Dividends Are Sexier Than You Think

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The Daily Reckoning | Wednesday, December 7, 2011 Negative sentiment for euro continues to grow... Why dividends may be more attractive than you previously thought... Plus, Bill Bonner with a “by the numbers” look at US household wealth, and more on his new theory of government... ------------------------------------------------------- FREE REPORT: “How to TRIPLE Your Money When Greece Defaults!” It sounds weird, but did you know a Euro-collapse, starting with a Greek default could be a GOOD thing for your retirement? It’s true! A little known strategy that could have literally saved your retirement in the middle of the 2008 market meltdown is set to soar again according to one market analyst. But you must act before January 2012, or you risk missing out on this opportunity... This new report is now available to download right now at absolutely no cost! Click here to learn more.   A Gift No One Wants Why Faith in the Euro Continues to Decline   Joel Bowman Reporting from Buenos Aires, Argentina... “Give the Gift of Europe” The above message came through to our inbox this morning, mailed to us by a discount airline headquartered in one of the PIIGS nations. We can’t remember having ever flown with this particular outfit before, but they sure put on a swell deal just the same. Boasts the advertisement: We’ve waived our “Name” and “Itinerary” change fees!* *Limited time only. Terms, conditions and restrictions apply. Far be it from an editor at a small and fringy publishing company to belittle the marketing efforts of a small and fringy air transport company. We love discount travel almost as much as we love competition in the marketplace, not to mention snazzy innovations like “name” and “itinerary” change fee waivers. Moreover, your editor might never have discovered the delights of cities like Rijeka, Brindisi and Tallinn had it not been for the irrepressible combination of discount online travel bookings and wide-eyed, twenty-something wanderlust. That said, we couldn’t help but observe that the phrase “Gift of Europe” seemed conspicuously out of place next to the other euro- related subject lines of the various financial newsletters and alerts that pepper our inbox throughout the day. (“Europe on Sale? Baloney!” was one we at The Daily Reckoning published not 24 hours ago.) The big news out of the Eurozone today is that rumor, hearsay and speculation are still considered valid reasons to buy and sell stocks en masse. As our mates over at The 5-Minute Forecast noted in yesterday’s edition: “When last we left the eurodrama 24 hours ago, the Dow was up 150 points on misplaced eurohopes. And then... Rumor filters out that Standard & Poor’s is about to put a “negative watch” on the six eurozone countries whose government debt is still rated AAA. The Dow surrenders about 90 points The rumor gets bigger: S&P’s negative watch will apply to all 17 eurozone nations. The day’s gains are erased, although by the close there’s a rebound After the close comes the announcement: It’s actually 15 of the 17 eurozone countries. Turns out Cyprus was already on negative watch and Greece is already junk Before the open this morning, S&P also places the scarlet letter of negative watch on the eurozone bailout fund, otherwise known as the European Financial Stability Facility (EFSF), currently rated AAA. “This last move,” continued The 5, “should S&P actually follow through, would make it nigh impossible for eurocrats to carry out their plans to leverage up the EFSF ‘ which is the only way they can conjure €440 billion into €1.4 trillion and hope to paper over Spain and Italy.” That was the situation yesterday. Clear as mud. Today, it’s more like mud...mixed with cement. France is optimistic...markets rally. Germany throws “cold water” on summit hopes...markets reverse course. And in the background looms the clear and present danger of a downgrade by perennially late-on-the-scene ratings agencies. Unfortunately for citizens and residents over on the continent, the “Gift of Europe,” and in particular, the “Gift of the Euro,” is fast becoming the kind of present that imposes an immense burden but which offers little satisfaction. It’s a bit like receiving a gift voucher for something you don’t necessarily need or want that is only redeemable at a store on the other side of town...and only during certain, inconvenient hours...and then only when you purchase something else you do not want of equal or greater value. Oh yes, and the person who gave you the gift will be popping in tomorrow to see how much you’re enjoying their generosity. According to a new survey, the French are beginning to tire of their relatively new currency toy. No doubt many would rather return it for something more familiar...something more like their old currency toy, the franc. “The survey shows a growing distrust of the effectiveness of the euro in overcoming the economic crisis,” Vincent Dusseaux of the Ipsos Public Affairs