Dividends Rising

As frequent readers know, I believe that dividend investing is best done surgically, one stock at a time, with the stocks selected not only for yield, but also for dividend safety and company stability, with extra points for a proven culture and history of raising dividends regularly. Rising dividend investing is a long-term strategy, not one designed to skyrocket one month and plunge the next. It’s the tortoise of stock strategies.

That said, the most recent across-the-board information from S&P provides a background against which dividend strategies can be measured. And the news is good.

This table shows the S&P 500’s cash dividends paid out over the last 10 years.

Year  Yield   Companies   Dividends Paid      Change from 
                       Paying             (Billions)              Prior Year

2009   2.0%      363                $195.61                  -20.9%
2008   3.1%      372                $247.29                     0.2%
2007   1.9%      390                $246.58                     9.7%
2006   1.8%      383                $224.76                   11.3%
2005   1.8%      386                $201.84                   11.5%
2004   1.6%      377                $181.02                   12.7%
2003   1.6%      370                $160.65                     8.9%
2002   1.8%      351                $147.81                     3.9%
2001   1.4%      351                $142.22                     0.8%
2000   1.2%      372                $141.08                     2.6%

As you can see, dividends crashed in 2009, falling almost 21%. Payments in Q1 2010 continued to decline, and they are expected to finish the quarter down 8% from Q1 2009. But those payments are mostly based on dividend rates set in place in 2009.

Going forward, S&P sees the indicated dividend rate for 2010 rising significantly. “Indicated rate” means the rate based on the most recent dividend declarations. Increases and initiations already announced in 2010 point to a significant increase in total dividend payments in 2010 compared to 2009. Through March 19, 68 of the 500 stocks have increased their payout rates and 7 more have initiated dividends, with just 1 decrease and 1 suspension. Compare that to Q1 last year, when there were 54 increases, 1 initiation, 40 decreases, and 6 suspensions.

Howard Silverblatt, Senior Index Analyst at S&P Indices, states that increases and initiations indicate confidence in future earnings abilities. S&P considers Q1 2009 to have been the worst quarter for dividends in history, so the year-over-year comparisons are not very challenging. Nevertheless, the early news this year is very positive. In my own Top 40 Dividend Stocks for 2010, 19 of the 40 stocks have already announced dividend increases for 2010, with no decreases.

Silverblatt goes on to note that April is usually a big month for dividend announcements. Four of the biggest payers--Exxon Mobil (XOM), IBM (IBM), Johnson & Johnson (JNJ), and Procter & Gamble (PG) are “up for renewal.” These four stocks, by themselves, account for about 11% of the S&P 500’s total payments. Interestingly, these stocks did not do badly at all in 2009 with respect to dividend increases. Respectively, they increased their indicated rates by 5%, 10%, 6.5%, and 10% last year. That illustrates why it’s a good idea to select your dividend stocks one by one. Even in an overall bad year like 2009, when total dividends fell 21%, these four posted average increases of 7.9%.

In 2009, 363 of the 500 stocks in the index paid dividends. To this point in 2010, 367 are dividend payers.

Is a Calm VIX Good News or Bad News?

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market. It is often referred to as the fear index. It represents one measure of the market's expectation of volatility over the next 30 day period.

A common interpretation of the VIX's value is that if it is above 30 or so, market participants are displaying fear of the market, and a market drop is likely in the making. Investors believe that a high value of VIX translates into a greater degree of market uncertainty, while a low value of VIX is consistent with greater stability. But another interpretation is that a low reading indicates complacency, low interest in the market, and therefore that the market might be ready for a fall, because there is little conviction on investors' parts.

Earlier today, I read the following from a well-respected analyst/pundit concerning the VIX: "The CBOE Volatility Index (VIX) fell to a low of 16.17 on Friday. The last time we saw a number on the VIX that low was in May of 2008, just prior to the fall from 13,000-plus to 10,970."

The implication was that the market is complacent, rolling over, and in his words, it’s time to “raise cash [sell stocks in anticipation of a decline] and be defensive.”

