Antidote to Market-Induced Motion Sickness

For those of us who own equities, the last five weeks have been devastating. Market losses have put us into red territory for 2011 and even wiped out much of our profits in 2010.

While equities have gone into a nose dive, U.S. Treasuries and gold have reached all-time highs.

But, being stubborn as a mule, I would like to make an investment case for stocks that pay dividends.

While companies have not been spending enough to pull the economy out of our malaise, they have been taking actions positive for stocks:

Making corporate acquisitions.

Buying back their outstanding shares.

Increasing dividends.

So far in 2011, companies have made 241 dividend increases, versus only three dividend cuts, according to Howard Silverblatt, S&P’s senior index analyst.

Dividend increases total nearly $29 billion, Silverblatt said.

PowerShares Dividend Achievers (PFM), an exchange-traded fund that invests in stocks that have bolstered their annual dividends for at least 10 consecutive years, has lost 3.7 percent year to date, versus a 9.5 percent decline for the S&P 500.

The dividend yield on the S&P index is above 2 percent, which exceeds 10-year Treasury notes. Per share, dividends of S&P 500 companies have grown at 5 percent annually over the past 50 years and have exceeded the average inflation rate of 4 percent. Dividends represent less than 30 percent of the earnings of these companies. Before the 2007 recession, dividends declined in only five years in the S&P’s history.

A Wall Street Journal article on Monday entitled “The Bond Bubble and the Case for Stocks,” by Jeremy Siegel and Jeremy Schwartz, noted that the sum of the dividends paid by firms in the nine sectors, excluding the financial sector, was 20 percent higher than in 2007. Dividend growth in the past two years has averaged 10 percent per year, almost double its historic long-term dividend growth rate.

Only the financial sector suffered significant dividend erosion, and it represents only 16 percent of all dividends paid. Currently, even this sector should enjoy dividend growth.

The price action of Johnson and Johnson (JNJ) highlights today’s market capriciousness. Specifically, S&P recently downgraded the credit rating of Treasury debt and maintained JNJ’s. It seems perverse that in the same period when we have witnessed wrangling over raising the U.S. debt ceiling, government securities’ prices rose and JNJ’s declined.

JNJ, a S&P Dividend Aristocrat, is rated AAA and yields 3.6 percent. The company has been paying dividends for the last 47 years and steadily increased its dividend over the past 25 consecutive years. Equity analysts following JNJ predict the company will maintain high single-digit earnings growth and will continue increasing its dividend.

Even pessimistic economists such as Mohamed A. El-Erian of the global investment management firm Pimco predict that the American economy will grow at 2 percent. Policymakers remain committed to monetary and fiscal stimulus in order to prevent another recession. The Federal Reserve has announced its intention to keep interest rates low until 2013.

Trillion-dollar budget deficits will mean continued fiscal stimulus. Hopefully, this will allow our economy to withstand even possible downdrafts from Europe.

This is Doc’s prescription: In order to stay the course in this market, we humans need to possess traits comparable to a mule’s: the even temper, patience, endurance and sure-footedness of the donkey and the vigor, strength and courage of the horse.

The dramatic decline in stock prices seems overdone. Companies are enjoying such record cash balances and earnings that they have been willing to increase their dividends despite our sluggish economy. The S&P’s 2 percent stock payout seems reasonable in the context of alternative returns.

One more tip for those of you seasick from the lurching, swaying stock market — keep a large quantity of Alka-Seltzer handy.