told the French English-language daily, FRANCE 24. Reported the paper, “A majority of the French people surveyed ‘ 60% ‘ said they still favoured holding onto the euro, but this overall fading confidence in the single currency is unprecedented, Dusseaux stated. The amount of people who want to leave the euro has increased ‘by around ten percent in recent months,’ Dusseaux told FRANCE 24 on Tuesday.” A case of “recipients’ remorse,” perhaps? Too bad. Should we really be so surprised when the government fails to surprise us with that perfect gift? How is the state, by its very nature a para-market institution, to know exactly what it is the market wants? After all, even the realm of private relationships is not without disappointment. You make out a holiday wish list, for example, and then, when the gifts actually arrive, you begin to wish you had wished differently. “No, no...they’re great. I always wanted a...uh...what are they again? Looks like some kind of...um...are they musical socks?” How can we expect the state to deliver anything better? You ask for a few friendly officer Pats to help the elderly cross the street and you end up with a troop of pepper-spraying robocops with a penchant for beating down students. Hint that you want some protection from foreign aggression and you get a military machine of unprecedented size, dropping bombs on and flying drones over countries you’ve never even heard of. Mention that you’ve had your eye on a little “protection of the courts,” a little “due process,” and you get a Senate that votes in overwhelming favor of a bill that can send you, without trial, on a not-so-romantic, one-way holiday for one to a Guantanamo hellhole. Draft a Constitution-length wish list and you end up with an IRS-length justification for daylight robbery. When it comes to the season for giving, nobody gives it quite as hard as the state.   It’s Time to Learn the Truth If the next financial bubble pops like I think it is... you need to get prepared. If you have the right plan set up, you won’t suffer when this bubble fully bursts. But ‘ and this is the most important point ‘ you must have a plan. And you must be prepared before this epic crisis hits. Get the inside scoop here. The Daily Reckoning Presents Dividends Are Sexier Than You Think   AddisonWiggin Last month, the dividend yields on American AAA corporations moved above the yield on 30-year Treasury bonds! That had never happened before. Even after last week’s stock market rally (which pushed dividend yields lower), the stocks of America’s four AAA companies still yield about 3%, on average, which is not quite as high as the yield on 30-year Treasury bonds, but still much higher than the yield on every Treasury bond of 24 years or less. So you’ve got an opportunity here to forgo the dubious promise of a bankrupt nation and to invest, instead, in some of the strongest companies on the planet ‘ those that are most capable of expanding, those that are most able to respond to government caprice and move operations wherever they need to move them, those with the most cash on their balance sheets. These are the companies that are going to lead the global economy for the next 10, 20, 30 years. The story is much the same throughout the developed markets of Europe and North America. In England, the FTSE index yields almost 4%. Ten-year British government bonds yield less than 3%. In France, The CAC 40 index yields 5.0%. Ten-year French government bonds yield around 3%. In Germany, the DAX yields 4%. German 10-year bonds yield 2%. In the US the S&P 500 dividend yield ‘ at 2.08% ‘ is higher than the 10-year Treasury yield for only the second time since 1958. In fact, many, many world-leading American companies now pay dividend yields higher than long-dated Treasuries. As James Grant framed this contrast in the Oct. 7, 2011 edition of Grant’s Interest Rate Observer, “Better the common equity of an adaptive and profitable American enterprise ‘ say, Molson Coors (NYSE: TAP/A) ‘ than the inert emissions of the US Treasury...Today, the stock is quoted at 39... at 11.1 times earnings with the yield of 3.25%. Meanwhile, the utterly unadaptive 10-year note of Timothy Geithner’s negative-cash-flow Treasury is quoted at 1.83% [now 2.03%].” Grant also highlights Campbell Soup (NYSE:CPB) as a compelling alternative to long-term Treasury securities. At the current quote of $33, Grant observes, this blue chip stock is selling for about 13 times trailing earnings and yielding 3.5%. “Campbell, which traces its corporate ancestry back to 1869 and which incorporated in 1922, early on conceived the bright idea of draining the water from canned soup. The shipping expense thereby saved was enough to allow a price reduction to a dime per can from 30 cents.” The company has flourished ever since. “From 1955 to the present,” Grant points out, “dividends have grown at an 8.9% compound rate.” Now, I realize that dividends sound very boring ‘ kind of like watching paint dry... I can almost hear you saying, “C’mon, Addison! This