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A Mountain of Cash is
Headed For Investors
By Tom Dyson
April 2 , 2007
A friend of mine, Nick, builds computer-driven trading systems for a currency-dealing desk at Chase Manhattan.
To test his systems, Nick has free reign to trade any currency he wants. Alongside him sit six more currency traders, who use his systems to augment their trades.
If you were to sum up the order flow of these seven traders each day, it would total in the trillions.
I spoke to Nick a few weeks ago, looking for gossip. Nick knows I write about high-yield stocks... and he always teases me about it when we speak. He thinks dividends are boring... that they've lost their meaning:
"What's in it for me?" he fires back. "Oh no... wait... don't tell me... Another nothing-point-nothing percent dividend yield. Mate, save your breath... didn't you hear that dividends went out of fashion in the 1950s?"
According Jeremy Siegel, between 1871 and 1980, the average dividend yield on stocks was 5%. Dividends accounted for 78% of the total real return of stocks during that period. Capital gains only provided 22% of the gains.
In 1929, stock dividend yields reached 14%. Even in the 1950s, you could have bought stocks at yields approaching 8%. Investors got a chance to buy stocks with a yield of 6% in the early 1980s.
But during the 1980s and 1990s, dividend yields collapsed. Some say it was due to tax laws, some say it was a shift to growth investing. Whatever the reason, by 2000, dividend yields had touched 1% on the S&P...
Dow Jones Industrials Dividend Yield
1925 to 2005
Andy Kessler sums up the attitude to dividends best in a Wall Street Journal article he wrote called, "I Hate Dividends."
"Dividends entice investors into debt-laden, slow- or no-growth companies," he wrote, "more likely to cut their dividend, burning investors worse than conflicted research analysts. Run away. They are wearing a scarlet dollar sign. You want yield? Buy a bond."
But here's the thing:
Last week, Bloomberg published what I consider one of the most groundbreaking articles I've ever seen.
Bloomberg states that right now, U.S. companies are sitting on more cash than they ever have before - $640 billion at the most recent reading. Also, the real yield on stocks is at 5.39%... whereas a 10-year Treasury bond only yields 4.62%.
Last year, companies paid out so much cash to shareholders, that for the first time since 1958, the payback yield on stocks is more than the payback yield on bonds.
How is this mirage possible, you ask? The answer is share buybacks. Take ExxonMobil, for example. Bloomberg says the following:
"ExxonMobil pays out 1.77% of its stock price in dividends, about equal to the dividend yield for the entire S&P 500. But factoring in the $29.6 billion ExxonMobil spent on buybacks last year, its yield jumps to 8.64%."
In all, S&P 500 members spent $431.8 billion on shareholder buybacks last year, according to data from S&P. This compares to only $224.3 billion spent on dividends. This news has some important conclusions.
Many people look at the lowest dividend yields in history and conclude stocks are overvalued... that you don't get compensated as a shareholder. But this data shows that stocks may be a better value now than they've been in almost 50 years, relative to bonds.
ExxonMobil, Microsoft, and General Electric are the three largest, most powerful companies in the world. If you buy them today, you not only get ownership in these great franchises, but you also get yields of 8.64%, 9.55%, and 5.19%, respectively (when share buybacks are added to dividends, using 2006 data.)
Finally, with their record cash hoards, S&P companies are in a position to keep showering investors with cash. There's never been a better time to get your share.
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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