Helping You Navigate in an Uncertain Investment World We would like to take this opportunity to thank our clients for making 2011 a record year for Deschaine & Company. Thank you! Year End 2011 Year End 2011 Viewpoint Volume 12 Issue 4 Was 2011, a perfect metaphor for the last decade in the stock market? F INANCIAL WRITERS, including yours we believe the need to emphasize dividends in truly, often invoke the metaphor of a one’s equity investment strategy is alive and roller coaster for the stock market. But well and in need of immediate and ongoing for the metaphor to be truly representative, a consideration. In other words, we believe in- roller coaster starts and stops at exactly the vestors need to continue to emphasize divi- same place. Stock markets rarely dends in selecting equities going do. Then there’s 2011. In what is Market Summary 2011 forward and for some time to certainly to go down in history as US MARKET INDEX 1.6% come. For without meaningful one of the most statistically inter- GLOBAL EX-US -13.9 dividend income, we contend, eq- esting years in memory, the uity portfolios are likely to pro-Viewpoint is assembled, sorted, and DEV MRKTS EX-US -11.4 duce less then acceptable results.prepared for mailing by SAVE. You Standard & Poor’s 500 finishedcan learn more about this vital, life-giving organization by visiting their 2011 about as close to where it EMERGING MRKTS -17.9 That’s not to suggest that thewebsite www.saveorg.org or contact- started the year as statistically CORE BONDS 7.2 ride for the S&P 500 was noting them at (618) 234-1992. Thank you possible. When you consider that Source: Morningstar Q4 2011 without excitement in 2011. InS.A.VE. for your much needed assistance. the index is made up of 500 sepa- Market Commentary early May the index was as high rate (may we suggest disparate) as 1370, or up 8.9% for the year, companies, that’s saying something. For the before slumping all the way down to 1,074 in record, the S&P finished 2010 at 1257.64 and October, before rallying at year end to finish Deschaine & Company, L.L.C. then closed 2011 at 1257.60 which calculates the year, at well, statistically even. Just to beA REGISTERED INVESTMENT ADVISOR to a loss of .00003%, or what’s known in the clear, we’ve no particularly compelling expla- business as a “statistically insignificant out- nation to offer to justify why the stock market World Headquarters come.” That’s before factoring in the $26 and moved in 2011, other than to suggest that’s 128 South Fairway Drive change the collection of companies that make what stock markets do from time to time. up the S&P 500 index will pay in dividends in Of course, most investors abhor price vol- Belleville, Illinois 62223 2011 for a total return of 2.11% for 2011.(1) atility—to their wealth creating detriment, we Phone: (618) 397-1002 What’s missing from most analysis of the like to point out. We also tend to remind read- Mark J. Deschaine stock market’s 2011 performance is the obvi- ers often in these august pages that were it not firstname.lastname@example.org ous fact, that without dividends, the S&P 500 for stock prices going down from time to time, Marnie E. Deschaine would have technically posted a loss for the we’d never be afforded the opportunity to email@example.com year. A statistically insignificant loss, to be cumulate shares of the companies we like at sure, but a loss nonetheless. reasonable, or even on occasion, bargain prices. That fact is not lost on us, however, as It is truly one of the strange phenomena of Highland Office we’ve argued for more than a decade now that investing that most investors never pick up on. 1300 Mercantile Drive without a myopic focus on dividends, and The simple idea that when acquiring an asset it Highland, Illinois 62249 growing dividends at that, equity investors is best to pay the cheapest price possible. In (618) 654-6262 will be hard pressed to post positive returns fact, the cheaper the price, the less risk one as- Jason M. Loyd over the long run. So far in the new millenni- sumes when acquiring an asset. Investing is firstname.lastname@example.org um, we’ve been right. We don’t point that out really the concept of buying a Mercedes at Kia Matt T. Powers simply to pat ourselves on the back for self- gratification, (ok, so maybe a little) but because (Continued on page 6) email@example.com 1) Is there something statistically significant about earning 2.11% in 2011? Just asking.
