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Keep long-term positive

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by Peter Switzer

The stock market has a tendency to grind normal people into the ground when it goes through strange, drawn-out negative days like these. And that’s why I always look for positive reasons for long-term investors to keep the faith.

Overnight, the Dow was down around 250 points but staged a comeback in the last hour following some positive news that Greece and the troika of officials from the EU, the IMF and the ECB may be near an agreement on a bailout. It closed 108.08 points, or 0.94 per cent, lower to 11,401.01.

But this is an issue that could go for some time, though I expect some resolution, that is credible, before the year is out. This is essential.

So if we can accept this possibility as a probability, is there a good historical reason to remain positive?

Sam Stovall, S&P Capital IQ Chief Equity Strategist, shared this with CNBC and it’s a ripper!

He looked at the S&P 500 Indicated Dividend Yield, which is now at 2.7 per cent. This covers the effective dividend you would get if you held all 500 stocks in the index. He then compared it to the yield on the 10-year US government bond and it exceeded it by 21 basis points.

Stovall says that this happens less frequently than a “blue moon” but when it does happen stocks rise by 20 per cent on average in the ensuing 12 months!

In the 1940s and 1950s after the Great Depression, people were so annoyed with stocks they went to the safety of bonds and then stocks had to push up their yield to attract these nervous investors.

Does this sound a bit like now? Yep, it does.

In the 1950s, stocks’ yield beat the 10-year bond yield but in the 60s, 70s, 80s, 90s and the noughties it was the opposite.

Since the 50s, this odd situation has happened 20 times and 80 per cent of the time stocks have gone up an average of 20 per cent.

This is a pretty persuasive case not to get rid of stocks but I would have liked it more if the 20 per cent rise happened 100 per cent of the time. That said, this research explains why I keep telling my financial advice clients and readers that we should stick with good dividend paying stocks.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, September 20, 2011

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