Large cap stock dividends look compelling

- by New Deal democrat

I've had drafts of several lengthy pieces prepared discussing the fundamentals of the US economy, but instead of those long posts, let me just say instead that whatever has been driving the stock market crash of the last two weeks, it isn't US domestic economic data, because with the exception of the Oil choke collar I've been writing about, the only other series to actually turn down recently are consumer confidence and the new orders component of the ISM manufacturing report. Every other data series is either continuing to improve or is going sideways - and that includes the majority of the Leading Indicators. For example, this morning's initial claims number of 395,000 is - with the exception of 8 weeks earlier this year - the best in the last 4+ years.

In other words, the cliff-diving of the stock market has been a solo performance.

So let me turn to a by-product of that cliff-diving. Suppose you had $10,000 that you had saved and were sure you wouldn't need for ahwile. Where would you put it?

You could put it in a bank. What sort of rate of return would you get? According to Bankrate, here is the best return you could get on various CD terms:

3 month 0.81%
1 year 1.27%
5 year 2.40%

Or you could invest in government bonds. According to the US Treasury, here is the interest you would make:

1 month 0.02%
1 year 0.09%
5 year 0.93%
10 year 2.17%

With inflation currently running over 3%, unless you think we are going to be in outright deflation or very close thereto for the next few years, both savings CDs and treasuries amount to "Certificates of Confiscation" as they used to say in the 1970s.

Now, let me show you the dividend yields on 17 of the 30 Dow Jones Industrial stocks as of yesterday:

AT&T 6.28%
Verizon 5.94%
Merck 5.10%
Pfizer 5.04%
Intel 4.37%
General Electric 4.24%
Johnson & Johnson 3.87%
Procter & Gamble 3.74%
Dupont 3.66%
Home Depot 3.65%
Kraft Foods 3.54%
Chevron 3.51%
Wal Mart 3.36%
McDonalds 3.15%
Coca-Cola 3.03%
Microsoft 3.02%
Boeing 3.00%

As of last Friday, the DJ yield gap - the comparison of yields between best quality bonds and stock dividends - had fallen to a nearly unprecedented 1.76%. Unless you think we are facing economic Armageddon - that could result in dividend cuts as well as plunging share prices - in other words, that people will stop using computers and electronics, not buy consumer products or appliances, and not use gas, or else high inflation is right around the corner - these are compelling values. You are getting paid a rate higher than any relatively safe bond investment, and higher than the rate of inflation for most of the last decade, simply to own a small slice of some of the biggest and most stable companies on the planet.

And they're on sale at 20% off.

Even if you think the prices of these shares will continue to fall in the near future, you are getting paid a dividend over and above the rate of inflation while you wait for your capital investment to break even at some future date.

Let me emphasize that I am not offering investment advice here. Everyone must do their own due diligence. But as of Thursday morning, August 11, 2011, the risk/reward profile doesn't look even remotely symmetrical.