A Decline In Bullish Investor Sentiment

Last week bullish investor sentiment declined to 40% from the prior week's sentiment level of 47.44%. The decline in bullish investor sentiment nearly matched the increase in bearish sentiment. The bearish sentiment reading came in at 34.74% versus last week's 26.92%. The result of these sentiment changes is the bull/bear spread fell to 5% from last week's spread of 21%. Since the release of the sentiment data by the American Association of Individual Investors, the S&P 500 Index has declined 4.1% to 1,91.76.

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With this decline in bullish sentiment and decline in the S&P 500 Index, can the market find support at the 1,086 level?

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High Yield Spreads Near Long Term Average

During the depths of the financial crisis last year, high yield spreads widened to near record levels. Spreads in early 2009 approached nearly 2000 basis points. Since that time spreads have narrowed to near their long term average just below 600 basis points.

One question many high yield investors are asking is whether the strong returns in this fixed income segment are behind us. Certainly, the 58% return achieved in the Merrill Lynch High Yield Master II Index in 2009 is not likely to be repeated in 2010. However, as the below chart shows, the spread tends to continue tightening beyond the long term average as the economy improves. Given the low interest rate environment for cash and investment grade debt, investors may continue to chase high yield resulting in further spread tightening.
High Yield Spread 12 2009

Source: Fidelity Investments

Decade Returns Are Strong Following Decades Where Returns Are Weak

The decade of 2000s is now being referred to as the "lost decade". This past decade was only the second one to record a negative return since the negative returning decade of the 1930s. Strong equity market returns tend to follow decades that recorded weak returns. For example, after the worst 10-year periods in the 1930s and 1970s, the market rose 9% and 15%, respectively, on an annual basis over the next decade.

An important factor for investors to consider is to establish an appropriate risk tolerance and time horizon for their investments as the stronger returns can occur later in the decade. The second slide in the below report displays the 10-year rolling returns for the S&P 500 Index since the 1930s.

Lost Decade

Source: Fidelity Investments (PDF)

Comprehensive Review Of The Dividend Aristocrats

There tends to be much debate on whether dividends are a critical factor in determining the suitability of a particular investment. One fact is clear though and that is since 1926 the dividend component of the S&P 500 has accounted for one-third of the index's total return. As you read further in this post, Dividend Aristocrats have outperformed the S&P 500 Index on both a return basis and with less risk (beta).

The two charts below show the cumulative return of a dollar for the S&P 500 Index on a price only basis and total return that includes reinvested dividends since 1926. The second chart shows the power of compounding on a percentage basis.

An important factor to review in selecting dividend growth stocks is S&P's Quality Ranking. Standard & Poor's states:

The ability of management to maintain stable or increasing dividends indicate the quality of the firm’s earnings and its growth prospects. The S&P Common Stock Ranking systems, for over 40 years, ranks stocks in categories based on growth and stability of earnings and dividends. [The below chart shows] ...the distribution of quality ranks of the constituents of the S&P 500 Dividend Aristocrats against those of the S&P 500 Index.

Given the strong market returns in 2009, one potential advantage to investing in dividend growth equities and specifically the Dividend Aristocrats, is the Aristocrats tend to outperform the market in down markets. Many are calling for a market correction and the past several days are providing support for that line of thinking. As the below table shows the Aristocrats not only outperform the S&P 500 Index over 3, 5, 10 and 15 year time periods, the Aristocrats outperform while exhibiting less risk. That is the standard deviation of returns is lower for the Aristocrats as compared to the S&P 500 Index.

The calendar year returns going back to 1998 are outlined in the chart below. In down markets the Aristocrats achieve significant outperformance relative to the market.

The math behind compounding shows if one losses less in a down market, it takes a lower return to get back to even. In essence, if one losses less in the down market period, the portfolio will have more invested when the market turns around and moves higher.

Finally, one thing investors need to keep in mind as it relates to the Aristocrats is the 43 stocks that comprise the Aristocrats in 2010 result in some sector overweights and underweights. As an example, the technology weighting is a little over 2% for the Aristocrats and the S&P 500 Index weighting is over 19%. For the staples sector, the Aristocrats list is 23% while the S&P 500 Index is 11%. Therefore, investors need to perform their own research before investing in any stock or buying into any particular strategy like a dividend focused one.

Source:

S&P 500 Dividend Aristocrats
Standard & Poor's
By: Aye M. Soe and Dave Guarino
PDF via .docstoc

S&P 500 Sector Earnings Growth For 2010

All sectors in the S&P 500 index are expected to contribute to earnings growth in 2010. Overall earnings growth for the S&P in 2010 is estimated to be 36%. Several keys for the market will be a company's top line results, the level of earnings vis-à-vis earnings expectations and especially company comments on their forward outlook.

Data Source: Standard & Poor's

Sentiment, Earnings and Asset Allocation: Making Sense Of The Data

In an effort to understand the potential direction of the overall market, one of many factors I look at is the investor sentiment data. A number of other strategist review this same data. The reason for including this variable in ones criteria for determining the future direction of the market is individual investors tend to plow into stocks at the top of the market. Consequently, high bullish investor sentiment could signal a market that is near its top.

