Thursday, November 20, 2008

Rising Dividends Are Not An Endangered Species

I have managed money using some form of a dividend investment strategy for nearly 20 years. In 1993, I discovered that a "rising" dividend strategy produced better results than just focusing on high dividend yields alone. Indeed, I call that 1993 discovery my eureka moment because I was not expecting to find such a relationship, and it came almost by accident. I'll share the story in a future blog. The question I have been asked a lot recently is, "What if we have now entered a time when dividends won't be rising anymore. Indeed, what if we have entered a time when dividends will be falling for most companies? How will you decide what stocks to own, then?" If the economy slows as much as the alarmists are telling us, then the universe of rising dividend stocks from which we would have to choose would shrink. However, in the tens of thousands of stocks that trade on the world's stock exchanges, we firmly believe there will still be a group of 25-30 wonderful companies whose dividends would still be rising. Those would be the stocks on which we would focus and build our portfolios. Thankfully, we have had very good dividend growth in our portfolios over the past 12 months, and based on our research we believe most of our portfolio companies will have dividend hikes again in 2009. Over the last twelve months in our Cornerstone Investment Style (our main dividend style), we have owned 31 companies. In that time, one company cut its dividend, and we sold it immediately, and two other companies have cut their dividends, but we have held them because our dividend valuation models indicate that the companies are still solid values. The remaining 28 companies have all raised their dividends at an average rate of just over 11%, about the same as the portfolio's recent 5-year average dividend increases. These dividend increases in the face of one of the worst economic crises in memory convince us that dividend growth is not a thing of the past. In these bear markets it is important to remember that while almost all stocks are moving with the bearish trend, the prospects for all companies are not going down. Indeed, I believe the great majority of our companies will have better earnings and dividends in 2009 than they did this year. Our companies are unique in that they are very adaptable, as well as being multinational. They can shift resources anywhere in the world to where ever the sweet spots lie. These are very tough markets and good news has been hard to find, but Bloomberg had an item that will give you some idea of how cheap stocks have gotten. For the first time since 1958, the dividend yield of the S&P 500 is now higher than the yield on a 10-year T-bond. In addition, the PE ratios of the S&P and Dow Jones Industrials, based on next years expected earnings, are also at a multi year lows.