Page 2 Year End 2011 Viewpoint VIEW FROM THE FRONT SEAT by Mark J. Deschaine How We Grow Money I ’LL BE THE FIRST ONE TO ADMIT I tend to get a little investors looking out over the next repetitive here in the pages of Viewpoint. But that’s pri- decade, (that would be us) he says se- marily because the process of investing, when you boil it lective equities may be a good buy. down, is really pretty basic. So once you implement the basics, I concur with Price’s interest rate, it’s pretty much wash, rinse, repeat. I also think it’s useful to economic and stock market outlook. I review the basics periodically, just to remind ourselves what it highlight his comments not because is we’re trying to accomplish, because I strongly believe, from they echo my own long-term outlook doing this for more than 30 years, that if you stick to the ba- (well okay, partly for that reason) but sics, over time you’ll do just fine as an because Bridgewater has a long-term investor. And this is important—no mat- Equity Income Portfolio Score Card investment track record managing more ter what the financial markets throw at you. than $125 billion in client assets that is 2011 3-Year 5-Year Incept* As the feature article will corrobo- second to none. Including their flagship rate, 2011 was another year to confound Equity Returns 11.8% 17.6% 4.5% 12.3% Pure Alpha Strategy fund which was up and maybe confuse investors. Especially more than 25% in 2011. The average Total Return 10.6% 12.8% 3.2% 8.9% those poor equity investors thinking similar fund was down 3.7% for the they could get good returns from inter- S&P 500 2.1% 14.1% - 0.3% 1.5% same period according to Hedge Fund national investing. One of the biggest Research. So when someone of Price’s Total return includes cash. *Annualized returns since Dec 31, 2000 misconceptions of the last decade just investment acumen speaks, I listen. might be that investors were earning good returns in foreign stock markets as investing outside the U.S. grew in populari- A Brief Look Back at 2011 In the highly competitive world of money managers with less ty. As mediocre as the returns for U.S. stock markets were in then $125 billion under management, the Deschaine & Com- 2011, as the table on page one shows; international equity pany Equity Income Portfolio was up a total of 10.62% in markets, for the most part, took it on the chin in 2011. That’s 2011, compared to the S&P 500 index which was up 2.11%. also true for the last five years as the MSCI EAFE non-U.S. That marks the seventh year out of the last 11 where the EIP Stocks Index (say that three times quickly) is down an average beat the market as measured by the S&P 500 from a total re- of 5.0% a year, after being down more than 12% last year. Lay- turn standpoint, (which includes cash returns) while the port- ing to rest, at least for now, the notion that investors seeking folio’s equity holdings managed to beat the S&P eight out of to diversify their equity holdings outside of the U.S. can do so the last eleven years. Cumulatively, over the history of the safely by investing in Europe, Asia, South America, etc. strategy, its managed to handily beat the overall stock market Much the Same in 2012? up 8.9% annually compounded compared to the S&P up 1.5%. Robert Price, co-chief investment officer at Bridgewater Asso- As proud as I am of those results, what I’m most proud of ciates, the largest hedge fund in the world, summed up the is the fact that the EIP’s dividend income grew more than 15% challenge facing investors in his year-end client letter as he in 2011 and has grown by just short of 13% annually (12.95% cautions to expect at least another decade of slow economic to be exact) since we began the strategy in 2000.(2) That was growth and high unemployment—world-wide. Price describes our primary investment objective when we began the disci- the big-developed economies, (meaning primarily Europe, the pline in 2000: grow dividend income at double digit annual U.S. and Japan) as “zombies.” Price suggests they’ll stay that rates. The bottom line: had you started in 2000 with a portfo- way until they work through their mountains of debt. His ex- lio generating $25,000 in annual dividend income and had ample, Japan the last 20 years; virtually no real economic been able to reinvest all of your dividend income over the last growth and a stock market that’s down from a high of 39,000 11 years, a portfolio of EIP stocks would now be producing on the NIKKEI in 1989 to less than 8,400 as of year-end 2011. over $95,000 in annual income. Not to mention—but I’ll men- That’s a negative 6.7% annual return not including dividends. tion it anyway—the EIP has more than doubled in market val- “What you have is a picture of broken economic systems ue over the same period. On one hand, the capital appreciation that are operating on life support,” Mr. Price says. “We’re in a of the portfolio continues to surprise me since I didn’t really secular deleveraging that will probably take 15 to 20 years to expect any given the relatively bleak outlook for the stock work through, and we’re just four years in.” In Europe, “the market in 2000. But on the other hand, if the companies in the debt crisis is a long way from over,” he said. The economic portfolio continue to increase their dividends at double digit and financial morass will mean interest rates will essentially rates, we should expect their market values to increase over be locked at zero for years. time, which is precisely what’s been happening. In this bleak investment and economic environment, Mr. It’s at this point in the proceedings where I’m compelled Price says stocks remain vulnerable to “air pockets” from to tell you that past investment results are not indicative of shocks, such as bad news out of Europe, but for longer-term (Continued on page 3)2) The growth rate in dividend income assumes full dividend reinvestment. Without dividend reinvestment the dividend income grew at about 9% per year sinceinception. I haven’t had time to calculate the EIP’s dividend growth without dividend reinvestment for 2011. Hey, I’ve been busy, like writing this article and such.