Is that quoted statement accurate? Yes. Is it misleading? Also yes.

It is true that the last time the VIX was at current levels was in 2008, just before the steepest part of the market crash that had begun in October, 2007. However, if you widen out the VIX chart to a 10-year look, you see a totally different pattern from the one implied by the statement above.

When the VIX hit 16 in 2008, it was rising, with increasing volatility. That presaged the market fall that the analyst referred to. But that moment in time had been preceded by a 3½-year period in which the VIX spent practically its entire time in the 10-20 range with low volatility. That period—from late 2003 to early 2007—coincided with a steady uptrend in the market. The Dow rose from about 9600 to about 13,000—about 35%--during that timeframe.

Currently, the VIX is falling, with decreasing volatility. It has dropped from a high of about 80 at the beginning of 2009 to its current level of about 16. The correct comparison is not between the VIX’s current level of 16 to the last time it was 16. The correct comparison is to the last time the VIX looked something like it does now. That would be mid-2002 to mid-2003, the last time the VIX was descending, with decreasing volatility, from a multi-year high to a level of 20 or below. The post-dot-com bear market, of course, ended in October, 2002, ushering in 5 years of a rising market that did not peak until October, 2007.

Disraeli said, “There are lies, damned lies, and statistics,” a saying that was popularized in the United States by Mark Twain. The statistic quoted at the beginning of this piece is the sort of thing they were talking about.

Timing Outlook Advances to 9.0

(Note to subscribers: The e-mail subscription version you receive omits some formatting such as boldfacing and other cosmetic touches that make reading easier. Links are also harder to see in the subscription e-mail. If you want to view this post in its most pleasing format, just click on the title above, which is a link that will take you directly to this article in my Newsletter.)

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 six weeks ago, after 4 straight down weeks in the S&P 500 resulted in a market loss of 8%. But the market has rallied 9% since then, restoring positive configurations to all three indexes that I use here (S&P 500, Dow Jones Industrial, and NASDAQ). The Timing Outlook has risen steadily since the single negative reading, up to 9.0 today, which is positive.

A few reports ago, I began describing the weekly movements in the market, using this simple system of nomenclature: P stands for a positive week, N stands for a negative week, and 0 stands for no change. Here is what the market has done since the beginning of the new year: P-N-N-N-N-P-P-0-P-P-P. That’s 6 P’s, 4 N’s, and a 0.

The market went up 3% in the first week of the year; then fell 7% over the next 4 weeks; and since then has rallied almost 9%. Netted out for the year, the market is up 4% in 2010. It is up 71% since last March’s lowest point. Note that the one-year anniversary of the rally came and went on March 10.

The first earnings season of the year is almost over, with companies reporting on their Q4 2009 and full-year 2009 results. About 80% of companies have beaten earnings expectations, about the same number beat revenue expectations, and year-over-year earnings for many companies have become positive. Note that the year-over-year hurdle was easy to clear, as Q4 2008 had some of the worst earnings on record. Nevertheless, positive year-over-year comparisons are always good news, and the market’s slow, steady climb has reflected that.

As you know, the 8% sell-stops in my Capital Gains portfolio were hit during the 4-week down-trend (N-N-N-N) of January and early February. Those sales put the portfolio more than 80% in cash. But when the market reversed itself and started back up, I began slowly to move cash back into the market. The portfolio is now about 75% invested, and I will probably make 1-2 more purchases this week. As always, holdings in the Capital Gains portfolio are protected to the downside by sell stops. I am currently using rather tight 6% stops, as I have not gained complete confidence in this rally yet.

If you want to check the performance of the Capital Gains Portfolio portfolio since its creation in 2001, check out this page on my Web site. The portfolio is way ahead of the S&P 500 since its inception.