isn’t the Great Depression! I don’t want to invest for dividends, clip bond coupons and store canned peas in my basement. I want something that’s high-growth. Something sexy.” My answer to that is: Sexy sometimes sneaks up on you. What if I had told you on Jan. 1, 2000, to sell all your tech stocks ‘ those highflying stocks that were doubling and tripling every few months ‘ and to spread the proceeds equally across three very boring investments: gold, 10-year Treasury bonds and stodgy old dividend- paying stocks ‘ like the ones inside the Vanguard Dividend Growth Fund (VDIGX), the mutual fund we highlighted in Apogee. You would have looked at me as if I had lost my mind. You might have even felt sorry for me and tried to offer me some intelligent investment advice. But with the benefit of hindsight, we know what happened next. The high-flying tech stocks that comprised the Nasdaq Composite Index crashed...and still have not recovered their losses, even after all this time. The Nasdaq is down 28% since the end of 1999. Even the “blue chip” S&P 500 stocks are down 15% during that time frame... until you add back those boring dividends. With dividends included, the S&P 500’s 15% loss flips to a 6% gain. That’s still a miserable return for an entire decade, but it illustrates the point that dividends matter. In fact, for long periods of time in the stock market’s history, dividends have been the only thing that mattered. Without dividends, the S&P 500 index would have produced a loss for the 25 long years from August 1929 to August 1954. Then again, without dividends, the S&P 500 produced a 5% loss during the 13 years from September 1961 to September 1974. But with dividends included, the S&P’s loss became a 46% gain. If you think that’s just a bunch of “ancient history”, think again. During the last 12 years ‘ from early November 1999 until this very moment ‘ the S&P 500 has produced a loss...unless you include dividends. The moral of the story is simple: Dividends matter. In fact, they may even be a little bit sexy. Over the course of the last half- century, dividends have contributed more than half of the stock market’s total return ‘ 56%, to be exact. So what happened to all that boring stuff you could have purchased at the dawn of the new millennium? Well, the Vanguard Dividend Growth Fund delivered a total return of 50%, 10-year Treasuries produced a total return of 162% and the “barbarous relic” gold provided a dazzling total return of nearly 500%. Average return of the three investments: 236%! We would expect the Vanguard Dividend Growth Fund to outperform their low-dividend or no-dividend counterparts over the next few years...and to greatly outperform the return of long-term government bonds. As James Grant observes, “Better the common equity of an adaptive and profitable American enterprise than the inert emissions of the US Treasury.” Regards, Addison Wiggin, for The Daily Reckoning P.S. It may not feature a seductive cover shot of Lindsay Lohan, but we still think this month’s issue of Apogee Advisory is pretty darned sexy. For more raunchy investment themes and steamy macro- economic analysis, check out our latest report here.   What To Do If Gas Hits $8 and Oil Soars to $300... Think we’re “done” with exploding gas and oil prices? Maybe Obama and Congress want you to look elsewhere, but the truth is... there’s a whole new and secret “Saudi Timebomb” that’s set to blow, as early as the end of this year. When it goes, even today’s high gas prices could look like a bargain compared to what’s ahead. Millions of Americans could take a financial hit... but a few could come out way ahead. Find out how in this urgent new report...   Bill Bonner By the Numbers: A Closer Look at the Real Wealth of US Households   Bill Bonner Reckoning from Baltimore, Maryland... Americans are poorer than they think... Dow up again yesterday. Gold still bouncing around... The press is still focused on Europe. A “deal over eurozone fiscal rules,” was announced earlier in the week. Every day brings more speculation about what form the final deal will take...and whether the European Central Bank will lend a hand. Nobody really wants to sell stocks. Because a real deal might send stock prices shooting up in a giant Christmas rally. They don’t want to buy either. Because a failed deal might send them collapsing. So investors watch...and wait. In America and Europe investors are playing it cool. Congress has to extend the payroll tax cut by December 16th or the economy is probably going to bite the dust. But no one seems particularly concerned about it. The automatic cuts probably aren’t going to happen ‘ at least, not the way they were supposed to happen. The pols are negotiating now. Their challenge is how to scam the voters and investors by pretending to cut spending, without really cutting much of anything. They’re pretty good at it; we’re pretty sure they’ll get the job done. But despite all this backdrop of chicanery and tomfoolery, the real USA is in deep trouble. The number of