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What an $840 Billion Cash Pile Means for Investors |
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By Carla Pasternak |
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Believe it or not, S&P 500 companies are sitting on the largest stockpile of cash in history -- nearly $1 trillion. This
bodes well for future dividend payments from Wall Street's biggest
names, but I would still be highly selective of what you buy.
(Full Story Below) |
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What an $840 Billion Cash Pile Means for Investors
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I doubt you've ever heard of Howard
Silverblatt.
Mr. Silverblatt is a senior analyst at Standard and Poor's
(the "S&P" in S&P 500).
He covers a lot of topics when it comes to his work at
S&P, but what's made him a hot commodity for reporters (and
why I like to keep tabs on him) is his knowledge of
dividends of S&P 500 components.
His position offers access to the raw data behind payments,
and he compiles this information so we can know how many
dividend cuts or increases S&P companies have announced and
how much total cash that means for investors. In addition,
he regularly gives forecasts on where dividend payments are
headed. Given his background and unrivaled access, I always
think his view is worth a listen.
Fortunately, it's currently good news for us income investors. Nearly
140 S&P companies have raised or initiated payments so far
in 2010 -- with only two decreases (last year there were a
total of 78 decreases).
And Howard Silverblatt predicts the good times to keep
rolling for dividend increases. He sees a +5.6% increase in
dividend payments this year over 2009 -- including a surge
in announcements as we get closer to year-end.
But what's going to drive these payments? After all, we're
still not even sure the recovery will hold.
Well, you may not realize it, but corporate America is
currently sitting on its biggest pile of cash in history.
The S&P 500 components are holding about $840 billion
in their coffers -- an increase of +26% over the first
quarter of 2009. (For reference, that amount of cash is
equal to the GDP of South Korea.)
There's no doubt these companies will hang on to a lot of
that money to ride out the storm, but eventually some of it
will find its way to investors in the form of share buybacks
and more dividend increases.
Dividend Increases Are Only One Side of the Story
As income investors, however, we all know our total returns
don't just rely on increasing dividends. They also take into
account the appreciation of our capital. Dividends can rise
sharply, but it means nothing if the value of our holdings
falls.
With the market losing about -15% from its April 26th peak
and volatility on the rise over the past few months,
ensuring the safety of your investment looks more important
than ever. That's why despite the rosy outlook for dividend
increases, I think the time may have come to rotate from
speculative to more "boring" high-yield plays.
The recent correction may be just a garden-variety pullback
after a long advance. Still, concerns about a weak global
recovery amid austerity programs in Europe, tightening in
China, and continued high unemployment in the U.S. continue
to weigh on the market.
With the economy still not robust, I recently wrote to my
High-Yield
Investing subscribers that I think now's a good
time to be playing "defense." I'd suggest the same to you.
(Just to be clear, I'm not saying that we're sure to see a
prolonged downturn. Instead, I simply think it's a good time
to start looking toward more
defensive names.)
You can start by looking to stocks that have a long history
of steady or rising dividend payments as they tend to hold
up better in down markets (as a bonus, look for companies
with a large cash stockpile). As well, "non-cyclical" income
stocks -- those backed by companies that don't rely on the
momentum of the broader economy -- may be a good place to
invest over the next few months.
Good Investing!
Carla Pasternak's Dividend Opportunities
P.S. -- As I mentioned above, I told
High-Yield
Investing subscribers in my July issue that it's
time to start looking toward defensive names. To get them
started, I uncovered two non-cyclical stocks I like in this
market. While they yield a little less than I'm used to
(both pay close to 6%), the added safety they provide is
invaluable.
Visit
this link to learn how to read my July issue.
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Notes
Looking for an easy way to see who is
increasing their dividends?
Take a look at
the results of a search on Google News for "dividend
increases."
At press time, dividend increases from General Mills,
Caterpillar, Best Buy, Medtronic, and others show just how
prevalent increases are right now.
--
Research Staff
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