For a portfolio that does not utilize timing or sell-stops, but rather uses a dividend-growth approach, use the same link above to check out my Dividend Portfolio. For a description of the book on which the Dividend Portfolio is based, go to this page to read about THE TOP 40 DIVIDEND STOCKS FOR 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 3/19/10)

Last Outlook (3/7/10): 7.8 (positive)

S&P 500 last time (3/7/10): 1139
S&P 500 now: 1160 Change: +2%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1160 Change in 2010: +4%

S&P 500 at close 3/9/09: 677 (beginning of 2009-10's bull market)
S&P 500 now: 1160 Change since 3/9/09: +71%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: A new report last week showed the 11th consecutive monthly increase. The string of increases suggests an improving economy, which is usually good for the stock market. Positive. +10

• Fed Funds Rate: No change.The Fed Funds rate remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: Correspondence with Morningstar paid off, they have corrected their display of the index’s P/E based on operating earnings. The current reading is 19.3, which is in the fairly valued, neutral zone. +5

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It has been going up for the past several weeks, along with the market itself, but staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.05, up from 1.04 last time. Neutral. +5

• S&P 500 Short Term Technical Trend: The rise in the market since early February (P-P-0-P-P) has pulled the S&P 500’s chart back into its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. This short-term technical indicator uses the index’s relationship with the two shorter  simple moving averages (SMA). The relationship is positive: The index has pulled the 20-day SMA above the 50-day SMA. Positive.  +10

• S&P 500 Medium Term Technical Trend: This trend uses the two longer SMAs. It remains positive. +10

• DJIA Short Term Technical Trend: The Dow has the same configuration as the S&P 500, so this indicator and the Dow's medium-term indicator are both positive. +10

• DJIA Medium Term Technical Trend: Positive. +10

• NASDAQ Short Term Technical Trend: The NASDAQ chart has the same configuration as the other two. Positive. +10

• NASDAQ Medium Term Technical Trend: Positive. +10

TOTAL POINTS: 90 NEW READING: 90 / 10 = 9.0 = POSITIVE

How I Tell If the Market Is "Going Up"

Over the past couple of years, I have written articles about whether the stock market has bottomed out or topped out, meaning has it hit an inflection point for awhile? I also wrote several articles about why I thought last year's rally was sustainable, which turned out to be accurate. I wrote an article a few weeks ago that opined that I thought the market had probably topped out for awhile after it hit 1150 and then fell backward. I was wrong: After dropping more than 8% and hitting my sell stops, the market reversed back and resumed a slow upward trend. It passed through 1150 a couple of days ago, and it finished at 1166 today (Wednesday).

And I continue to write the bi-weekly Timing Outlook articles that use a formulaic system to project the market's likely direction for 2-4 weeks. Those, while of course not infallible, have had a high batting average.

One point I have not nailed down: If my sell-stops get hit, and therefore my Capital Gains portfolio has cash rather than being 100% invested, how do I know whether and when to start re-investing the money? I have been vague about this, simply stating that I like to see the market "going up" for 2-3-4 weeks before I conclude that it may be in an "investable uptrend."

In this article, I want to get more specific about that. What follows is still a hypothesis, not a prescription. But here is what I have been doing.

1. I start with Ned Davis’ definitions of a bull market. (Ned Davis Research is a respected, fact-based research outfit.) Their two definitions of a bull market are:

• A: Market rises 30% over 50 calendar days (which equals about 36 trading days or about 7 weeks)
• B: Market rises 13% over 155 calendar days (about 110 trading days or 22 weeks)

Clearly, the first definition is for a fast-rising, sudden upturn, while the second defines a slow-but-steady rise.
To my eyes, the second definition is a little lenient. So I toughened it up by requiring a 20% rise rather than a 13% rise over the same time period. I chose 20% because it matches the common definition of bull market (a 20% rise in the market). So my modified "B" bull market is defined like this:

• B: Market rises 20% over 155 calendar days (about 110 trading days or 22 weeks)

2. We must make investing decisions in real time, without the luxury of waiting 22 weeks. I refer to these shorter decision-making periods as "investable" markets. The question becomes, at what point will I decide that the market is in an "investable uptrend"?

