USA TODAY International Edition
Bailing on stocks could be good news
As bull market chugs on, cash moving in is a plus
Americans are working and spending and generally in a good mood. But they do not appear enamored of this, the longest- running bull market on record. Perhaps the old saying is true that when we feel burned, we behave ridiculously. Hence the most unloved bull market in memory chugs along: since March 1, 2009, the S& P 500 is up 435% while investors continue to reduce their exposure to stocks.
Despite 2019 turning in the strongest year for stock investors in the last six years, investors have been selling stock mutual funds at a record pace. So far this year, equity mutual funds and exchange- traded funds have lost over $ 135 billion to withdrawals – the largest amount since Refinitiv Lipper began tracking the flows in 1992.
While the market has continued to power forward and investors have been exiting equity investments, cash on the sidelines has risen. So what exactly does that mean for investors?
While it is difficult to say for certain, we can make some assumptions based on what we do know. First, when markets get frothy, one of the catalysts that drives stocks higher is cash moving from the sidelines into the stock market. Think FOMO on steroids. Yet, we have seen the opposite occur over the last few years. Indeed, as stock prices have risen, so has cash
And it remains a fact that with bond yields at extraordinarily low levels, there are few investment options other than stocks to achieve yield and capital appreciation objectives for many investors. According to Strategas Research Partners’ Jason Trennert, one- half of the S& P 500’ s total return since 1926 has come from dividends. And in the decade beginning in 2000, basically, the only return investors received came in the form of dividends, according to Trennert. Dividends matter.
Real yields on bonds – the after- inflation return – is just modestly above zero. And, while we are on the subject of inflation, despite expectations that full employment would drive prices higher, inflation remains elusively tame. The Fed is unlikely to raise rates in such a benign environment.
Additionally, stock buybacks are providing a floor to stock prices by reducing the supply of individual shares. Trennert’s work also has shown that in 2018 “buybacks accounted for $ 573 billion of net new demand for equities.” Compare this to equity ETFs which generated $ 210 billion in demand and stock mutual funds which were responsible for $ 124 billion of net sales.
Dividend growth is around 7.2% in recent years and payout ratios are near historic lows. This gives companies room to grow the dividends further. Importantly, dividends provide investors with information: large companies pay and raise the dividend at a rate based on what they believe longterm sustainable earnings growth to be. The dividend is a commitment; buybacks are opportunistic. But when combined, the two produce what is called the shareholder yield. That number is currently 5.1% for the S& P 500 which is more than 3 percentage points higher than the yield on the 10year Treasury.
If you have cash on the sidelines, companies who pay a dividend and grow the dividend are a good place to start. These are easy to find if you run a search on just about any financial website. You also can determine if the company is buying back stock by reading the most recent earnings press release on their website.
The combination of above- market dividend yield ( that is growing) and a promise to buy back shares can create an attractive investment opportunity. Being informed and diligent is a better investing strategy than no strategy at all. And it keeps us from “acting ridiculously” at just the wrong time.