Page 3Deschaine & Company, L.L.C. (Continued from Front Seat Page 2,) through simple compounding. I say virtual- backs it seems) will do more to grow ly, because, I’m not allowed to say guar- dividend payouts in the future as any- future results nor are they in any way anteed. And I don’t say, guaranteed, be- thing else I can point to. To which I can shape or form, guaranteed. However, if cause, I can’t, well, guarantee it. only say, “show us the money.” there’s any aspect of equity investing In addition, healthy double digit Three: Compounding from Dividend Reinvestment that we as investors can rely on to any annual income growth is also assured.(5)Once we establish a portfolio and get it degree of certainty it’s most likely divi- If for no other reason than reinvesting invested, our job is to maximize the dends and dividend growth. You see, dividends buys more shares powering portfolio’s total return by efficiently and once a company commits to paying a more dividend income. Again, let me effectively reinvesting dividend income dividend, they’re extremely reluctant to point out that the Equity Income Port- (and any new contributions to the port- cut (or eliminate it). That’s because they folio’s dividend income grew an average folio) in the highest yielding stocks usually only increase it when they’re of 13% a year over the last 11 years. I available to us at the time. Note the in- reasonably certain they can continue to see no reason for that to change over verse of high yield is “low price.” pay it at the new higher rate go- One of the great things about ing forward. It’s the closest thing How We Grow Money investing in the stock market is to a sure thing in investing there Part 1: Compounding from High Dividend Yields there’s always a company (or two) is, short of the interest payment that, for whatever reason, is sell- on a U.S. government bond. And Part 2: Compounding from Dividend Growth ing at a price that makes them an lately, I’m not even sure that’s attractive addition to our portfo- true. Part 3: Compounding from Dividend Reinvestment lio. Or, as is usually the case, Periodically, at least annually, I feel compelled to tell you how Part 4: Capture higher yields as stock prices decline makes them an attractive stock to increase our already existing posi- we managed to achieve our in- Part 5: Add additional funds to the portfolio tion. One of the most egregious come growth objective over the mistakes investors make (us too) history of the strategy and how Part 6: Minimize fees, commissions and taxes over the short run is we over-pay we expect to do so going forward. for a stocks. It’s not because we’re stu- It’s really a pretty straight-forward six- the coming decade. If anything, it’s like- pid, it’s just the nature of investing. It’s part mathematical formula. (See “How ly to only get better as prices ease. just plain easier to buy stocks when We Grow Money,” nearby.) prices are, shall I say, “healthy” then it is Two: Compounding from Dividend Growth After Our Equity Income Portfolio’s divi- dividend yield, dividend growth is the when they’ve just tanked 30%. So if we dend focused investment strategy con- most important variable to the outcome find we’ve over-paid for a stock (which sists of six components.(3) They are: of our investment strategy over the next is one reason why we rarely buy a full One: Compounding from High Dividend Yields In a decade. Despite the dour outlook for position of a stock in the first go- world of increasingly volatile stock pric- economic growth both domestically and around) we have the opportunity to rec- es and zero short-term interest rates,(4) worldwide, we’re optimistic about the tify the situation with each passing as of year-end 2011 we can construct a prospects for dividend increases from quarter with our dividends. I thinks this diversified, high-quality dividend port- the companies in the EIP over the next is one of the fundamental strengths of folio with a current dividend yield from ten years. For a number of reasons in- our high-yield, dividend growth equity 5.5% to 6.5%. If we’re then able to rein- cluding: they’ve got lots of cash on their strategy. vest all the dividends at a dividend yield balance sheets, they’re generating lots of Over the coming decade, I expect of 6% over the coming decade, then our extra cash because they’re running lean we’ll add as much as 1.0% a year in addi- portfolio will grow 79% over ten years and mean after the economic slowdown, tional annual return by timing dividend just from cumulative dividends. (at the expense of the unemployed, of reinvestment when stocks yields are Throw in an additional 2% in new course), and the fact that dividends are most attractive. With discipline, I think money to your portfolio each year and and will be increasingly in demand from the goal is actually quite conservative, your portfolio doubles over the next investors with each passing year of poor but then I always prefer to error on the decade from those two variables alone. capital returns by stocks. conservative side when forecasting such And again, at the risk of boring you to McDonald’s (MCD) stock (See page return variables. tears, I’ve not factored in dividend 8) had another stellar year in 2011, up One final note about the process of growth, capital appreciation or the stock 35%. I predict MCD’s amazing share- dividend reinvestment. Believe it or not, market grinding down in price to the holder performance over the last nine every time we buy a stock it’s with the bottom of the current long-term bear years will not go unnoticed by investors expectation that we’ll be able to buy it market allowing us to reinvest our divi- or corporate boards. As a result, the 50% cheaper at some point in the future. dends at dividend yields in excess of the pressures to emulate MCD’s corporate If that seems extreme to you, punch up current 6.0% we’re looking at today. performance by returning more cash to the price chart of just about any stock Thus, doubling the EIP portfolio over shareholders primarily by raising divi- (Continued on page 4) the next decade is virtually assured—all dends (and the obligatory share buy-3) For details of our investment process and philosophy you can always contact us and we’ll be happy to send you a detailed booklet of our investment research andselection process or meet with you to discuss it at your convenience. 4) I’m still amazed every time I write that, the zero interest rate part, that is. 5) I see zerochance of significant dividend cuts or eliminations from quality dividend paying stocks over the next decade barring some major economic calamity.
