Market Lows: Here's How to Turn It Around

Dow 8000 -- I remember that. The first time the market crossed that level was July 1997. That was back when Apple’s survival was in serious doubt. It had completed a decade-long slide to less than $4 before securing a $150 million lifeline investment from Microsoft. That was also around when, unbeknownst to any of us, an unemployed British mom, rejected by 12 book publishers before securing a tiny advance payment for a story about a boy wizard named Potter, saw her first 1,000 copies hit shelves.

The Dow hit 8000 again 14 months later, this time moving in the wrong direction after reaching 9300. And again in July 2002 after having paid a visit to 11900.

And now here we are again, just over a year after summiting 14000. In 11 years stocks have moved much but progressed none.

Returns would have been generous just the same, if bloated valuations and overconfident managers hadn’t robbed investors of the juicy dividend yields they’re entitled to. Over the past two centuries, American stocks yielded an average of 5% for the first 180 years, but just 1.6% during the past two decades.

In other words: Had investors been collecting a 5% yield since the first Dow 8000, and reinvesting their quarterly payments, they’d be up 73% today.

Lately I’ve been writing a lot about how dividends aren’t just a nice add-on to yearly share price gains. Over the whole history of stocks, dividends have made up the bulk of returns. This last trip back to 8000 has taught me a lesson I won’t forget. If you’re not collecting dividends, you’re probably better off in bonds.

Crushed investors are naturally wondering how low stocks can go. Price-to-earnings ratios are already low, but I submit they’ve become irrelevant. Stocks will bottom when investors are once again being properly paid to hold them. That means a yield of 5%. That’s enough to double your money in 14 years, even if we’re still at Dow 8000 by then.

America’s big companies pay 3.4% now, but that needn’t imply a further plunge in stock prices. Companies can pay more. I’ve recently badgered the likes of GameStop, Starbucks and Gap to either initiate or increase payments. There’s little excuse for a mature company to keep more than three-quarters of profits. Let’s stop pretending that managers are so much better at shareholders than investing that cash.

Studies show that companies that pay out the bulk of profits as dividends actually grow earnings faster than those that don’t. Share repurchases are more welcome, but even they are no replacement for cash in the pocket.

Which is more likely to lure buyers, a noncommittal repurchase plan or a 5% stream of payments?

All this isn’t to suggest investors should sell and wait for even bigger yields. Insufficient as 3.4% is, it’s about what bank CDs pay. My advice: Hang on and, if you can, reinvest. And pester executives who aren’t coughing up the cash.