I answer this by taking the bull market definitions (A and B) and slicing them into shorter time periods. I also add a requirement: that 2/3 of the trading days have to be “up” days. This prevents one gargantuan "up" day from creating an "investable" market all by itself. What results is this:

• 2 weeks: A: 9% rise with at least 7 positive days (out of 10 trading days). "B" produces no signal, because the rise required would be less than 2%, which seems meaningless.
• 3 weeks: A: 12% rise with at least 10 positive days (out of 15). B: 3% rise with at least 10 positive days (out of 15). Since B is more lenient than A, it makes A moot.
• 4 weeks: A remains moot. B: 4% rise with at least 14 positive days (out of 20).
• 5 weeks: A remains moot. B: 5% rise with at least 18 positive days (out of 25)

3. So, to summarize, here are the qualifications for an "investable uptrend":

• 9% rise over two weeks, with at least 7/10 days positive
• 3% rise over 3 weeks, with at least 10/15 days positive
• 4% rise over 4 weeks, with at least 14/20 days positive
• 5% rise over 5 weeks, with at least 17/25 days positive
• Etc.

These are the standards I have used to get back into the market after my sell stops got hit in late January and early February. The market reversed itself and started going back up, and I made my first purchase on March 4, after it had been going up for about 3 weeks. Ever since then, I have been making one or two purchases per week, so long as the "investable trend," as defined above, has remained intact, which it has through today. I'm buying back in 10% chunks of the portfolio's total value. As of today, the portfolio is about 67% invested, and I have an order for execution tomorrow that will take that up to about 75%.

For risk management, I am using pretty tight sell stops, around 6% on all holdings. As you probably know by now, I use sell stops on all holdings in my Capital Gains portfolio. I do not use them in my Dividend Portfolio, preferring other approaches to risk management in a dividend growth strategy.

Timing Outlook Advances

1. Summary

After staying positive for 11 months, the Timing Outlook fell to a negative 4.4 four weeks ago after 4 straight down weeks in the S&P 500 resulted in a loss of 8%. But a 7% rally in the markets since then has pulled the Timing Outlook up to 7.8, which is positive.

Last time, I noted that the market had basically moved sideways since October. Now let’s just focus in on the past 9 weeks. If P stands for a positive week, N stands for a negative week, and 0 stands for no change, here is what the market has done since the beginning of the new year: P-N-N-N-N-P-P-0-P. That’s 4 P’s, 4 N’s, and a 0. The S&P 500 has gone up 2% over that timespan, but the last 4 weeks have seen a 7% rise.

Last time, I asked the question, what kind of market are we in?

1. A continuing bull market that began last March, went through an 8% “correction,” and is now going up again? Or…

2. A new bear that began with the 4-week decline? Or…

3. A range-bound, trend-less market that might just go up and down in relatively small amounts for an indeterminate period of time?

After the 4 consecutive down weeks, during which investor sentiment seemed sullen, investor sentiment seemed to turn more positive. Perhaps it was the almost-consistently good news from earnings season. About 80% of companies that have reported have beaten earnings expectations, about the same number beat revenue expectations, and year-over-year earnings for many companies have actually been positive. Please note, on the latter point, that the year-ago comparisons are a low hurdle to clear, as Q4 2008 had negative earnings for one of the few times ever. That’s the quarter when many banks took massive write-downs in the midst of the credit crisis. Nevertheless, positive year-over-year comparisons are always good news.

It is still too soon to tell whether #1, 2, or 3 will answer “what kind of market are we in?” The positive action of the past 4 weeks seems to render choice #2 (new bear market) less likely than the others. If the markets keep reacting positively to positive news, and not too negatively to negative news, I’d say that the likely choice is #1—still in the bull market that began last March. But overall, as I said, it’s too early to tell.