The individual sentiment data reported last week by the American Association of Individual Investors shows bullish investor sentiment rose over six percentage points to 47.4% from last week's bullish sentiment reading of 41%. This reading is below the average plus one standard deviation of the bullish sentiment reading. The 8-period moving average of the bullish sentiment reading increased to 43% from 42% last week. At the market top near the beginning of 2000, the 8-period average was in the high 50's and even hit 60 at one point. In short, sentiment is elevated, but does not seem to be at an "extreme" level yet.

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What about investor asset allocations? Again, AAII allows investors to note their overall asset allocation on a monthly basis on the organization's website. The December allocation is reported at 64%/18%/18% (equity/bonds/cash). Going back to late 1997, the long term average allocation is 60%/15%/25%. Given the low interest rate environment, it seems reasonable that investors would have lower allocations to bonds and cash. Additionally, the magnitude of the equity market's advance last year will force down the weighting of the bonds and cash simply because of the market growth in equities. Again, going back to 1997, the maximum equity allocation reported by AAII is 77% and the lowest reported cash level is 11%. As with the sentiment data, I do not view asset allocations at "extreme" levels.

Finally, what do earnings for the S&P 500 Index look like for 2010? Standard & Poor's is reporting the estimate for bottom up operating earning on the S&P for 2010 is $76.37. This represents a nearly 37% increase over the final estimate for 2009 of $55.79. The 2010 projected P/E for the market is just under 15. Now I know there is more to valuing the market and/or companies than simply looking at the P/E ratio; however, this broad valuation measures does not seem to be at "extreme" levels either. Another way to look at the market's P/E is Robert Shiller's method where the market P/E is based on average inflation-adjusted earnings from the previous 10 years. This methodology indicates the current market P/E is 20.6, essentially in line with the 2009 year end estimate provided by S&P.

Source: Standard & Poor's

One key to the market's future direction is to answer the question of how likely is the market to achieve the earnings results that are projected. There are several variables that could derail the earnings that are projected. I believe two significant variables are:

1. how likely is the financial sector to incrementally grow 2010 earnings by $8 per share on average, and
   
2. how will Washington policies: cap and trade, health care, etc., impact company earnings
   

Nearly all of the policies being proposed in Washington add expenses to companies not to mention the impact on state budgets. At a time when the economic recovery seems fragile, these added expenses are not likely to be positive for corporate earnings or municipal budgets.

Much is made of the benefit of running deficits during economic slow periods. In 1937, the Roosevelt administration and the Federal Reserve reversed liquidity measures taken to fight the Depression. This is thought to have resulted in the double dip during that time period in addition to some other factors that were not pro-business (see my post, Positive Equity Market Returns Probable In 2010). The key though is how is the deficit money being spent. The deficit funds need to be spent in productive ways that create an environment that put the jobless back to work in the private sector and not the government sector.

In summary, sentiment and allocation data appear elevated but not at extremes. At the same time the market's forward valuation does not appear too stretched. This does not mean dive head first into the market. Being selective in the companies one invest in could still provide adequate returns in 2010, but not without experiencing some volatility.

Current Dow Rally Below Average In Magnitude And Duration

As a follow up to my post yesterday, Positive Equity Market Returns Probable In 2010, the current advance in the Dow Jones Industrial Average (^DJI) is below average in both magnitude and duration as compared to past rallies. The Chart of the Day chart service looked at the prior 27 market rallies since 1900. They note:

• most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days.

• the current Dow rally (hollow blue dot labeled you are here) has entered the low range of a "typical" rally and would currently be classified as both short in duration and below average in magnitude.
  

Source: Chart of the Day

If company earnings reports meet or exceed expectations on the whole this reporting period, the market could continue to grind higher.

Positive Equity Market Returns Probable In 2010

Given the magnitude of the market's advance in 2009 and more specifically off of the March low, what does history suggest for the coming year? As the below chart details, the 65% return for the S&P 500 Index from 3/9/2009-12/31/2009 is the second best return period for the market during the first year of a bear market recovery. The only higher period is the 124% return achieved in the 1929 - 1932 period.

Source: Fidelity Investments-Room For Stocks To Run?

The red circle on the chart highlights the fact the market remains 29% below the 2007 high. The average for the prior bear market periods is -14% with the median equaling -8%. This market cycle seems most similar to the 1937 - 1942 period from a return perspective. This being the case then, positive but muted returns are probable in 2010. In a low return environment, dividends will be an important part of investor returns.

If the market is similar to the 1937-1942 period, investors might want to be cognizant of policies that impacted the market and economy during the '37-'42 time period. I must say I am not in agreement with some of the author's conclusions in the article at the previous link (like continued deficit spending). What is important for investors is to understand the policies that were instituted at that time that may have prolonged the recession during that period--like the Wagner Act. Some of the policies out of Washington today look similar and could derail the recovery past 2010.

