How to Profit from the Low Growth Years of The Lost Decade
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For those investors concerned about if their portfolios can survive a "lost decade" of low economic growth and poor stock returns, they already have. In March 2000, the Standard & Poor's 500 Index was around 1550. Now it is about 1350. The anemic jobs report just released for June is yet another indicator that low economic growth and high unemployment is here to stay in the United States as it is "The New Normal."
As stated by Paul O'Keefe, Director of Economic Research for JH Cohn and a former US Labor Department official, about the current weak employment creation in the United States, "We had confirmation of what all the other other economic indicators have been signaling for some time, and that is marked deceleration in the US Economy. This is not an outlier month. We've seen deceleration in job growth since the beginning of the year."
To profit from "The New Normal," investors should turn to the old standby of stocks with high dividend incomes. Coupled with the dividend income feature should be a high beta, a low payout ratio, and a business model that will benefit from global economic growth in China, India and other emerging market countries.
The dividend income element cannot be understated in significance. According to legendary investor Jack Bogle, founder of Vanguard Inc and creator of the first index mutual fund, the dividend income component has returned more than 40% of the historic total return of an equity. Since March 2000, it has provided the only positive return for the Standard & Poor's 500 Index, as a whole.
A low payout ratio and high beta enhance the long term returns of a dividend paying stock. Historically, the average payout ratio, the percentage of earnings needed to provide the dividend income to the shareholders, has been just over 50%. When there is a low payout ratio, that means there is ample cash for dividend growth in the future, or a share repurchase program. A low payout ratio is also a sign of prudent financial management and other appealing attributes.
In this regard, dividend growth is far more desirable than share buybacks. As noted about that by Motley Fool's Anand Chokkavelu in his piece, "The 100 Things I've Learned in Investing, "I'll take dividends. (A tangential bonus fact: Dividend stocks have historically beaten non-dividend stocks)."
Stocks with a high beta fluctuate more than the market as a whole. The beta for the overall stock market is 1. This allows for shrewd investors to buy equities on the dip. As about 70% of the price movement in a stock is due to the sector that it is in, solid companies are punished unfairly. Life is not fair; and this is a way for investors to gain when the share price of a company falls due to the sector being out-of-favor even though the company has not lost any value.
Three "Big Oil" companies are dividend paying stocks with high yields, low payout ratios, a high beta and positioned well to profit from growth around the globe, particularly in emerging market regions such as Asia and Africa: ConocoPhillips (NYSE: COP), BP PLC (NYSE: BP) and Statoil ASA (NYSE: STO).
ConocoPhillips is headquartered in Houston, Texas. It has exploration activities in 19 countries with proven reserves in 15 countries. As a dividend paying stock, ConcoPhillips has a yield of 4.82%. The average dividend income from a stock on the Standard & Poor's 500 Index is around 2%. This high dividend yield is supported by a low payout ratio of just 28.27%. There is plenty of cash for dividend growth in the future at ConocoPhillips. With a beta of 1.13, ConocoPhillips has ranged from $43.33 to $58.93 over the past 52 weeks of market action; and is now trading around $54.75.
Majority owned by the government, Statoil SA is the oil company of Norway. It has a high dividend yield of 4.53%, a low payout ratio of just 25.53%, and a beta of 1.21. Now trading around $23.37, Statoil SA has been as low as $19.21 over the year and as high as $27.65. Statoil SA, particularly active off the coast of Africa, also has a network of more than 2300 fuel stations throughout Europe.
Based in London, BP PLC provides dividend income at a 4.84% rate for its shareholders with a payout ratio of only 18.37%. For the past year, BP PLC has traded between $32.56 and $47.77. It is now around $39.63. BP PLC has a beta of 1.25. BP PLC has operations in Europe, the United States, Asia, Australasia, Latin America, North Africa, and the Middle East.
Even during The Great Recession, there was still growth in emerging market regions. China is still growing at more than 7% and India at more than 5% as Europe is in a recession, the United States is looking at sub-2% growth and Japan has been in its "Lost Decade" for well over ten years. As dividend paying stocks, ConocoPhillips, BP PLC and Statoil ASA provide a solid return just in dividend income alone. Since there is no way to time the market to buy at the bottom, a useful device for the entry price point would be when the stock has a dividend at an enticing level, such as 5%. That price point is well below the 52-week highs for Statoil ASA, ConocoPhillips and BP PLC.
With such low payout ratios, dividend income growth in the future is likely for these Big Oil firms. The high betas allow for investors to acquire shares at a discount price on downward fluctuations. With each having a significant presence around the globe, Statoil ASA, BP PLC and ConocoPhillips should make the "New Normal" profitable for its shareholders no matter how many decades are lost in the years ahead for other stocks.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.