Important Updates for Investors
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The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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Published: December 14, 2004
The markets are facing a
number of cross-currents, including volatile oil prices, mixed economic
data, and a weak U.S. dollar.
Adding to the mix, December is typically a time when stocks reflect
concerns about fourth-quarter and year-end results. At this time of the
year, stocks are also volatile since investors often seek to offset
their gains and trim their taxes by selling losing positions.
December started with a bang, as crude oil prices plunged more than $5 a
barrel during the first two days of the month, ending the week down
-14%. The drop fuelled a sharp rally in stocks, as the reduced prices
spurred hopes for a solid economic recovery. But the rally sputtered the
next week when OPEC agreed to reduce output and prices began creeping
higher.
Mixed economic signals are also keeping investors jittery about the
market's potential future direction. A report that the U.S. economy
created fewer-than-expected new jobs in the past three months raised
concerns of an economic slowdown. In addition, a sharper-than-expected
rise in wholesale prices triggered inflation fears that further spooked
the markets.
Also weighing on the markets is the weak U.S. dollar. In the past year
and a half, the dollar has lost about a third of its value against the
world's major currencies, mainly on concerns over the funding of the
huge U.S. trade gap. The dollar fell to an all-time low against the euro
and a five-year low against the Japanese yen early in December but has
since strengthened. The problem is if the dollar needs to be propped up
with higher interest rates, then stocks might appear less attractive
than risk-free Treasuries.
On Friday, December 10th the
market closed down about three points from the start of the month, with
the S&P 500 finishing at 1188.00. The Dow Jones Select Dividend
Index (^DJJ) paced the broader market, declining 16 points from December
1st and 19 points off its record high on November 15th. The index closed
Friday at 699.65. Meanwhile, the Dow Jones Equity REIT Index (^DJR)
closed on December 10th at a record high of 228.04, buoyed by continued
low interest rates.
While dividend indices hit new highs, yields on U.S. Treasuries have
been falling on the mixed economic signals. Traders expect the Federal
Reserve to raise short-term interest rates by a quarter of a percentage
point to 2.25% on December 14th. But rates are also expected to remain
relatively low over the coming year. The yield on the benchmark 10-year
Treasury dropped a stunning 13 basis points after November's low
employment numbers were reported, finishing at 4.16% on Friday, December
10th.
LOOKING AHEAD
Income stocks have delivered market-beating returns this year, and
there are reasons to believe their performance could get even better in
the year ahead.
From January through November 30th, dividend payers in the S&P 500
posted a total return of +14.4% versus just +7.8% for non-payers. The
strong performance of dividend stocks stems from the double-barreled
gains they have enjoyed in both dividend payments and share price
appreciation.
So far this year, almost half of the components of the S&P 500 have
boosted their payouts and 10 have introduced their first-ever dividends.
At the same time, many dividend payers have reached fresh all-time highs
during the year.
Will the good times continue?
With many dividend-paying stocks now trading at lofty P/E multiples, we
do not expect major share price gains from this group in the coming
months. Instead, we expect higher-yielding dividend stocks to provide
the best overall returns thanks to steadily rising dividend payouts.
Given that more companies announce dividend increases in January or
February than in any other months, we can expect to see a surge of
higher payments in the coming months. The longer-term outlook for higher
dividend payments is also optimistic, given that current dividend
payouts are at rock bottom levels compared to their historical norms.
The market's current dividend yield of about 2% is only half of the 4.1%
yield the S&P 500 has averaged for over the past 75 years. Since
companies in the S&P 500 are now paying out less than 30% of their
earnings in the form of dividends, there's plenty of room to lift their
yields closer to the historical norm. Despite the recent dividend
increases by many companies, payout levels are still at rock bottom
levels compared to the 60-year average of 50% to 60% of earnings.
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The market is now trading at a
price-to-earnings (P/E) multiple of about 18X the past year's earnings
-- in line with the 25-year average. Given that the market appears to be
fairly priced and that corporate earnings are expected to grow by less
than +10% next year, we are unlikely to see a period of rapidly rising
share prices anytime soon. With this in mind, it seems clear that
investing in stocks which offer the possibility of rising dividend
payments, as well as modest share price appreciation, is a sure way to
enhance returns.
Important
Note: To view the remainder of this Mid-Month Update, in which
Carla Pasternak provides an in-depth analysis of dozens of her favorite
income-oriented stocks and funds, you'll need to subscribe to our premium
High-Yield Investing newsletter. Please visit one of
the following links to continue...
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Please Note: The above article was merely a
small excerpt from an issue of our premium income newsletter -- High-Yield
Investing. In each issue Carla Pasternak presents
a wealth of information and timely investment ideas to help you earn a
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