Page 4 Year End 20101Viewpoint (Continued from Front Seat page 3,) vested each year might grow over the sumption. next 40 years under a dividend growth Second: if the stocks in a portfolio and see for yourself. Johnson & Johnson and reinvestment strategy. While I real- grow their dividend by 10% a year over (ticker JNJ) for example traded for $71 ize most of us probably don’t have 40 the next decade, then eventually the in August 2008 and $48 in March 2009. years to watch our money compound, underlying value (i.e. their stock prices) A difference in price of 32% in just eight we all have a lot more time then we re- should follow. And third: if I assume months. And JNJ is certainly one of the alize, and besides, our kids and grand- prices remain flat (or go down) over a less volatile companies you can buy. Our kids have decades longer than 40 years, 40 year period, then the cumulative job is to try to buy JNJ closer to $47 a so it’s still relevant. So if we’re not go- numbers in year 40 just get ridiculous. share (yield of 4.9%) and less so when ing to do it for ourselves, how about For example, if I assume stock prices it’s trading at $71, (yield of 3.2%). By doing it for our kids and grandkids? stay flat over 40 years yet also assume doing so we’re locking in an additional (Shameless plug, why not send a copy of this dividends grow 10% a year and you dili- 1.7% in annual yield in the process. to your kids, or grandkids, or better yet add gently reinvest all dividend income, a Four: Capture Higher Yields as Stock Prices Decline them to our mailing list and get them start- $100,000 investment and $10,000 a year As I’ve said many times, I expect the ed on learning how to build their wealth in new savings grows to $1,100,963,648,891 bear market to take another ten years to and income though dividend growth and in 40 years. That’s as in one TRILLION, run it’s course.(6) As a result, I anticipate reinvestment.? This illustrious publication is one hundred billion. (For those of you skep- flat to negative capital returns from free and we’re always happy to put folks on tics out there I’m always happy to send you stocks as the stock market grinds down our mailing list, no charge or obligation.) my excel spread sheet and you can check my the last third of it’s price-earning adjust- The table assumes a dividend yield math for yourself.) ment from 14 (the year-end PE on the of 5% and an annual dividend growth As you can see from the table be- S&P 500 Index) to 7 time earnings (the rate of 10%. Both are below the long- low, $100,000 and $10,000 a year in- typical bear market bottom PE). term historical annual returns for the vested at 5% with a dividend that grows If I had to guess how the stock mar- EIP strategy since it’s inception in 2000. at 10% will grow to more than $46 mil- ket might perform over the next ten Believe it or not, I also assumed stocks lion and produce more than $2 million years, I’d point to the last ten years and go up 10% a year over the next 40 years, in annual dividend income in year 40. suggest that it’ll perform an awful lot including the next ten years. Huh? You That works out to a compounded annual like that. But as I’ve also said repeatedly ask. How can I assume stocks appreciate growth rate of 16.53%. over the last ten years, that’s actually 10% a year over the next 40 years if I think The arithmetic behind the trillion really good news for dividend investors. the stock market isn’t going to go up over the number is the assumption that we would At least for investors looking to build next decade? For a couple of reasons: be able to reinvest a divided that’s grow- their wealth and grow their dividend First, eventually the bear market will ing at 10% a year into a stock with a income by accumulating as many shares end and the next bull market will com- stock price that remains flat for 40 as possible by reinvesting dividends and mence and when it does, stock prices years. While that’s not a particularly cash flow over the next ten years. will grow at double digit annual rates realistic assumption, what I’m trying to Table One “How We Grow Money” for an extended period of time, just like demonstrate is the fundamental power below shows how a $100,000 initial in- they did from 1982 to 2000. As I’ll show behind the arithmetic. In other words, vestment and an additional $10,000 in- you in a moment, to assume they go up 10% year is actually a conservative as- (Continued on page 5)Table One: How We Grow Money: 5% Dividend Yield, 10% annual Dividend Growth, all dividends reinvested One time $100,000 Investment and all income reinvested One time $100,000 investment, annual investments of $10,000 and all dividends reinvested Market Annual Annual Estimated Value Market Income Estimated Market Market Estimated Assumed Annual Income Estimated Growth Value Estimated Income Annual Year End Value Value Annual Year End Dividend Growth Year End Rate Growth Annual Growth Growth Market Growth GrowthPeriod Dividend Share Price Income Factor Market Value Factor Rate Income Factor Rate Value Factor Rate 5 $ 1.46 $ 32.21 $ 8,745 1.75 $ 201,135 2.01 15.00% $ 12,762 2.55 19.45% $ 280,767 2.15 16.53% 10 $ 2.36 $ 51.87 $ 17,589 3.52 $ 404,555 4.05 15.00% $ 28,873 5.77 16.92% $ 635,211 4.86 16.53% 15 $ 3.80 $ 83.54 $ 35,379 7.08 $ 813,706 8.14 15.00% $ 61,278 12.26 15.90% $ 1,348,124 10.32 16.53% 20 $ 4.18 $ 91.90 $ 71,159 14.23 $ 966,235 16.37 15.00% $ 185,363 25.29 15.43% $ 2,782,048 21.29 16.53% 25 $ 9.85 $ 216.69 $ 143,126 28.63 $ 3,291,895 32.92 15.00% $ 257,554 51.51 15.21% $ 5,666,181 43.36 16.53% 30 $ 15.86 $ 348.99 $ 287,877 57.58 $ 6,621,177 66.21 15.00% $ 521,236 104.25 15.10% $ 11,467,203 87.75 16.53% 35 $ 25.55 $ 562.05 $ 579,024 115.80 $ 13,317,552 133.18 15.00% $ 1,051,597 210.32 15.05% $ 23,135,129 177.03 16.53% 40 $ 41.14 $ 905.19 $ 1,164,624 232.92 $ 26,786,354 267.86 15.00% $ 2,118,341 423.67 15.03% $ 46,603,497 356.62 16.53%6) I told you I tend to repeat myself.