Highest Yielding Stocks In The S&P 500 Index Best In The Long Run

A recent article in Kiplinger magazine by Jeremy Siegel, Scoop Up Dividends, notes the highest yielding dividend payers in the S&P 500 Index have outperformed the lowest yielding dividend payers going back to 1957. In Siegel's research he points to the fact:

"If an investor had put $1,000 in a portfolio of the 100 highest-yielding stocks on January 1, 1957, by December 1, 2009, he would have accumulated more than $450,000 (assuming all dividends were reinvested). That’s a hefty annualized return of 12.5%, an average of almost 2.5 percentage points per year greater than the return on the S&P index. That same $1,000 invested in the 100 lowest-yielding stocks returned only 8.8% per year."

As I have noted in past posts, the absolute dollar amount of dividends in 2009 has declined significantly. Most of the decline has occurred in the financial sector. The article notes,

• for 2007, at the height of the bull market, the dividend stream -- total dividends paid on all U.S. stocks -- was $288 billion.

• for 2009 through November, the dividend stream had dropped to $216 billion -- the greatest decline in that measure since the end of World War II

• the entire decline in dividends can be attributed to the financial sector, which cut its total payouts by $79 billion over the past two years. (Siegel includes General Electric because GE’s dividend reduction was caused solely by the losses at GE Capital.)

• in other sectors of the economy -- energy, health care, technology, consumer discretionary, consumer staples, telecom -- dividends have actually risen over the past two years, even with the recession.

Although Jeremy Siegel cites the higher return of the highest yielders, investors should perform their own due diligence and not chase yield blindly. The dividend paying stocks in the S&P 500 Index can be found at indexArb's website.

Source:
Scoop Up Dividends
Kiplinger Magazine
By: Jeremy Siegel
February, 2010
http://www.kiplinger.com/columns/goinglong/archives/scoop-up-dividends.html

Linear Technology: Buy The Rumor Sell The News

After the market close on Tuesday, Linear Technology (LLTC) reported better than expected earnings for the company's second quarter ending 12/31/2009: 33 cents per share versus an estimate 30 cents per share. On Wednesday the stock proceeded to trade down 1.2% to $29.87 with pretty good volume on the positive earnings news.

In the company's earnings release, they also announced a 4.5% increase in the quarterly dividend to 23 cents per share versus 22 cents per share in the same period last year. The company has increased its dividend each year since it first began paying one in 1992. The projected payout ratio using an average of the June 2010 year end earnings estimate ($1.24) and the June 2011 earnings estimate ($1.51) is 67%. The payout ratio trend continues to move higher with the 5-year average payout ratio equaling about 43%. The company does maintain an S&P Earnings & Dividend Quality Ranking of A-.

Investor Sentiment Near Long Term Average

The American Association of Individual Investors reported bullish investor sentiment fell eight percentage points last week. The bullish sentiment reading came in at 41% versus the prior week's 49.18%. Last week's reading is near the long term average of 39%. Additionally, the bull/bear spread narrowed to 15% versus the prior week spread of 26%. In spite of the bullish sentiment decline, the 8-period moving average increased for the 5th straight week to 42.3%.

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Essentially No Job Growth In Last Decade

Last week the labor department noted December non-farm payrolls fell by 85,000. This was a much larger decline than consensus estimates. This capped off a decade in which non-farm payrolls were nearly unchanged from the beginning of the decade. As the below chart notes, this is the first decade since the 1940's that job growth did not exceed 20% from the beginning to end of the period.

Source: Chart of the Day

Washington's Policies On Jobs Misguided

Whether eligible voters voted for President Obama in the last election or not, all voters need to pay attention to the policies being pursued in Washington. Most are not creating an environment that is conducive to business and/or job creation.

Today's jobs report noted companies shed 85,000 jobs in December versus consensus expectations of a 10,000 job loss figure. Additionally, the work force declined 661,000 showing the jobless are giving up. When discouraged workers and part-time workers who would prefer full-time jobs are included, the so-called "underemployment" rate in December rose to 17.3% from 17.2% in November. This is near the record high reported in October of 17.4%.

As reported by ABC News, the administration's response to these job numbers was the implementation of a green jobs program.

"Obama announced the awarding of $2.3 billion in tax credits to companies that manufacture wind turbines, solar panels, cutting edge batteries and other green technologies. The money will come from last year's $787 billion stimulus program. He also renewed a call by Vice President Al Gore for Congress to approve an additional $5 billion to help create more such jobs."

What kind of success has been experienced by other countries that have modeled job growth on a "green" basis? President Obama often cites the Spain model.

A study released early last year by Dr. Gabriel Calzada, an economics professor at Juan Carlos University in Madrid, said the United States should expect results similar to those in Spain:

"Spain’s experience (cited by President Obama as a model) reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created,” wrote Calzada in his report: Study of the Effects on Employment of Public Aid to Renewable Energy Sources"

According to the Cybercast News Service, it is noted,

"in the study’s introduction Calzada argues that the renewable jobs program hindered, rather than helped, Spain’s attempts to emerge from its recession."

“The study’s results show how such 'green jobs' policy clearly hinders Spain’s way out of the current economic crisis, even while U.S. politicians insist that rushing into such a scheme will ease their own emergence from the turmoil,” says Calzada. “This study marks the very first time a critical analysis of the actual performance and impact has been made."

