Some readers tell me they sleep at the end of their driveways on Sunday nights so they don't waste a minute getting to my column early Monday morning. My friend, Mike Doyle, says that if he ever detects a hint of pessimism on my part, he wants to know as soon as possible so he can bail out of the markets and sell short to beat the crowd.
Shouldering this level of responsibility, I spent four hours last week listening to economist Alan Beaulieu who, based on his past track record, is remarkably prescient when it comes to offering a glimpse into our economic futures. He points out the fallacy of consumer sentiment, for example, by pointing out that when people are at their gloomiest, almost all other economic indicators rise. The stock market's last eight weeks offer a good example of that counterintuitive disconnect. The only economic statistic that tracks consumer sentiment is the sale of used boats.
Beaulieu had some depressing news for us as he said that we are heading for a long grinding road to economic recovery and that the stock market would not rise to its September 2007 high water mark until the year 2020. Now then, on the surface that would strike some people as being really depressing news. Not me. I actually just bought a used 1967 boat. Moreover, simple analysis indicates that a long, dry period could be terrific for long-term buy and hold investors who are dollar-cost-averaging with steady contributions into retirement plans. The best thing that could happen to us over the next 10 years would be to contribute with despair into mutual funds that go nowhere quarter after quarter and that then finally double in value starting in about 2018 - exactly what happened at the end of the 1990s.
Peering under the hood of a market that goes nowhere, we can see a far more promising story if we consider the dividends and stock buybacks that are sure to be reinvested during that 10-year period.
Those quarterly statements reflecting reinvested earnings will tell an entirely different story than persistent headlines that keep comparing an in-the-tank Dow Jones average with that fondly-remembered 14,600 Dow of Sept. 31st 2007 - that quarterly statement we wish we'd framed.
This month's AAII Journal (American Association of Individual Investors) points out the extent to which dividend-paying companies actually grow faster than the so-called growth companies that reinvest all profits. Enough convincing research now makes the case that the companies with strong dividend payout rates are actually the ones whose stock appreciates the most over the years. Setting aside the early wonders like Microsoft and Oracle, most mature companies struggling to maintain growth by avoiding dividends just don't rise as much as value stocks over time.
Dividend payout rates for the S&P 500 were averaging about 3.7% a few months ago when share prices were at rock bottom. With a 37% rise in share values, those payout rates will have been reduced to just under 3%, assuming the dividends per share remain the same - which most do.
Besides dividends, however, are stock buybacks. In the years from 2005 through 2007, the largest 500 companies bought $2 worth of their own stock for every dividend dollar they paid out. When a company buys back its stock from the public and retires that stock, all of the remaining stockholders just received an increase in the value of the stock that remains. Why? Because the entire company and its profits are now split between fewer shares of stock. In a simple example, if five partners in a business use company profits to buy out one of the partners, the remaining four owners go from owning a 20 percent share to owning a 25 percent share - a 25 percent increase in their ownership - otherwise known as "profit." This is how many public companies have elected to spend their profits rather than paying the money out in dividends.
Going forward, if the total earnings between dividends and buybacks adds up to 6 percent total per year - as was the case from 2005 through 2007, then $1,000 invested today will compound to $2,000 by around 2020 even if the market itself remains flat. If our current, depressed stock market actually returns to 2007 values because of a healthier economy and higher price earnings ratios, what will then be $2,000 will double to $4,000.
The lesson is to remember that companies still make money regardless of their stock prices. Staying invested and capitalizing on reinvested earnings - both dividends and stock buybacks - will always be rewarding. For entertainment, we can just sit back and watch the market do its thing.