Page 5Deschaine & Company, L.L.C. (Continued from Front Seat Page 4,) ing dollar. Trust me when I tell you Hypothetical Reader Question that it won’t be easy to buy stocks Why haven’t I ever seen the arithmetic of we can quibble about the particulars of after another decade of relentlessly $100,000 initial investment and $10,000 in- the assumptions but it doesn’t change declining stock prices, but that’s when vested annually at 5% dividend yield and 10% the underlying arithmetic behind them. it will be the most rewarding. My dividend growth rate grow to a trillion dollars? Regularly reinvesting a growing income suggestion—hold onto your hat, and stream into a cheap asset is the secret The number seems absurd? save, invest and reinvest. behind growing wealth and income. ANSWER: For a number of reasons. Most investors never get the con- Six: Minimize fees, commissions and taxes ONE: Investors rarely calculated returns This is akin to saving more money in over 40 years when the real power of com- cept of buying stocks cheap because it’s that every dollar we to save in fees, pounding kicks in. They just don’t think so counter intuitive to everything that commissions and taxes over the next that way. has been drummed into their under- decade is one more dollar available to TWO: They assume simple compounding, standing of stock investing over the last us to compound in our portfolios. not the power of compounding that can oc- 30 years. Over that time they’ve been Need I say more? cur from “double compounding” from rein- led to believe that the path to great wealth is to seek out and buy stocks like The Paradox of Dividend Investing vesting a growing income stream. Apple and hang on. The problem with When you get right down to it, the THREE: They bring compounding to a that strategy, known as growth stock only really “unknown” component to screeching halt because, at some point, they investing is twofold: one, few investors our high-yield, dividend growth equa- start spending the money or they have the ever find the next Apple, and two, if tion, is what the stock market does temerity to get old and sick, or worse die. they do, they rarely hang on long over the next decade. But as I’ve FOUR: Most important to the equation, they enough to reap the benefits of com- pointed since the beginning of the EIP assume rising asset prices and usually buy at pounding.(7) Because most investors strategy in 2000, a declining stock high prices never realizing the benefits of never get the concept of buying stocks market actually helps us reach our cheap stock prices. Keep in mind, getting to cheap is the reason I pound on it repeat- income growth objective. I call it the a trillion dollars requires assuming flat edly in the pages of Viewpoint. “Paradox of Dividend Investing.” stock prices over 40 years, a scenario that is With each successive decline in stock not going to occur in real life. Flat stock Five: Add Additional Funds—save more money prices over the next ten years, however, is a I touched on adding new money to the prices (assuming dividend payments remain intact and we actually have the very distinct possibility, just as we’ve seen investing equation at various points so since 1998, which is why we need to take far, but it can’t be overstated. Saving guts to invest excess cash and divi- dends in the face of a declining stock full advantage of cheap stock prices during money has never been more important the current bear market to build our share than it is in today’s challenging econo- market) the faster we’ll build wealth and future dividend income because positions, wealth and dividend income. my and investment environment. Even a Finally, the power of compounding is little incremental savings can have a we’re able to buy that many more shares. The only time, as dividend the reason the estate tax is such a devastat- huge impact on the long-term outcome ing tax. It robs families and estates the pow- of your investment plan. Just look at the investors, should want stock prices to go up, I suppose, is when we want to er to compound just at the time of maximum difference adding an additional $10,000 benefit. If the government was truly inter- a year does over 40 years in the table on sell. But since my personal investment objective to build my wealth and divi- ested in creating wealth and prosperity it page four. Particularly if stock prices are would eliminate the estate tax immediately. declining. Every new dollar of savings dend income until I’m called to the great beyond, I’m not rooting for To whack 55% off the top of an estate simp- will buy more assets and more income, ly because someone has the misfortune to magnifying the compounding effect. stock prices to ever go up. (8) But because price volatility poses die is completely counter to the very con- I think it’ll be critically important cept of creating wealth and long-term pros- to save more over the next decade be- such a vexing psychological challenge to most investors, they rarely take perity. Remember, the money’s already been cause I suspect that many investors will taxed and in the case of dividends, some- be inclined to throw in the towel on the advantage of cheap stock prices. Which is why I believe the average times twice previously. Just thought you whole notion of saving and investing might be wondering. after a couple of more of years of poor investor doesn’t achieve anywhere stock market performance (like the last near the returns from stocks as they 11 years?) and just spend their money. could. If 2011 and the last decade at the highest yield (safe dividends) How do I know this? Because they often demonstrates anything, it’s that inves- available to us in the market at any do so at the tail end of a long-term bear tors should use the stock market for point in time. Either by adding to exist- market. Needless to say, that’ll be pre- what it really is—a market place to buy ing stocks within our portfolio trading cisely the time when savings and invest- shares of your favorite company when they at attractive yields or by identifying ing is most financially rewarding, be- periodically go on sale. That’s really what new stocks that have recently hit an cause that’s when you’ll get the most investing is all about. attractive dividend yield target. bang for every new dividend and invest- That’s what we try to do here at Of course, the EIP is just the equity D&C. Efficiently reinvest our dividends (Continued on page 12)7) Because such companies are rare and really hard to find. Isn’t it interesting how we’re talking about Apple, when just a few short years ago it would have beenGoogle, Cisco Systems, Microsoft or Wal-Mart. All great companies, but which exemplifies the difficulty in “growth stock investing.” Eventually, the growth stopsand when it does, the stock usually gets hammered often wiping out much of the long-term gain. 8) I guess you could say I’m on record as saying I hate rising stock prices.