Pat Michaels, professor of environmental sciences at the University of Virginia and senior fellow in environmental studies at the Cato Institute, a free market group, told CNSNews.com that the study’s conclusions do not surprise him. He added that the United States should expect similar results with the stimulus money it spends on green initiatives.

Michaels also said he was not surprised by the study’s finding that only one out of 10 jobs were permanent.

h/t: Michelle Malkin: Spain’s green jobs boondoggle
and Here comes another multi-billion-dollar Green Jobs boondoggle

Dividend Actions Largely Negative In 2009, Dividend Growth To Resume In 2010

Standard & Poor's reported 2009 dividend results for the approximately 7,000 companies that report dividend information to S&P. According to Howard Silverblatt, Senior Index Analyst for S&P,

• 804 companies cut their dividend payments in 2009 which was a 631% increase over the 110 companies that cut their dividends in 2007.
• In absolute dollars, the cuts represented $58 billion in reduced dividend income.

From a positive perspective, for the S&P 500 Index, negative dividend actions in the 4th quarter of 2009 of 74 were substantially lower than the 288 negative actions in the 4th quarter of 2008. Additionally, positive actions finally turned higher in the quarter totaling 484 versus 475 in Q4 of 2008.

There has been a shift in the composition of the top dividend payers in the S&P 500. Many of the past top payers were financial stocks where financials made up over 20% of the dividend income, they now account for only 9%.

The current top payers (over $5 billion) are:

• AT&T ($9.9 billion rate)
• Exxon ($8.0 billion)
• Pfizer ($5.8 billion)
• Chevron ($5.5 billion)
• Johnson & Johnson ($5.4 billion)
• Verizon ($5.4 billion)
• Procter & Gamble ($5.1 billion)
  

S&P's initial estimate for dividends in 2010 is about $23.67. This is 5.6% higher than 2009's dividend estimate of $22.31. If history is any guide, dividends will be an important part of an investor's return in 2010. Since 1926, dividends have accounted for 40% of the S&P's total return. This may be the case for returns in 2010.

Source:
2009 Worst Year Ever For Dividends;
Expects 2010 to Show Steady Improvement
Standard & Poor's
By: Howard Silverblatt
January 7, 2009
http://www.businessweek.com/investing/insights/blog/Worst_year_for_dividends_2009.doc

Easy Money Was Made In 2009

As noted in several of my prior posts over the last week or so, 2009 was one in which it seemed nearly all equities moved higher. As a result, indexing would have been a rewarding strategy for the last year of this past decade. Howard Silverblatt, Senior Index Analyst at Standard & Poor's notes the following detail about 2009,

• 425 issues were up with an average return of 51.4%
• 73 issues were down with an average return of -14.3%.

The below table provides a little more detail on the top performing issues.

Dividend Payers Underperformed In 2009

As the below table notes, the dividend payers in the S&P 500 Index underperformed the non-payers by a wide margin in 2009. In looking at the 4-year annualized return for the payers, non-payers and the S&P 500 Index, it is the payers that are the underperforming asset class. The non-payers large outperformance in 2009 is impacting the 4-year return results. For contrarians, as 2010 unfolds, maybe the market will finally reward the dividend payers as this coming year unfolds.

Source: Standard & Poor's

Mid Term Election Year Market Returns

Now that we are beginning a new decade and one that is a mid term election year, how has the market performed in past mid term election periods? As the below chart notes, the first three quarters of the year tend to be flat and choppy with a rally in the last quarter. This chart is simply another data point that might suggest stock picking wins out in 2010 versus an index strategy as noted in several of my posts over the course of the past week.

(click to enlarge)

Source: Chart of the Day

Dividend Payers With Below Market Valuation

As I have noted in my previous two posts (Investor Sentiment Suggesting Caution and Markets And Their 200 Day Moving Average) the broader market indices are approaching extended levels on the upside. In this environment, investors might consider investing in equities that do not have valuations that are extended relative to the overall market.

Below is a list of 26 companies in the S&P 500 Index that was generated using the following criteria:

• current P/E less than 15
• dividend yield greater than 2.5%
• beta less than .7

The P/E for the S&P 500 Index based on inflation adjusted earnings (Robert Shiller methodology) over the last ten years is 20.22. I chose the lower beta variable to provide companies that might hold up better in the event the market does experience a downward correction. Six of the stocks on the list are Dividend Aristocrats. As with all stock screen lists, this list is not a buy list, but a starting point for investors to begin more in depth research.

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Investor Sentiment Suggesting Caution

This week's investor sentiment reading reported by the American Association of Individual Investors is suggesting individual investors might be getting too bullish.

• bullish investor sentiment is reported at 49.18% this week. This is the highest level since 51% was reported on August 13, 2009.

• bearish sentiment is reported at 22.95% and is the lowest bearishness reading since 22.31% on February 27, 2007.

• the bull/bear spread is reported at 26% and is the widest spread since 28% was reported on May 8, 2008.
  

Data Source: American Association of Individual Investors

As noted in yesterday's post, Markets And Their 200 Day Moving Average, the market in 2010 will likely be more of a stock pickers market than one where a rising tide lifts all markets. Focusing on those stocks that have not become extended from a valuation perspective will likely generate better returns in 2010.

