocks, rather than seeking out the next big thing? Probably not, given the turbulent state of our markets. The problem is: dividend stocks, especially those that are offering a high yield, may not be as safe as you think they are.

Read more in our current newsletter.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Stock investing involves risk, including loss of principal.

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The New Milestone

March 12, 2013

The Dow Jones Industrial Average rose above its all-time intraday and closing highs on March 5, ending at 14,253.77. That’s more than 100 points above the 14,164.53 record it hit in October 2007 before the Great Recession. The almost-four-year bull market is the eighth longest in the last 100 years, and the sixth strongest in terms of the return of the S&P 500.

Wow! So what? Or something in between? Here are some perspectives on the market for the long-term investor.

This upward trend for the markets continues against a backdrop of monetary policy decisions and continuous (albeit slow) economic growth. The Fed and other central banks continue to pursue a policy of easy money and low interest rates, and economic growth is unspectacular but solid: corporate earnings and dividends are rising, the U.S. housing market is growing, the unemployment rate is gradually declining, and the auto industry is healthy again.

Low interest rates and low bond yields mean investors seeking income are increasingly turning to stocks. And periodic reminders of continued weakness in the euro zone, like the recent Italian elections, give investors worldwide a reason to move money into the United States. Demand increases price, so the Dow is rising.

Now for two reality checks.

First, since the end of 1994 and the beginning of the 1990s stock boom, consumer prices have risen 55%. The Dow has more than doubled since 1994, but after adjusting for that 55% inflation, it shows no gains since the first part of 1999. Investors planning for retirement have to remember that ignoring inflation overstates the value of future investments and understates the amount of money needed for retirement. Second, the four-year bull market and the “lost decade” that preceded it yielded a total return on stocks less than half the historical norm.

And a reminder.

There’s still a lot of money sitting on the sidelines, and a lot of people who are getting ready to jump in. If you’re one of them, remember that a new all-time high is just a number, so don’t get swept up in an emotional reaction to highs or lows.

The fundamental things apply as time goes by, the first of which is that even the pros can’t time the markets in the short term. You should have a long-term plan that integrates your investments, savings, taxes and risk management. Adjust it periodically as markets and the economy warrant. And, stay invested because investments work; investors don’t.

 

The Dow Jones Industrial Average is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.

 


The Eurozone Crisis Drags On

August 28, 2012

Europe is nearly through its August holiday and the only evidence of progress in the debt crisis has been press releases and sound bites from vacationing heads of state. Recently, however, the German weekly newsmagazine Der Spiegel reported that the European Central Bank (ECB) is once again debating a plan to cap interest rates in countries like Spain and Italy by buying unlimited amounts of their bonds.

The ECB, of course, immediately denied the report, as the plan’s potential to saddle German taxpayers with huge debt makes it a political non-starter for the EU’s most powerful member. Just to underline how Germany doesn’t (at least publically) approve, both the German Finance Ministry and the Bundesbank made it clear that any such plan is unacceptable, which didn’t stop the Spanish and Italian bond markets from rising on the news, thereby lowering interest rates.

Meanwhile, the Eurozone economy, as expected, contracted in the second quarter, with Germany positive, France flat, and most of the remaining countries negative. Less government spending, lack of hiring and worsening consumer sentiment led to a consensus estimate from economists of further contraction in the third quarter followed by weak growth in the fourth.

None of that is good news for the American economy or American investors. Europe as a whole is our largest trading partner, so slack demand across the Atlantic means lowered demand here, slower job growth, and lower profits for many American companies, particularly those with a large percentage of their business overseas. (Think Coca-Cola, Microsoft and General Motors, just to name a few.)

Compounding the problem is the continuing uncertainty as the Euro crisis drags on, month after month, with stalemate, and often economic impotence, built into the structure of the European Union itself. Don’t look for a resolution any time soon.

As always, the best defense is a diversified portfolio and the advice of a smart, experienced financial advisor.


Feeling bad, but still prosperous

August 16, 2012

The U.S. stock market, as measured by the S&P 500, has had an outstanding year so far, posting gains of 12.8 percent through August 10. Yet, there are plenty of reasons to feel pessimistic about the future: unemployment is at 8.3 percent, Europe continues to fumble for an answer to its debt crisis, and growth in emerging economies is slowing. How can stocks, which are supposed to trade on future earnings, be doing so well when the financial press is full of caution? We believe the answers to the apparent disconnect lie in the financial reports of U.S. companies for second quarter 2012.