Page 6 Year End 2011 Viewpoint(Continued from page 1) Gold was up 10% for the year but years away from a bottom. (See D?)prices. Funny, (funny as in ironic, not finished well off its highs reached in Another way to look at the currentfunny as in ha ha,) that most folks get it August. We mention it, because we bear market cycle is by price-earningwhen applying the concept to just about think investors ought to have some of ratio and dividend yield. As you can seeanything else they buy. Nevertheless, their investable assets in gold related from each of the three bull market peakswhen it involves buying a few shares of assets. (say 10%) Such as gold EFTs and the average PE ratio is about 32 timesa great business like Johnson & John- gold mining stock ETFs, as well as earnings, with a record high of 38 timesson, the whole notion of paying a cheap some physical gold (coins) just in case earnings in 2000, while the correspond-price is completely lost on them. All we the world really does end later this year ing dividend yield is about 3.0% withcan tell you is, the longer we’re in this as the now infamous Mayan Calendar the statistical anomaly for dividendbusiness, the more we appreciate the implies. We also mention it because yields being the 2000 market peak (aperiodic stock market selloff. gold is the inflation adjustment we make new record low) dividend yield of 1.1%. Although the year wasn’t particu- to the stock market each year to put the On the flip side, the average PElarly volatile, by statistical standards, current long-term bear market into his- ratio and dividend yield at the bottom ofconsider that the S&P 500’s quarterly torical perspective. (See chart below.) each of the three previous major bearreturns for 2011 were as follows: 1st market bottoms is 7 times earnings andquarter: up 5.92%, 2nd quarter: up 0.10% The Bear Market Marches On 6.0% respectively. (See A, B, C,) The(again, without dividends, returns would Or Where are we in the Current Bear market’s current PE ratio: 14, currenthave been negative,) 3rd quarter: down Market Cycle? dividend yield: 2.2%. We’ll continue to13.87%, and 4th quarter: up 8.31%. Giv- The chart below is our annual stock monitor the price to gold index ratioen that data set, when would’ve been the market update showing the Dow Jones and show it to you each year as a gaugebest time to consider buying stocks? Industrial Average going back to 1900 of where we are in the current bear mar-May we suggest after stocks had been adjusted for inflation. Veteran View- ket cycle. Bottom Line: the current bearmarked down 13.87% in the third quar- point readers have seen this chart peri- market has a few more years to run.ter? We’re just saying. odically since 2001. The beauty of the Of course, the S&P 500 is but one of chart is it’s simplicity. It’s the year end Are Dividends Too Popular?hundreds of stock market indexes. Dow divided by the corresponding year In a world of zero interest rates andThe Dow Jones Industrials for example end price of an ounce of gold. Most im- another mediocre year for stocks, divi-was up a relatively robust 8.38% for the portant is what it tells us, which is that dend are garnering more investor andyear compared to 2.11% for the S&P. the long-term bear market is right on press attention. As a result, we’re in-The dividend yield for the Dow: 2.82%. track. That is, until the Dow Jones in- creasingly asked if the dividend “craze”All but one stock in the Dow (or 97%) dex to the price of gold ratio dips below has run it’s course. Or if it’s too late topays a dividend compared to 77.9% or five, the stock market will continue to consider dividends a part of one’s in-104 stocks in the S&P 500. The yield on trend down. Equally important is the vestment strategy. It’s hard to arguethe S&P 500 index minus the fact that we’re still probably several that dividend stocks haven’t become toozero dividend stocks is 2.57%. popular when they The Dow Jones Industrials divided by the $ Price of Gold (Continued on page 7) Valuing the Stock Market in “Inflation Adjusted” Dollars: 1900 — 2010 45 2000 Stock Market Peak PE: 38 Yield: 1.1% Average PE ratio at bear 40 market bottom: A, B, C: 7 times earnings. 35 1966 Stock Average dividend yield: 6% Market Peak Year End 2011 PE: 14x et? PE: 28 Yield: 3.0% Year End 2011 Yield: 2.21% ark 30 ll M 25 t Bu 1929 Stock Market Peak Nex 20 PE: 28 Yield: 3.1% The 15 Year End 10 2011 5 A B ‐ 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 C D?