Markets And Their 200 Day Moving Average

One thing is certain and that is the markets have advanced significantly this year. The adage that a rising tide lifts all boats seems appropriate as it relates to many of the market indices this year. As a result and in hindsight, an index strategy would have served investors well in 2009. The Dow Jones Industrial Average (^DJI) has gained over 20%, the S&P 500 (^GSPX)over 24% and the Nasdaq Composite (^IXIC) over 45%. When looking at the market advance since the March 9th lows, the gains are even more pronounced; the DJIA is up 61%, the S&P 500 is up 67% and the Nasdaq is up 79%. This strong advance has pushed the index levels far above their 200 day moving averages.

Source: Charles Schwab and Argus Research

For investors looking at investment opportunities going into 2010, this likely means they will need to focus more specifically on individual stocks versus indexing. Even though the broader indexes are trading far above their moving averages, some individual stocks have not participated in the rally. For example, the below chart shows the performance of Procter & Gamble (PG) versus the S&P 500 Index (^GSPX).

(click to enlarge)

As the above chart shows, P&G has generated a flat return on a price only basis versus a return in excess of 20% for the S&P 500 Index. As investors then, for 2010, look for opportunities in higher quality stocks that have not participated in this mostly lower quality stock rally of 2009.

Disclosure: Long Procter & Gamble

Unsustainable Growth In Government Debt

The growth of U.S. total government debt is on an unsustainable trajectory. At some point in the very near term, the U.S. populous needs to voice their concern about this growth to their elected representatives. This debt growth does not include the future cost of health care legislation or cap and trade legislation. In my opinion we are mortgaging our children's and grandchildren's futures.

Data Source: US Government Spending

Book Review: Why Are We So Clueless About The Stock Market?

Although I normally do not write book reviews, I agreed to read and review Mariusz Skonieczny's book, Why Are We So Clueless About The Stock Market. Since I would have a few days off around the holidays and the new year, I suppose he made the ask to review the book at an opportune time.

I believe this book is best suited for new, or somewhat new, investors in the stock market. Mariusz does a nice job leading his readers from the beginning or inception of a stock, a company's capital structure and through the time one should consider selling a stock. The book includes a chapter on the economy including a brief discussion on the economic cycle. Mariusz's investment style seems more of a contrarian or value one. He rhetorically ask a couple of questions,

• "When is it best to own a great company--in good times or bad times?"
• "When is one more likely to buy a great company at a reasonable price--in good times or bad times?"

Both are important questions investors need to answer as they buy and evaluate stocks. He does provide answers to the questions in his book.

Buying stocks is not too different from buying real estate. That is, one makes money in real estate not when they sell it, but when they buy it. In other words, what one makes is based on how much they paid for it. Real estate investors have been finding that out over the last year to year and a half. So I digressed.

The book covers topics on valuing stocks based on the dividend discount model. Additionally, he shows how company leverage can add value to a company's earnings. He shows how the value that is created (or not created) is based on the financing cost and the company's return on equity or ROE. In the chapter on "Basic Capital Structure" he provides investors with a way to evaluate a company's earnings growth and whether reinvested earnings are being reinvested "efficiently" as he states.

And finally, beyond the financial numbers, he discusses what comprises a good business. Does the company have a "wide moat" around its products and market. If so, this type of company tends to have higher ROEs and thus potentially higher sustainable returns.

At the end of the book Mariusz provides several case studies or real examples that utilize the topics he covers in his book in order to evaluate specific companies.

In conclusion, I found the book an easy read that was not mired in technical details. Having said this, Mariusz provides his readers with spreadsheets useful in valuing a company's stock. Additionally, I do believe this book will provide its readers with a good starting foundation upon which to build their investment knowledge.

Top Economist Ed Hyman's And Francois Trahan's 2010 Forecast

Ed Hyman of ISI Group has been voted Wall Street's top economist for thirty straight years. In an interview with Consuelo Mack on WealthTrack, Ed and Francois provide their firm's view on both the global and U.S. economy in 2010 and 2011. A couple of takeaways from the interview:

• 2009 was the year of the beta trade. In 2010 the focus will be on companies that generate free cash flow and pay dividends.

• anticipate upside surprise for companies with exposure to southeast Asia economies.

• Francois believes a contrarian view could be rates actually fall in 2010. On a percentage basis, interest rates have risen as much as the equity markets have moved higher.

If Investing Based On Yield, Know What Makes Up The Yield

As a follow up to my post yesterday, Jim Cramer Does Not Disclose Complete Picture On Blackrock's Dividend Achievers Trust Yield, investors purchasing an investment for its yield or income payout need to know what comprises that yield.

As noted in yesterday's post, Blackrock's Dividend Achievers Trust (BDV) distributes a payout every quarter. This quarterly payout includes more than the income from the underlying investments. This type of payment is often referred to as a managed distribution. Many online sources include the entire distributions amount in the yield calculation. Some of the distribution can be a return of an investor's capital.

Investors can get a list of closed end funds that make payouts that are in excess of the income generated by the underlying investments at the Closed End Fund Association's (CEFA) website. The CEFA lists some forty CE funds that have manged distributions. For reference, these distributions are know as Section 19 payments.