I reported several weeks ago that the 8% sell-stops in my Capital Gains portfolio had been hit, putting the portfolio more than 80% in cash. But with two straight positive Timing Outlooks and a solid 4-week rise in all the major indexes, I have decided to cautiously put some money back into the market. I made two purchases last week that put about 20% of the portfolio’s cash back into the market, and I will make one or two more purchases this coming week if things continue to trend positively. As always, these purchases are protected to the downside by sell stops.

If you want to check the performance of the Capital Gains Portfolio portfolio since its creation in 2001, check out this page on my Web site. The portfolio is well ahead of the S&P 500 since its inception.

For a portfolio that does not utilize timing or sell-stops, but rather uses dividend-paying stocks and basically a buy-and-monitor approach, use the same link above to check out my Dividend Portfolio. For a description of the book on which the Dividend Portfolio is based, go to this page to read about The Top 40 Dividend Stocks for 2010: How to Generate Wealth or Income from Dividend Stocks.

2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 3/5/10)

Last Outlook (2/21/10): 6.1 (positive) 

S&P 500 last time (2/21/10): 1109
S&P 500 now: 1139      Change: +3%

S&P 500 at beginning of 2010: 1115
S&P 500 now: 1139      Change in 2010: +2%

S&P 500 at close 3/9/09: 677 (beginning of 2009's bull market)
S&P 500 now: 1139      Change since 3/9/09: +68%

S&P 500 at peak 1/19/10: 1150 (possible beginning of bear market)
S&P 500 now: 1139      Change since 1/19/10: -1%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The report issued 2/18/10 showed the 10th consecutive monthly increase. Because this index tracks data that tend to lean in advance of the business cycle, a string of increases suggests an improving economy, which is usually good for the stock market. Positive. +10

• Fed Funds Rate: No change. Two weeks ago, the Fed’s raising of the “discount rate” from 0.5% to 0.75% seemed to be absorbed by the market with little concern. The market has risen 3% since then. The Fed Funds rate itself remains near zero, so this indicator stays positive. +10

• S&P 500 Market Valuation: I have been corresponding with Morningstar about this number, and they have acknowledged an error in their display of the data that I had been using. I still do not have a satisfactory substitute. On their page for the S&P 500 index itself, Morningstar reports the index’s P/E based on “prospective earnings,” but to use that, I would have to recalibrate what the bands are for the index being undervalued, overvalued, or fairly valued. So again for this report, I will drop this factor from the calculation. NA

• Morningstar’s Market Valuation Graph. This indicator has been meandering small distances around 1.0 (“fair value”) since late July, 2009. It has been going up for the past several weeks, along with the market itself, but staying within the “fairly valued” band of 0.9 to 1.1. It currently stands at 1.04. Neutral. +5

• S&P 500 Short Term Technical Trend: This indicator looks at the index’s relationship with two key moving averages, the 20-day and 50-day simple moving averages (SMA). During the 4 down weeks in January, the S&P 500 lost about 8% of its value, fell through both its 20-day and 50-day SMAs), and pulled the 20-day SMA down through the 50-day SMA. Then the market reversed itself. After a four-week recovery, the index has risen 7% and gone back up through both SMAs, although it has not yet pulled the 20-day SMA obove the 50-day. So we have Index > 50-day SMA > 20-day SMA. The back-and-forth movement of the index renders this short-term indicator ambiguous and neutral. +5

• S&P 500 Medium Term Technical Trend: This trend, which uses the 50-day and 200-day SMAs, turns positive. The index has moved well above its 50-day SMA, which in turn has remained above the 200-day SMA through these back-and-forth weeks. Positive. +10

• DJIA Short Term Technical Trend: Has the same configuration as the S&P 500 short-term trend. Neutral. +5

• DJIA Medium Term Technical Trend: Same pattern as the S&P 500. Positive. +10

• NASDAQ Short Term Technical Trend: Same as the other two. Neutral. +5

• NASDAQ Medium Term Technical Trend: Same as the other two. Positive. +10

TOTAL POINTS: 70 NEW READING: 70 / 9 = 7.8 = POSITIVE