Page 7Deschaine & Company, L.L.C.(Continued from page 6) search firm. “When you look at 2012, Yes, there is always the possibilityappear in major features in the New the two sectors that are expected to that companies could reverse course andYork Times and Barron’s within a week drive growth are financials and technol- cut their payouts to shareholders. “But ifof one another. Yet we’re not worried ogy,” he said. companies cut, forget dividends – that’sfor this reason. It seems, every article Mr. Butters said the modest 2012 a sign that the economy is really shot, “extolling the virtues of dividend stocks growth projection for the overall S.&P. he said.is also replete with caveats to the risks was dependent on financial sector earn- Mr. Silverblatt says one reason forof dividend investing. Which is a good ings climbing by around 25 percent this continued growth in dividends is thatthing. It’s only when we start to see year. Last year, banks, brokers and in- companies are sitting on recordarticles that extoll the virtues of divi- surers collectively saw their profits rise amounts of cash. And “companies havedends without the usual obligatory just 6 percent. The forecast also depends been pounding their chests about thehomage to risk that we’d become con- on tech sector profits expanding by importance of dividends, yet the divi-cerned. around 10 percent this year. dend payout ratio is a little under 30 Finally, dividend investing, unlike “The question is, do people have a percent,” he said, referring to the per-the Internet and Tech bubble of the late lot of confidence that financial compa- centage of earnings that corporations1990s is built on a foundation of basic nies will perform so well?” he asked. As are passing along to shareholders aseighth grade arithmetic. As long as we for technology, Mr. Butters pointed out dividends. Historically, the payout ratiocan continue to find stocks with a 4-5% that one tech leader, Oracle, recently has hovered around 50 percent for S.&Pdividend yield that can grow their divi- reported worse-than-expected revenue 500 companies.dend at 8-10% a year, we’ll do fine. It’s growth, which could be a harbinger of Low interest rates are another rea-not built on some pie in the sky, earn- the challenges faced by the broader tech son that investors are likely to focus onings or revenue growth expectation. sector as well as the general economy. dividend growth. Since 1962, the divi- Technology revenue growth, for dend yield of the S.&P. 500 has aver-How Dividends Could Save the Day instance, is expected to slow to 7 per- aged about 40 percent of the yield on 10By Paul J. Lim cent this year from 12 percent in 2011. -year Treasury notes. Today, however,New York Times, December 31, 2011 Similarly, sales growth for the entire the S.&P. is paying more, dividend-wise,When the global economy slowed last S.&P. 500 is expected to slow to around than 10-year Treasuries.year, investors looking for reasons to be 4 percent in 2012, a sign that the global In such an environment, marketbullish could at least point to one posi- economic slowdown is starting to seep strategists say, investors tend to leantive sign: the continued strength of cor- into corporate results. Global gross do- toward dividend-paying stocks. And ifporate profits. mestic product growth is expected to corporate profit growth slows as ex- Even as the pace of economic slip to 2.7 percent this year, from 3 per- pected that interest will only grow.growth in the United States fell to 1.7 cent in 2011, according to HIS Globalpercent in 2011 from 3 percent in 2010, A Toast to 2011 Insight. So if investors can’t rely onprofits among companies in the Stand- Last Year was a Great One for Dividends strong earnings growth or a rapidlyard & Poor’s 500-stock index climbed by Barron’s January 5, 2011 expanding economy, what’s left to keepan estimated 15.8 percent. Revenue, Dividends had a great year in 2011. the bulls hopeful?meanwhile, surged by a surprisingly Among the reasons why: robust corpo- One possible answer may be divi-strong 10 percent. rate profits and strong cash flow; payout dend growth, market observers say. “In Yet as investors usher in a new rates, which historically average 52%, an environment where economiesyear, their faith in the profit outlook is remain near their lows at under 30%; around the world are slowing, growth isstarting to wane-and for good reason. and yields are staying relatively high starting to get scarce, “ said ThomasCorporate earnings are projected to rise compared with those on alternative in- Huber, a portfolio manager at T. Roweonly around 4 percent through June, vestments. Thus, Standard & Poor’s Price, “ and interest rates are so low, itand 8 percent for the full year, accord- announced Wednesday that dividend makes sense to focus on companies thating to estimates by S.&P Capital IQ. increases reached $50.2 billion last year. can grow their dividends over time.”That’s down from earlier projections of That’s an 89.2% surge over 2010’s $26.5 Unlike corporate profits, which13 percent growth for 2012. billion. rebounded to record levels last year, The recent adjustments to the pre- S&P counted 1,953 dividend in- overall dividends paid by domestic com-dictions were to be expected, said Chris- creases, in 2011, up 13% from 1,729 the panies have yet to recover fully to thetine Short, senior manager at S.&P. preceding year. While only 101 of the highs reached before the global financialCapital IQ. “There’s a cloud of uncer- approximately 7,000 publicly companies crisis. Yet that could change early thistainty engulfing Europe,” She said, “and that report their payout activity to S&P year. S&.P. 500 dividends are expectedanalysts don’t know how to position cut or omitted dividends, down 30% to grow by nearly 11 percent in 2012,their forecasts.” from 145 in 2010. said Howard Silverblatt, senior index There are other reasons to be con- Fourth-quarter dividend enhance- analyst at Standard & Poor’s. “The divi-cerned, said John Butters, senior earn- dend story is good and should continueings analyst at FactSet, a financial re- (Continued on page 8) to be good, “ he said.
