The grass is always greener on the other side of the street. It is human nature to want what you can’t get. Just a few years ago, dividends were out of style. Who needs dividend payments when the market is soaring?

Amid the biggest stock market meltdown in decades, investors have become more humble, looking for companies whose dividend yield might soften the blow of declining stock values. Like a shy cat, dividends are disappearing just as investors are starting to chase them. Will chasing dividend yields prove as elusive as shuffling sand with a pitch fork?

The Curious Case Of Falling Dividends And Rising Yields

Even though dividends are being cut at the fastest pace in 50 years, dividend yields (the annual dividend per share divided by the price per share) are on the rise.

Dividend yields for the Dow Jones (NYSEArca: DIA) bottomed in 1999 at 1.47%, the lowest level on record. The low in dividends coincided with a high in the stock market. Investor’s confidence in the future prospect of capital appreciation was greeted by the bust of the dot.com bubble and Nasdaq (Nasdaq: QQQQ) meltdown.

Since 1999, dividend yields and stock prices have more or less risen in tandem. It took an eight year bull market to push the Dow’s dividend yield from 1.47% in 1999 to 2.25% in 2007. This indicates that higher yields came on the heels of actual dividend increases. It only took a 16 month bear market to push the dividend yield from 2.25% to 3.35%. The S&P 500 (NYSEArca: SPY) yields 3.02%.

A haven for yield hungry investors

Investors fishing for yields won’t settle for 3% if double digit yields are to be found. Financial and real estate ETFs currently offer the highest cash incentive. The Financial Select Sector SPDRs (NYSEArca: XLF) yields 6.16%. The iShares Dow Jones US Real Estate ETF (NYSEArca: IYR) yields 8.24%.

Even though the iShares Dow Jones Select Dividend ETF (NYSEArca: DVY) yields 5.85%, dividend ETFs do net necessarily pay the highest dividends.

The iShares Morningstar Large Value Index (NYSEArca: JKF)  and Vanguard Value ETF (NYSEArca: VTV) for example, have higher dividend yields than the PowerShares Dividend Achiever (NYSEArca: PFM) or Vanguard Dividend Appreciation ETF (NYSEArca: VIG). A research paper listing the highest paying dividend ETFs is available via the ETF Profit Strategy Newsletter.
 

Dividend yields flash a “thumbs down”

Bank of America (NYSE: BAC) and Pfizer (NYSE: PFE) are a few of the companies that have decided to slash dividend payments. Bank of America reduced the dividend payment to 4 cents a share from $1.28 a share. Just recently, Citigroup (NYSE: C) was forced to reduce dividend payments to 1 cent a quarter in order to gain access to coveted life support, courtesy of the U.S. government.

Ironically, the government’s continuous bailout efforts won’t only hurt tax payers, they are also hurting investors dependent on income from their stock holdings. Bank of America’s dividend cut wiped out $6.2 billion worth of cash payments to shareholders. Pfizer’s move to reduce dividends will cost investors over $12 billion.

It doesn’t take a rocket scientist to figure out that the above stocks just became less attractive to investors. Dividend cuts make a bad situation even worse. This results in a downward spiral whose momentum is fueled by its own negative energy (already in 2008 we considered the financial sector a “downward spiral with no stop-loss provision”).

The big picture

Barron’s has been recording dividend yields since 1929. For the first time ever, dividend yields broke below 3% in the early 90s. This coincides with research results of financial breadth, the driving force behind economic advances. The economic fundamentals (unemployment, GDP growth, federal debt, etc.) supporting the 1987 – 1999 bull market were much weaker compared to financial breadth seen during the expansion in the 1940s, 50s and early 60s.

A manufacturing powerhouse (America from 1940 – 1970) turned into a finance powerhouse (America from 1970 – 2007). The financial powerhouse became pre-occupied with fighting inflation (unsuccessfully as we’ve seen). Profits, to a larger degree, were contingent on manipulating money and credit. The lack of real growth (as previously created by the manufacturing powerhouse) was sugar coated by fiat growth.

General Electric (NYSE: GE), the only original component of the Dow Jones, illustrates the development of the American economy. Once known for its engineering ingenuity, this manufacturing powerhouse created products built to last. GE “brought good things to life”.

In recent decades, GE morphed into a financial conglomerate controlled by number crunchers and financial visionaries. Fittingly, GE’s slogan has changed to “Imagination at work”. Imagination is necessary for a company relying on TV stations and financial services as profit centers.



For decades, dividends have been a trusted indicator of the economy’s health. The December issues of the ETF Profit Strategy Newsletter analyzed the Dow’s dividend yields since 1929. The conclusion is truly amazing.

Not only does the analysis show that yields will have to rise further (which means the stock market will have to drop further) before reaching a bottom, it also shows how high yields will have to rise and how low the Dow and other indexes will have to fall in order to find a solid foundation for the next bull market.

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