As Fools Todd Wenning and Bryan Hinmon pointed out last week, the word "dividends" has received more media mentions than Lady Gaga over the past month.
This isn't surprising. One of the cool things about writing about markets is that you can gauge how investors feel at any given moment based on how readers react to articles. Over the past year, mention the word "dividends" and suddenly you're on everyone's good side. Dividend giants like Annaly Capital (NYSE: NLY), Altria Group (NYSE: MO) and Pfizer (NYSE: PFE) -- companies few cared about two years ago -- have become some of individual investors' favorite stocks.
Why is this?
The main theory I hear batted around is that with bond yields so low, investors who want yield are now forced to search in dividend stocks. It's the only place you find respectable yields. In that case, the reason dividends are so popular is because they're taking on the de facto role of bonds.
This makes sense, but this story might be deeper than that. I think the reason so many investors are suddenly enthralled with dividends is not just because they need a bond substitute, but because their perceptions of stocks have been fundamentally altered.
In the most distilled sense, there are two ways to make money in the stock market: either from dividends, or capital appreciation. Dividends, of course, are when companies write you a check. Capital appreciation -- an increase in a stock's market value -- comes either from earnings growth, or multiple expansion (the market's willingness to pay more for earnings).
For the better part of the past half-century, most investors focused almost entirely on capital appreciation as a way to make money. The hype wasn't about collecting a 3% dividend and compounding it over a lifetime; it was about buying a stock at $10 and selling it at $20, $30, or $40 as soon as humanly possible. You bought low and sold high. That was what the market was all about.
But all of that changed over the past two years. Since the crash of 2008, which sank markets back to levels not seen since 1996, talking about capital appreciation has become a sore subject, if not a sick joke. Given that stocks are now cheaper, that's a completely backwards mentality, but it's not surprising. It's hard to get fired up about capital appreciation when your portfolios has lost value over the past 10-12 years.
And due to our innate tendency to extrapolate past returns into the indefinite future, expectations of future capital appreciation have been chronically flattened. Just look at the P/E ratios on some high-quality stocks like Johnson & Johnson (NYSE: JNJ) and Microsoft (NYSE: MSFT). We're talking nine to 12 times earnings. The market is pricing in what looks like zero expected growth -- which isn't surprising given that both companies' stocks have been stuck in neutral for years. In so many cases, investors have all but given up on the possibility of future growth.
But think about what that means. If investors don't think they can earn much capital appreciation in the future, then there's only one other reason to be in the stock market: dividends.
That, I think, is why dividends are suddenly so popular. Return expectations have become so depressed that dividends are the only scraps of hope left to cling to.
And frankly, I think that's great news. The time you want to invest is when expectations are low. And today, they're pretty low.
