There are brief periods in life when everything seems to line up perfectly. If you speak with anyone that has been involved in athletics they will mention times of being “in the zone.” When you are in the zone, all of the different aspects of the game you are playing seem to fit together perfectly. You know exactly what to do at that specific time. However, that moment is fleeting and every athlete is constantly trying to recreate that moment in time. I believe we are in the midst of one of those moments.
We have seen the equity markets rally for the bulk of 2017 and end the year with more fuel being added to the fire in the form of tax cuts. There has been much debate on what these tax cuts will in fact do and how they will be used. Generally speaking, I can say that the tax cuts will provide most businesses more money to employ since they will not be giving it to the United States Treasury. The most pertinent question is how will they employ it? I have heard it argued that it will be “wasted” by companies because they will simply give the tax savings to shareholders in the form of dividends. I believe this is a good thing. If you own a pension there is a high probability that it has a decent portion invested in dividend paying stocks. Many pensions have struggled, for a variety of reasons, to have enough money available to make distributions to retirees. Thus, when those underlying companies increase their dividends, it tends to cause the stock price to rise. This provides more assets to the pension in the form of stock appreciation and greater dividends, which helps the pension to remain solvent.
“But, I don’t have a pension, why does this matter to me?” If we are working together there is a high probability that you are invested in companies that pay a solid dividend. Thus, you too will partake in the rise in value if these companies increase their dividend. You will see a more direct impact if this comes to fruition. Conversely, what if we are close to the top of the hill on the roller coaster ride (see Efficient Frontier #8)? Companies with strong balance sheets that pay a dividend tend to weather the downturn more so than those that do not.
Therefore, whether you believe we are heading for a “pullback” or think the stock market is going to continue its push higher, companies that pay a solid dividend appear to be positioning themselves to perform well. I believe that we will see a pullback in the market, but it will likely go by without notice to most as the market continues to grind its way higher. With that being said, I am not an astrologist nor do I play one on TV. Yet, it would appear to me that the stars are aligning for companies with strong balance sheets that pay a solid dividend to have their day in the sun.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
