Don't Get Sick of Dividends
From: James Cramer
Sent: Thursday, May 31, 2012 6:10 PM
To: Nicole Urken
Subject: where were they then
For this piece I need how low oil went, how low copper went, dividends at the time / cuts for the names, earnings at the time
From: Nicole Urken
Sent: Thursday, May 31, 2012 6:40 PM
To: James Cramer
Subject: Re: where were they then
Got it. As you mentioned, we can start with the Industrials, as these are the most sensitive to macro-economic trends / overall sentiment / cyclicality. along with levels of oil (currently at 83.12 vs 32.40 on 12/19/08 after it fell from a high of 147.27 on 7/11/08) and copper (currently at 332.75 vs 125 on 12/26/08). Will get dividend/earnings levels for some of the key names
Wasn’t there a time when the summer was supposed to be carefree and fun? Unfortunately, if the downward action of the major indices of late are any indication, carefree would not be the first word that comes to mind. After all, the past two years have given us May through July corrections of 17 percent and 20 percent, respectively. Because of the fear of a repeat-in-trend — especially given the litany of woes that have plagued the market from home and abroad — on "Mad Money" we have had to address the “what if?” scenarios of no resolve and deteriorating conditions by taking a look back at the 2008-2009 lows and more realistically the more recent (and less dire) lows of August and October of last year.
With the averages up on Tuesday and Wednesday after a streak of red, we have a counter-balance of weighing best-case scenarios (with a kick-off of some sort of resolve in Europe) and worst-case scenarios (with allusions to the 2008-09 recession lows), which makes stock picking in the current environment a difficult task. Of course, what many have termed “Eurosis” has been the central problem in focus — with the upcoming Greek elections and the Spain credit crisis as stand-outs. Of course, worries about slowdown in emerging markets (which had been the engine of growth) heighten the negative thesis. And we were beaten while already down when we got last Friday’s U.S. unemployment report, a major disappointment, with U.S. adding a mere 69,000 jobs in May. Of course, economic slowdown in the U.S. comes on top of the looming fiscal cliff our country faces, as politicians have deferred the tough budget decisions of the last several years until right after the November election.
Amidst all of this, the front and center call has been dividend stocks. In fact, there has been such a focus on dividends that most people are probably sick of hearing about them. But ultimately, the current environment makes this group more attractive than ever before, as we have discussed on "Mad Money." First off, over 40 percent of total equity market performance in the U.S. over the last century has come from dividends. Read: Solid precedent. Second, dividend-yielding stocks have outperformed non-dividend paying stocks during periods of slower gross domestic product growth (2 percent — that counts!). Third, payout ratios are currently at historical lows, at about 30 percent versus historical average of 54 percent. As company earnings have rebounded since the recession, there is upside to boost dividends. Fourth, the record-low yield on the 10-year Treasury. Fifth, we are continuing to experience a secular shift in investor demand for income versus capital appreciation, making dividend-paying stocks increasingly in demand. Over the next 20 years, the U.S. Census Bureau forecasts that the percentage of the U.S. population that is older than 65 will double. While inflows into bond funds and out of equity funds echo this increased demand for lower-risk, income-oriented investment vehicles, the increasingly attractive opportunities from stocks should not be ignored.
Of course, this doesn’t mean you should look for any name with yield and come in — it is key that the dividend is well covered by earnings and cash flow and that the business has growth potential. Some key names? We have highlighted “domestic security” themes on "Mad Money" — defensively postured names with very minimal European exposure, including Dean Foods, B&G Foods and Consolidated Edison. Additionally, many of the pharma names present strong value in this environment. As we have highlighted, value is being created from break-ups, mimicking what we saw when Bristol-Myers shed its non-core businesses at the end of 2007. Abbott’s break-up announcement at the end of last year positions the company well, and Pfizer has also benefited from selling its non-core assets. Johnson & Johnson in particular remains a solid investment here, as the company’s pharma pipeline is underestimated and trends in the consumer and medical devices/diagnostics segments are improving. In fact, Goldman Sachslaid out a great case for a break-up that we highlighted last week — read more here.
And, albeit having lower yields, some of the serial dividend boosters are a good place to look. We have highlighted Pepsi and Target, both companies that have boosted their dividends each year since 1980 and are undergoing turnarounds, as we noted earlier on "Mad Money."
Certainly not all dividend stocks are immune to macro — for example, Eaton, which current yields 4 percent, is a cyclically-oriented stock. However, its pullback from the low $50s to under $40 makes it attractive — particularly given integration upside from its recently announcedCooper acquisition.
Look, the importance of dividend stocks in this environment is anything but new. We know the market has lately been rewarding higher-quality, higher-yielding stocks, with the top three sectors over the last three months being telecom, consumer staples and utilities. Why write about this now? Even on an up day, it is important to reiterate this strategy, as it is a key foundation for your stock portfolio and managing risk as you also search for value names and pick amidst the rubble amidst fallen names that are more cyclical or may have more international exposure. But as uncertainty prevails, the foundation of dividend stocks should continue to manage risk in your equity portfolio.
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