Page 8 Year End 2011 Viewpoint(Continued from page 7) with the ability to live through the cur- first at just the year’s final quarter for rent and expected economic turmoil, a the 30 industrials, Barron’s statisticsments, however, didn’t mirror the year balanced dividend– oriented stock selec- director, Peter Miller, counts eightas a whole. They slipped about 7%, to tion should be part of your portfolio,” boosts: by AT&T, Boeing, Chevron,649 from 696. Not to worry. Howard says Silverblatt. Disney, General Electric, Home Depot,Silverblatt, S&P’s senior U.S. bank and thrift divi- Merck and Pfizer. All told, 2011 was aindex analyst, explains McDonald’s Share Buybacks dend activity in 2011 was strong year for dividend investors andthat the drop was a re- 2002‐2011 strong. SNL Financial dividend growth. We look for thosesult of a sharp 44% ad- Period $ Amount Out/Shares Per share recorded 123 payout trends to continue in 2012 and beyond.vance in positive actions 2011 $3,535 1,054 $3.35 hikes or initiations, 8%in 2010’s fourth quarter, 2010 2,699 1,066 2.53 above 2010’s 78 and more McDonald’s Update“as the market entered a 2009 than triple 2009’’s 39. Another Great Year for Shareholders 2,797 1,092 2.56recovery period.” What’s more, dividend We highlighted McDonald’s in last Silverblatt predicts 2008 3,919 1,127 3.48 decreases fell by about year’s year-end Viewpoint because ofthat, in 2012, “dividend 2007 3,943 1,188 3.32 half, to 16 from 31, while the outstanding job management’s doneincreases will continue 2006 2,959 1,234 2.40 cuts plummeted to just in creating wealth for shareholders sinceacross the board for all 2005 1,202 1,260 0.95 seven from 25. State 2002. The good times continued in 2011sectors with another 2004 621 1,260 0.49 Street and PacWest Ban- as MCD’s stock was up more than 35%double digit gain in ac- 2003 corp had the biggest compared to the S&P 500 up 2.11%. 391 1,270 0.31tual cash payments. boosts (each to 18 cents a As we noted last year, McDonald’s 2002 670 1,273 0.53 has been dishing out dividends as effi-“The latter climbed share from a penny).more than 16% in 2010, Total $22,736 $19.92 The 65 stocks in the ciently as their hamburgers. Moreover,and the forward indicated dividend rate Dow Jones Averages saw plenty of posi- they have raised their dividend everyis up 18%. If you’re a long-term investor tive dividend action in 2011. Looking (Continued on page 9)$0.70$0.60 McDonald’s Quarterly Dividend 1976 to 2011$0.50$0.40 McDonald’s Corp Performance 2002-2011 Does dividend growth lead to . . . 2002 2011 % Change Ann GR$0.30 Revenues $15,406 $24,075 56.3% 5.1% Operating Income 2,113 7,473 253.7% 15.1% Earnings Per Share 0.70 4.64 562.9% 23.4%$0.20 Dividends 0.24 2.80 1,091.5% 31.4% Year End PE Ratio 20.9 19.7$0.10 Source: Morningstar$0.00 $100 McDonald’s Market Performance March 2002 to December 2011 McDonald’s Stock Price $90 S&P Relative $80 MCD 500 Performance 1970 to 2011 $70 Capital Appreciation 660% 54% 606% $60 Dividend Return 95% 29% 65% superior stock price performance? $50 Total Return 756% 84% 672% $40 $30 $20 $10 $0 Jan‐70May‐71 Jan‐72May‐73 Jan‐74May‐75 Jan‐76May‐77 Jan‐78May‐79 Jan‐80May‐81 Jan‐82May‐83 Jan‐84May‐85 Jan‐86May‐87 Jan‐88May‐89 Jan‐90May‐91 Jan‐92May‐93 Jan‐94May‐95 Jan‐96May‐97 Jan‐98May‐99 Jan‐00May‐01 Jan‐02May‐03 Jan‐04May‐05 Jan‐06May‐07 Jan‐08May‐09 Jan‐10May‐11Dec‐11Sep‐70Sep‐72Sep‐74Sep‐76Sep‐78Sep‐80Sep‐82Sep‐84Sep‐86Sep‐88Sep‐90Sep‐92Sep‐94Sep‐96Sep‐98Sep‐00Sep‐02Sep‐04Sep‐06Sep‐08Sep‐10