Dividends: Now More Than Ever

I'm usually not much for pundits who proclaim with Carnac-like certainty the direction of the stock market. But I do pay attention to economists. I do so because the health of the overall market -- and, arguably, my portfolio -- is indelibly linked to the amount of moola consumers have to sock away for a better tomorrow. No one knows better what we, as a nation, do and don't have than those who study the numbers daily. That's why I fear a day of reckoning is coming.

The bubble babble
Indeed, I'm seeing economists become much more bearish lately. In August, the head honcho of 'em all, Federal Reserve Chairman Alan Greenspan, was like rain at a parade. In comments made at a meeting of the Fed in Jackson Hole, Wyo., Greenspan had some choice words for investors, especially those running roughshod over their home's equity:

"... This vast increase in the market value of asset claims (read: real estate) is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

I'm not an economist, so I won't even attempt to translate. Instead, I'll turn to John Mauldin, an investment advisor and author of Bull's Eye Investing, from whose weekly newsletter I pulled this gem. Mauldin argues that Greenspan believes we ought to reduce our risk and do it now, before housing prices start to fall.

No crystal ball, but maybe a case of deja vu?
That's not to say that Greenspan, Mauldin, or any of us possesses even the slightest degree of clairvoyance. No one knows when today's fragile conditions will, if ever, turn to a recession and a bear market. But when 80% of gross domestic product is tied to increases in U.S. household debt -- as reported by portfolio manager Steven Dray of Babson Capital Management in the latest issue of Better Investing -- it seems appropriate to say we're drunk with spending, and that last call is coming.

Or maybe we ought to just say we've been here before, at the end of the last millennium. Bubble or no, we're spending way more than we're saving. Another recent Mauldin letter reported that consumers spent more than they earned in July for just the second time in 46 years. (Incomes increased by 0.3% while spending increased by 1%; that left the savings rate at negative 0.6%, or the lowest since 1959, when monthly records began.)

So we've got soaring debt coupled with an unsustainable spending pace. Great. Again, I may not be an economist. (I'm a liberal arts guy; a communications major who took the market's back alleys to achieve investing competence.) But I've enough common sense to see that investing is now riskier than it was a few years ago. And I've skinned my knees with poor stock picks enough times to know that fortune favors the prepared.

Sometimes the best defense is ... a good defense
History shows that there are few better ways to muddle through a declining or flat market than with dividend-paying stocks. That's because dividend payers tend to keep their payouts in both bull and bear markets. And the best increase their payouts regardless. The regular delivery of checks can add needed ballast to a leaky portfolio during bad times.

In fact, I've got personal experience in this area. During the last bubble, I had invested my wife's portfolio in a few dividend payers such as Caterpillar (NYSE: CAT  ) and JPMorgan Chase (NYSE: JPM  ) and my portfolio in some highfliers such as Amazon (Nasdaq: AMZN  ) . Having been around tech for nearly 15 years, I thought I had a firm grasp of the high-flying dot-coms. My hubris cost me. A lot. But my wife's portfolio lost nothing. The dividends had spared her the downturn.

Guarantee your returns
It makes sense, doesn't it? Not to oversimplify things too much, but if you had $10,000 to invest and you bought 1,000 shares of ACME Rocket Co. (Ticker: BOOM) at $10 a share with a 5% dividend, you'd do well in a flat market. In fact, if the shares didn't move an inch for five years, your total return would be 25% if you did nothing but collect the cash. If you reinvested the proceeds, your return would be nearly 28%.

Dividend stocks, in other words, are worth your time. And we've got just the Fool to help you. Mathew Emmert is chief analyst for Motley Fool Income Investor. Over the past two years, his picks have beaten the market by more than 10% while taking on much lower risk. You can get in on the action by signing up for a free trial now. And there's never, ever an obligation to buy. (Though if you do, the service is backed by our money-back guarantee, no questions asked.)

Are stocks heading lower soon? I have no idea. But I think it's fair to say that we're investing in a market that's largely built on the assumption that we'll grow our assets and income well into the foreseeable future. In such an environment, there can be few guarantees. Dividends -- the promise of cold, hard cash -- may be the best of them all.

Fool contributor Tim Beyers loves getting paid to invest. He didn't own shares in any companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking his Fool profile here. The Motley Fool has an ironclad disclosure policy.


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