Several years ago, the Gabelli Funds prepared a paper on the pros and cons of managed distributions. The paper can be read below.

Closed End Funds Managed Distribution Policy: What Is It?

Jim Cramer Does Not Disclose Complete Picture On Blackrock's Dividend Achievers Trust Yield

I was driving home tonight listening to Jim Cramer's Mad Money on XM Radio when he was pounding the table on dividend paying investments. As readers of my blog know by now, I am certainly a strong proponent of dividend growth stocks. One of the recommended investments Jim cited for a worthwhile investment because of its 7.6% yield was Blackrock's Dividend Achievers Trust (BDV). What Jim unfortunately did not mention was this yield was not all income yield.

Some investments distribute both principal (an investor's capital) and income to its investor on a regular basis. For Blackrock's Dividend Achievers Trust, the "income yield" is only 3.46% and the "distribution yield" is 7.67% as of November 30, 2009. The difference between the two yields is the return of an investor's investment in the fund so should it really be counted as income? Personally, I don't think so. Below is a table taken from Blackrock's Section 19 Notice for the Dividend Achievers Fund.

(click to enlarge)

The SEC has been on top of these so called Section 19 distributions and the misleading reporting of yields by some investment firms. (It should be noted Blackrock does a pretty decent job of providing a link to the Section 19 Notice on its website). In a November 2009 speech by Andrew J. Donohue, a Director of the SEC, to the Independent Directors Council Investment Company Directors Conference, it was noted:

"The last challenge that I would like to discuss with you today involves disclosures associated with a fund's yield or its managed distribution plan. Closed-end funds sometimes tout a high, level dividend or a managed distribution plan to investors. Investors may incorrectly believe that the dividend rate is "yield," i.e., earned income or gain. In fact, the dividend rate often includes a return of capital (emphasis added). As directors, you must make sure that the fund's disclosures explain what the distribution yield represents and what it does not represent and that it is not confused with the fund's actual performance. In particular, if a fund with a managed distribution plan does not earn enough income to sustain a distribution, it must be clear that distributions to investors may be paid from a return of capital which has the effect of depleting the fund's assets. Moreover, in exercising your oversight, you should carefully consider whether managed distribution plans continue to be in the best interests of the fund and its shareholders.

Let me highlight one additional managed distribution plan disclosure issue for your consideration. As you know, funds are required under Rule 19a-1 to provide notice when distributions include a return of capital. In reviewing these notices, my staff has found inconsistencies between 19a-1 notices and other information posted on a fund's website. In particular, the 19a-1 notices show the return of capital while other charts on a fund's website show distributions consisting of all income. Funds have indicated to us that the reason for any differences is because the disclosures are prepared under different bases with 19a-1 notices disclosing book values and other disclosures based on tax considerations. However, fund websites do not always include an explanation discussing why the information is inconsistent in different online sections. Accordingly, I suggest that you review your fund's disclosures to make sure that the information is disclosed consistently and, if not, that the reason or reasons for any inconsistencies are adequately explained to investors."

For investors, be sure to review an investment and ascertain what comprises its yield. In addition to these Section 19 distributions, some funds use leverage in an attempt to increase a fund's yield. This increased leverage might not be so good when interest rates begin to rise and cut into the actual "income yield" for a particular fund. So don't chase an investment based solely on its yield.

BetterInvestings Most Active As Of December 20, 2009

Below is a list of companies attracting the most interest from BetterInvesting's members based on their recent buy and sell decisions. The list is based on a small, informal sampling of 145 transactions for the trailing 4-week period ending December 20, 2009.

Full View

Note: Figures in parentheses provide the previous ranking four weeks ago. (*) denotes unranked in previous period. This listing is presented as a source of stock study ideas in the current market. No investment recommendation is intended.

Pimco Increasing Cash Position

Pimco's Bill Gross has increased the cash level in the firm's flagship total return fund (PTTRX) to 7%. This compares to a negative 7% cash position in October. This higher cash level would indicate the firm expects interest rates to rise near term. Does this mean Pimco believes a stronger economy is ahead of us or is it simply the fact the Fed is beginning to step away from some of its fixed income market support programs? Time will tell.

Source:

Pimco’s Gross Boosts Cash to Most Since Lehman Failed
Bloomberg
By: Wes Goodman and Garfield Reynolds
December 17, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQYnPNqVNIsg&pos=2

Bullish Investor Sentiment Stuck In A Range

Today's release of the individual investor sentiment survey shows investor bullish sentiment stuck at the low 40% level over the past several weeks. For the period ending November 17, 2009, individual investor bullish sentiment was reported at 42.11%. For the last four weeks, bullish investor sentiment has had a 41 or 42 handle on the percentage.

As this indicator is a contrarian one, bullishness readings in the high 40% area would be a reason for equity investor to become more cautious based on this indicator if viewed in a vacuum. Interestingly, this week's bearishness level fell to 28.42% versus the prior week's bearishness level of 35.37%. Consequently, the bull/bear spread widened to +14% versus last week's spread of +7%.

