Dividend Paying Stocks

Lately, you can't browse investment news without hearing about dividend paying stocks. What is behind this feverish sentiment and why is it important now?

To begin, a dividend is a sum of money paid by a company on regular intervals to its shareholders. A stock's dividend is calculated by totaling the annual sum of payouts made by the company and dividing that by the current stock price. This ratio is your dividend yield. 

Companies that pay consistent dividends are usually less volatile than their cash-hoarding contemporaries. Throughout the course of the year, these value oriented businesses are run in such a way that they plan to return portions of their profits back to shareholders. Conversely, growth oriented companies take all of their profits and reinvest them directly back into the business for future expansion. Cases can be made for each side in deciding the winner of the value vs. growth stock preference, but the truth is that dividend payers typically outperform during bear markets and growth stocks typically outperform during bull markets (as seen in the graphs below). 

Why now? Investors who still want to own stocks for the growth, but don't want as much volatility should be comfortable with dividend payers. However, this begs the question: are we still in a bear market, or are we entering a new bull market? The answer to that question should play a role in your current allocation.

Sources:

www.ritholtz.com

Signs of Life

Even though it may not feel like we are making any economic progress, we are slowly clawing our way back to normal. Weekly jobless claims beat analyst estimates yet again dropping to 364,000 - the lowest reading since April 2008. Moreover, the four-week moving average is now at 380,250 claims per week. The last time we had jobless claims numbers like this was June 2008. While the overall unemployment picture still remains stubbornly high at 8.6%, we have continued to improve, slowly but surely.



Sources:
SeekingAlpha.com
Federal Reserve Bank of St. Louis

The Emotional Investor

With volatility through the roof recently, emotions have been running high in the investment community. This sentiment can be dangerous for returns! Remember this: emotions have no place in investing or speculating. Only research and facts should drive our decisions. The following charts from do a great job of showing what the emotional speculator goes through as he loses money.

Source:
www.ritholtz.com

TED Spread

The TED Spread is a common reference for determining the amount of stress banks are having raising short-term cash. Specifically, it is the difference between three-month Eurodollar contracts (represented by LIBOR) and three-month Treasury Bill yields.

Historically, it has been a good indicator of perceived credit risk in the overall economy because T-Bills are generally thought to be risk-free offerings and LIBOR measures the credit risk of lending to commercial banks. The difference is a premium for taking on additional risk.

Currently, the TED Spread sits at a new 52 week high of 56.82. Banks aren't lending to each other for a reason: they don't like the odds of repayment.

This can have serious consequences for a global economy trying to emerge from stagnation, and an even bigger impact for those countries trying to avoid a recession.


TED Spread Chart via Bloomberg:
Dec. 14, 2011


Sources:
Bloomberg.com
Bankrate.com

10 Market Rules to Remember

Here is a timeless list of "10 Market Rules to Remember" offered by legendary market analyst Bob Farrell.

For the record, Bob currently advises to use every advance in the market as a selling opportunity. He sees P/E ratios finding a trough at 8x... we are currently at 13x.

1. Markets tend to return to the mean over time.When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.  

2. Excesses in one direction will lead to an opposite excess in the other direction.Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.  

3. There are no new eras — excesses are never permanent.Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half. As the fever builds, a chorus of "this time it’s different" will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.  

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually comes.  

5. The public buys the most at the top and the least at the bottom.That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.  

6. Fear and greed are stronger than long-term resolve.Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism," says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks." 

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks ("Nifty 50" stocks).  

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend. I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July. Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.  

9. When all the experts and forecasts agree — something else is going to happen.As Stovall, the S&P investment strategist, puts it: "If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?"Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.  

10. Bull markets are more fun than bear markets. Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.

Source:

Marketwatch

www.ritholtz.com