For those watching closely, there has been a lot of good news for stocks. Of the companies in the S&P 500 that have reported second quarter earnings, more than 70 percent have beat Wall Street’s earnings estimates. That means that companies are making more money than analysts expected. As analysts adjust their future estimates to include the recent good news, prices of stocks rise. While earnings are surprising to the upside, revenue—or how much companies sell—has been surprising to the downside. Almost 60 percent of S&P 500 companies missed their Wall Street revenue targets. Companies are making more money than expected, but with fewer sales.

Companies are able to generate more profit per sale by controlling costs. Another way of putting this is that companies are squeezing more and more out of their employees; in economics parlance we call this productivity gains. Productivity gains are good, because it means that each employee produces more, which generally leads to higher wages and more disposable income. Higher disposable income in turn leads to more spending, which leads to higher revenue for companies. You get it—a virtuous cycle of growth. Yet while productivity is rising among those employed, we have a large pool of unemployed workers and that means that wages aren’t rising; try negotiating a raise when there are 3.5 job-seekers for every 1 job opening. Without rising wages, disposable income is stagnant, which means people aren’t buying more things, and that largely explains the missed revenue numbers.

The fact that we haven’t been able to enter the cycle of virtuous growth is part of the reason why the recovery has felt uninspiring. That said, even in this weak environment, companies continue to increase profitability as they squeeze workers for more output without increasing their wages. But, the current state can’t go on forever. Companies will eventually start hiring and that will result in higher wages. Either there will be virtuous growth OR companies will start to put up disappointing earnings. We don’t know which scenario will play out, but we are hoping, along with the rest of the country, for the former.


Europe: The Rollercoaster that Doesn’t Seem to End

August 7, 2012

The jump in volatility recently has caught the interest of many investors and prompted thoughtful questions about the economy.  We have been tracking three primary subject areas on a daily basis through these unusual global financial events:  (1) the health of the U.S. financial recovery; (2) the European debt crisis; and, to a lesser degree, (3) the health of China and other Asian economies.  These first two issues are at the heart of the recent market volatility.

The European Union is in an unfortunate position of slow to declining growth combined with unmanageable levels of debt.  In most economic downturns, the cycle to reverse the decline is a decrease in interest rates by the Central Bank, which puts more cash into the system and creates a declining currency value.  As a result of low borrowing rates and attractive currency exchange rates, domestic and international spending slowly improves.  The 17-member Euro zone does not have this luxury because, while they share a Central Bank lending rate and currency exchange rate, they pay their own sovereign debt at a borrowing rate set by the market.  Countries that have very high levels of debt—like Greece, Spain, Ireland, Portugal and Italy—cannot muster the growth needed to raise revenue to pay their existing debt and cannot issue more debt at a cheap enough rate to make it financially viable for the long term.  It is a vicious cycle that has been a decade in the making.  While it seems to have been a slow-moving train wreck, we appear to be nearing the climax.  Ultimately, that should be good news because it would create some clarity in an uncertain world.  The hope is that the Euro zone will solve the current problems without an undue level of bank failures and defaulting loans, while also fixing the deficiencies in the system.  There have finally been some meaningful ideas offered, such as a rescue fund that can borrow from the European Central Bank, thus ensuring enough resources to bail out even a large participant like Spain.

In addition to news from Europe, every day we see some chart that compares the current financial recovery in the United States to recoveries in the past.  More often than not, the current recovery is shown to be very weak and fallible compared to others.  A strong recovery creates jobs, increases our standard of living, and ultimately increases personal net worth.  We want a strong recovery because we want all of the above, so it is disappointing when jobs growth or retail sales or home sales are reported to be unexpectedly weak.  Although it has been frustratingly slow, and may continue to be for awhile, the good news is that our economy is making progress.  The even better news is that when the rest of the world gets its act together, the United States seems poised for solid growth and a recovery.  Recent earnings reports show a very lean corporate America with little fat to trim.  A pickup in global sales should have a pronounced and immediate impact on the American economy.