Source: American Association of Individual Investors

A List of Dividend Growers In The S&P 1500 Index

Standard & Poor's recently assembled a list of dividend growth stocks screened from the S&P 1500 Index (SPSUPX). S&P based the below list on those companies that have paid increasing annual cash dividends for the past ten years and have an actual 2008 and estimated 2009 and 2010 dividend coverage ratio of at least 2.0 (based on street estimates divided by the current 12 month indicated dividend rate).

This list includes large, mid and small capitalization dividend growers. S&P appropriately notes that the below list of stocks are not necessarily buy candidates, but a starting point for additional research.

Full View

Stock Buybacks On The Rise

In a sign that corporate America's prospects are taking a turn for the better, on a sequential basis stock buybacks increased 44% in the third quarter of 2009 for companies in the S&P 500 Index. On an absolute dollar basis buybacks totaled $34.8 billion versus $24.2 billion in the second quarter.

This increased buyback activity coincides with an improvement in "as reported" earnings. The low point in earnings came in the fourth quarter last year when earnings, or lack there of, were reported at -$202.11 billion. In the third quarter of 2009 the final tally for as reported earnings are projected to total $131.96 billion, the third straight quarterly improvement.

The negative aspect of the increased buyback activity and no corresponding increase in dividends may be reflect of the uncertain view companies have about prospects in 2010. If companies had a favorable view of the business climate in 2010, dividends may have been increased as well. Increasing dividends is a longer term commitment on a companies cash while buybacks can be suspended easily at any time. Given the uncertain impact that all the new policies coming out of Washington may have on businesses, it is understandable that businesses are cautious about the economy next year.

Source:

S&P 500 Buybacks Rebound 44%; Remain 80% off Their High (pdf)
Standard & Poor's
By: David Guarino and Howard Silverblatt
December 14, 2009

Dividend Aristocrats For 2010

Below is the list of companies that will comprise Standard & Poor's Dividend Aristocrats after the close of business on December 18th. The changes that will be made to the list were detailed in an earlier post, Big Changes For Dividend Aristocrats Index in 2010.

Full View

Source: Standard & Poor's (xls)

Government Spending Is Out of Control

A significant risk to economic growth in the U.S. is the record amount of debt being taken on by the U.S. government. The brief video below explains the spending in this crisis compared to past crises.

Since this crisis began in late 2008, the government has spent $4 trillion supporting various new programs. The government has committed to spend an additional $7.8 trillion over the next several years which will bring the total new spending amount to $12 trillion. As year-end approaches, Congress wants to increase the U.S. debt limit by nearly $2 trillion. The spending coming out of Washington does need to stop.

How does this spending compare to spending in past crises?

• Marshall Plan-$115 billion
• New Deal-$500 billion
• TARP-$700 billion
• Stimulus Plan-$787 billion
• World War II-$3.6 trillion

Some of this spending is finding its way into the hands of government employees. USA Today reports the average pay for federal workers is now $71,206 versus $40,331 in the private sector.

As Margaret Thatcher once said, "the problem with socialism is that you eventually run out of other people's money." I think we could be on a slippery slope to that outcome if the government does not reign in its current rate of spending growth.

Key Economic Indicators Suggest The Worst Is Behind Us

In a post I wrote on July 12, 2009, Economic Indicators That May Signal A Bottom In The Economy, I noted six indicators investors might follow to determine the future direction of the economy. The indicators outlined back in July were excerpted from a Kiplinger's Personal Finance magazine article. The magazine article noted when three of the six below indicators turn in a favorable direction, then an economic recovery is likely unfolding. At this point in time three of the six indicators support the contention an economic recover is unfolding.

The three indicators that are in an improving trend are:

• Jobless Claims
• Retail Sales
• Interest Rate Spread (the TED spread)

The three indicators needing to show more improvement are:

• Durable Goods Orders
• Existing home Sales
  
• Consumer Confidence

Jobless Claims

• Look for a four-week moving average hitting 550,000 and continuing to decline would signal that companies have stopped slashing jobs. The four week moving average is 473,750.
  

Source: Federal Reserve Bank of St. Louis

Durable Goods Orders

• A two- or three-month uptrend in orders -- excluding defense, aircraft and other transportation equipment -- would presage an expanding economy. New orders for manufactured durable goods in October decreased $1.0 billion or 0.6 percent to $166.2 billion according to the latest U.S. Census Bureau report. This was the second monthly decrease in the last three months. This followed a 2.0 percent September increase. Consequently, this indicator's trend falls short of meeting an uptrend requirement.
  

Source: Federal Reserve Bank of St. Louis

Retail Sales

• Two to three straight months of increasing sales would mean consumers have more money in their pockets and are willing to spend it. Each of the last two months have seen higher retail sales. Sales have increased from $343.7 billion in September to $352.1 billion in November.
  

Source: Federal Reserve Bank of St. Louis

Existing Home Sales

• Two or three consecutive months of growth would be a sign that investors and would-be homeowners are back in the market. Although existing home sales are not showing sequential 2 or 3 months of growth, since May, sales in 2009 have exceeded the monthly sales of the same period in 2008.
  

