Wednesday, January 11, 2012

Will Rising Dividend Yields Woo Back Reluctant Investors?

In 1949, Benjamin Graham published a book called The Intelligent Investor.

Graham - who was Warren Buffett's teacher at Columbia Business School, and is widely cited as being the founder of modern stock security analysis - was attempting to explain to wide audience why at least some of their savings should be invested in common stocks.

He had a tough audience.  As Graham noted in his introduction, fully 80% of Americans surveyed in 1948 thought that common stock investing was too risky for the average citizen. 

This was not too surprising, if you think about.  After the stock market crash in 1929, the market briefly recovered, then collapsed in the wake of the Great Depression. The market recovered during World War II, but the broader market averages were essentially only back to where they were 20 years before.

I remembered Graham's book,  and his survey, when I read this article on Reuters this morning.

Titled "Generation Yikes:  Why Young Savers Are Avoiding Stocks", the piece discussed the fact that younger workers - who should in theory have the longest time frame for investing - are largely shunning the stock market.

According to the article, a survey done by money manager MFS Investment Management found that fully 52% of Generation Y investors (those under the age of 31) say that they will never be comfortable investing in stocks.

The article goes on:

...the MFS survey, which asked investors which asset classes they would deem an "excellent or very good place to invest." The only area on the rise: Safe harbors like bank CDs, savings accounts and money markets. As for stocks, from February to October of last year, that number was sliced in half: Only 18 percent of Americans now see equities as a very good place to put their money.

Judging from fund flows, that dire sentiment is having very real effects on asset allocation. Retail investors pulled almost $37 billion from stock funds in 2010, and more than $101 billion over the first 11 months of 2011, according to the Investment Company Institute.

I'm not suggesting that we are totally in the same situation to the late 1940's - valuations are not as low as they were back then, for example - but there might be some similarities.

For example, stock dividend yields in the 1950's were far higher than bond yields.  No one would think of taking the risk of buying a stock without getting a handsome cash return every year.

So perhaps dividends will begin to increase significantly, as companies are forced to part with some of their massive cash hoards in order to entice more interest in their stocks.

This was the thrust of an article titled "Dividends Rise in Sign of Recovery" in this morning's New York Times.  The author noted that some of best performing stocks last year offered some of the highest dividend yields:

If analysts’ forecasts come true, that trend will continue later into the year, as companies release more of their cash and try to win over investors still hesitant about putting their money back into stocks.

“The idea is beginning to percolate a little bit in management suites that paying a bit higher percentage of your earnings in dividends might be a way to a higher stock price and better benefits for shareholders over all,” said Edward F. Keon, portfolio manager for Quantitative Management Associates.

Although dividend-paying stocks were big winners last year, I think they will continue to be favored by cautious stock investors in 2012.