The outcome of the European debt situation and the recovery path of the U.S. economic recovery will influence the financial models and the psyche of investors worldwide.  While the volatility causes us to pay extra close attention to world events, our outlook for a slow and steady recovery in the United States has not changed.  We have lived through many of these market “blips” over the past few years and will probably experience many more over time.


Economic Update: The View From 3 Months In

April 24, 2012

Except for those who are still unemployed, 2012 has been a good year so far. The U.S. economy is recovering slowly, and there are many indications it will continue to recover. Markets are up, with the Dow reaching the 13,000 milestone last seen in 2007. Greece hasn’t defaulted. Even unemployment is showing signs of improvement.

The U.S. picture
The consensus prediction is for 2% to 3% economic growth in 2012. That’s better than the 1.7% of 2011, but too slow to quickly cut unemployment from 8.3% to a more acceptable level.

Job creation, nevertheless, is increasing. December, January and February added 244,000 jobs a month, the most since before the Great Recession. Many experts think that productivity growth is maxed out and more hiring is inevitable. Businesses are investing in new equipment after spending the last two years increasing production by working off spare capacity.

Consumers are spending and borrowing again, even for big-ticket items like cars. February auto sales were at the highest since 2008. Housing starts show signs of recovery, spurred by continuing record-low mortgage rates.

So what gives us pause? Oil. Should tensions with Iran turn to war, higher gas prices would dramatically cut consumer spending, and slow the U.S. economic recovery as a whole.

Europe and Asia
Europe appears to have avoided a severe financial crisis, and while its recession is expected to be mild, the United States is feeling the effects. Banks with exposure to European debt, and the global economy as a whole, may be affected if debt restructuring doesn’t go smoothly.

China’s growth is slowing, impacting the global economy and the recovery of almost every nation. Can the Chinese avoid a hard landing on one hand, and avoid inflationary over-stimulation on the other hand? We’ll see.

What we think
We’d summarize the first quarter and the outlook going forward with two words: wary confidence. There might be some slowdown and market volatility. Oil prices will affect the economy. Fixed income has been a haven for investors, but that may be changing. Interest rates are likely to rise, and the 30-year bull market in bonds will become more bearish. And, as always, a diversified portfolio is a prudent hedge against unpredictable events and a good long-term strategy for investors.

 

Wealth Enhancement Group

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Ahhhh, 13,000!

March 1, 2012

“After bouncing up and down around the 13000 level for a week, the Dow Jones Industrial Average finally closed above that psychologically important mark for the first time since May 2008.”

That’s what The Wall Street Journal says in its online edition about the February 28 market close. But is closing above 13,000 really psychologically important?

The short answer is that for the pros, no, it isn’t. They’re busy drawing conclusions from the facts hiding behind the milestone. The twin specters of U.S. recession and European debt collapse are fading. The Dow is up 22% since October and 6.4% since the beginning of 2012, the strongest rise to start the year since 1998. Will it continue?

On the plus side, there’s another bailout for Greece, rumors of a renewed Federal Reserve bond buyback should the economy show signs of weakness, declines in borrowing costs for Italy and Spain, and a 12-month high in the Conference Board’s index of consumer confidence. On the minus side, the slowing growth rate of corporate profits, fears that China’s real estate bubble will pop, rising oil prices, and the plain fact that stocks have been rising for five months and could be due for a correction.

So the answer to “Will it continue?” is, as usual, maybe.

And if 13,000 isn’t psychologically important for the pros, is it for the Main Street investor? Probably it is. Consider the five-month run-up that led to 13,000. In the past few weeks it has finally brought the Main Street investor creeping back into the market.

Here are some ways the average investor can avoid letting the psychological component override the facts: 

  • Pay attention to valuations, the most fundamental measure that moves stocks.
  • Remain focused on broadly diversified portfolios with exposure to multiple asset classes.
  • Focus on long-term goals and stay invested.
  • Avoid the “herd mentality” of jumping on the most recent investment bandwagon.

 

James Copenhaver, Director of Investment Management

 

Sources: Optimism Drives Dow Past Milestone; Main Street’s $100 Billion Stock-Market Blunder

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.