(Chart Courtesy of Calculated Risk)

Data Source: National Association of Realtors

Consumer Confidence

• An index in the 60s would suggest that consumers will be less tightfisted. The November Index was reported at 49.5 versus the prior months index reading of 48.7. According to the Conference Board, "the moderate improvement in the short-term outlook was the result of a decrease in the percent of consumers expecting business and labor market conditions to worsen, as opposed to an increase in the percent of consumers expecting conditions to improve. Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood."

Data Source: Consumer Confidence Board

Interest Rate Spread

• A narrowing of the gap to about one-half of a percentage point would signal improving health in the banking sector. The spread has remained below 50 basis points for the last six months.
  

Source: Bloomberg

Also noted in my earlier post, the stock market tends to be a leading indicator. Once a number of the data points become more favorable, the market tends to move higher in advance of the economic data confirming a stronger or improving economic environment. My March 9th post touches on the lagging nature of the consumer confidence data as an example.

S&P 500 Dividend Estimate Down 21.4% In 2009, But Growth Likely Resumes In 2010

In spite of the fact that dividends paid in 2009 are estimated to decline 21.4% or $52.6 billion in 2009 versus 2008, dividend growth is projected to resume in 2010. Standard & Poor's is projecting that dividends per share for the S&P 500 Index will rise 6.1% in 2010 to $23.67 per share versus the estimated payment for 2009 of $22.31.

As the below chart notes, as reported operating earnings are estimated to have returned to growth in 2009. This improved earnings outlook as pushed down the payout ratio (based on operating earnings) for 2009.

S&P believes that the growth in dividends will be back half loaded next year:

"While we do expect additional dividend decreases, Standard & Poor’s believes that improving economic conditions will inspire companies to slowly increase their payouts," notes Howard Silverblatt, Senior Index Analyst at S&P Indices. "We expect dividend rate increases to average in the mid to high single digits, with the second half of the year much better than the first half as companies will need time to reassure themselves of their product and financial position."

In addition to other fundamental factors like lower valuation, positive currency impact, to name a few, this improved earnings and dividend picture provides further support for better returns in the higher quality dividend growth stocks.

Source:

S&P Estimates 6.1% Dividend Increase for the S&P 500 Companies in 2010;
2009 Dividend Payment Expected to Post 21.4% Decline
Standard & Poor's
By: David Guarino and Howard Silverblatt
December 7, 2009

Big Changes For Dividend Aristocrats Index in 2010

On Friday, Standard & Poor's announced the changes to its Dividend Aristocrats for the coming year. According to S&P,

The S&P 500 Dividend Aristocrats Index is designed to measure the performance of S&P 500 constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 years. The index is equal-weighted, with constituents being re-weighted every quarter. Membership is reviewed each December.

The two additions are:

• Brown-Forman Cl B (BF.B)
• Cintas (CTAS)
  

The following ten companies will be removed from the Aristocrats list:

• Avery Dennison (AVY)
• BB&T Corp (BBT)
• Gannett (GCI)
• General Electric (GE)
• Johnson Controls (JCI)
• Legg Mason (LM)
• M&T Bank (MTB)
• Pfizer (PFE)
• State Street (STT)
• US Bancorp (USB)
  

The annual rebalancing will take effect at the close of business on December 18, 2009.

Source: Standard & Poor's

Ecolab Increases Dividend 10.7%

Ecolab (ECL) announced the company is increasing its first quarter 2010 dividend by 10.7%. The new quarterly dividend rate will equal 15.5 cents per share versus 14 cents per share in the same quarter last year. This represents the 18th consecutive annual dividend rate increase for Ecolab. The estimated 2010 payout ratio is 27% based on 2010 estimated earnings of $2.27. The 5-year average payout ratio is approximately 29%. The company maintains an S&P Earnings & Dividend Quality Ranking of A+.

(click to enlarge)

Nucor Increases Dividend 37th Consecutive Year

Nucor Corp. (NUE), a mini steel mill company, announced a 2.8% increase in the company's quarterly dividend. The new quarterly dividend increases to 36 cents per share versus 35 cents per share in the same quarter last year. During strong economic times the company often institutes special dividends as well.

The company is projected to report a loss of 85 cents per share for 2009 but 2010 estimates have the company earning $2.79 per share. The payout ratio is estimated to equal 52% based on 2010 earnings. The company's 5-year average payout ratio (excluding 2009) is 9%. Nucor as an S&P Earnings & Dividend Quality Ranking of B.

As noted in Nucor's press release:

"Nucor has increased its regular, or base, dividend for 37 consecutive years -- every year since it first began paying dividends in 1973. Reflecting the Nucor team's success in building Nucor's long-term earnings power, the base quarterly dividend has more than tripled since the end of 2007. In addition, over the period from 2000 to 2009, Nucor's base dividend has increased approximately ten-fold."

(click to enlarge)

(Disclosure: long interest in NUE)

Dividend Payers Outperform Non Payers In November

For the second month in a row, the dividend payers in the S&P 500 Index outperformed the non payers, 5.77% versus 4.86% respectively. This could be a sign that the market is turning in favor of the payers as they tend to be higher quality companies and have underperformed this year. On a year to date and 12-month basis, the payers have lagged the non payers by a wide margin.

Source: Standard & Poor's