people living with the help of US government food handouts has risen to 46 million ‘ a new record. And figures from Credit Suisse’s World Wealth Report show that the typical American is a lot poorer than generally believed. The report compares average wealth to the median wealth. For the benefit of Dear Readers who have forgotten the distinction, average is what you get when you add all the wealth together and divide by the number of people. Put in a few super-billionaires and everyone looks rich. The median, on the other hand, is what you get when you separate the people into two groups...those above and those below. At the center is the “median”...or what we usually refer to as the “typical” American. In Britain, for example, the average wealth is $258,000. Not bad. But it’s not what most people have. It’s just what you get when you average all those rich people ‘ with their very expensive houses in London ‘ along with everyone else. Few people in Britain actually have $258,000 net worth. The median net worth is not even half that amount ‘ $121,000. That’s what the typical fellow has. And even that amount depends heavily on real estate prices that have still not come down in Britain. But get this. In the US, the average wealth figure is a little less than in Britain ‘ $248,000. But the median figure ‘ what most people actually have ‘ is much less, only $53,000. What this means, says our Bonner Family Office chief economist, Rob Marstrand, is that “wealth in America is heavily skewed to the rich, with a lot of adults with very little net worth.” Compared to the typical Japanese or European, the typical American is only half as rich. Half the people in the US have less than $53,000 net worth. You can imagine what the bottom 20% have. This is a devastating and grim insight. It explains why so much of America seems, well, so poor. Because it is poor. People don’t have any money. They dress poorly. Eat poorly. Live poorly. Compared to Britain and Europe, much of the difference can be explained by the housing bubble, and subsequent housing crash in America. If we remember correctly, the US housing stock was valued at about $20 trillion in ’07. It lost 33% of its value, putting a quarter of mortgaged houses underwater and wiping out about $7 trillion of “wealth.” This explains why there are so many reports of people living in motels...and, according to a recent CNBC report...in automobiles. Yes, families have taken to living in trucks and cars. We recently rented an RV for Thanksgiving. The idea was to give our son and his family somewhere to stay when they came for the holidays. It was as nice as a small apartment, with three TVs and sophisticated electronic gizmos we couldn’t quite figure out. But the poor aren’t living in Class A motor-homes. They’re living in panel trucks and old vans. In this regard, it is probably worth pointing out that the recent news of a decline in unemployment was a fraud. The news reports told us that 120,000 jobs were added last month. Unfortunately, 150,000 are needed just to keep up with population growth...and 500,000 to convincingly claim to have a ‘recovery.’ And the only reason the jobless figure improved was because the statisticians knocked 300,000 job seekers off the list. Never in history have so many people been unemployed for so long. So, the quants figured that if they hadn’t found a job by now, they might as well give up. Which flatters the figures, but it doesn’t do much for people looking for work...or for people who are trying to understand what is really going on. What we take from these figures is that America has a huge and growing class of very poor people...who are bound to be getting more desperate...and more angry...as time goes by. Unless there is genuine growth, they have no way to expand their spending, no way to get good jobs, and no hope of ever getting ahead. When you put the unemployed together with the under-employed...those with pick up work but no fulltime, stable jobs...the total rises to one of five people in the labor pool. And more thoughts... More on a new theory of government... You’ll remember from yesterday that we have some question as to the actual divinity of the Egyptian dynastic rulers. Certainly, either the Egyptians had some doubts themselves, or they were among the most impious people who ever lived. Pharaoh was supposed to be a god. He was supposed to be in charge of everything, even the annual flooding of the Nile, the weather...life, death, you name it. But that didn’t stop him from getting the old heave-ho from time to time. Rival groups didn’t wait for God to decide who would sit on the throne. Men fought it out. We don’t have any way of knowing about the pharaohs’ divine bona fides. We just note that as a theory of government, it does the job. Government claims the right to tell you what to do. Using the blunt instrument of ‘government’ some people are able to categorize, regulate, tax, inspect, dragoon, conscript, enslave, bully, incarcerate, murder and push around other people. Why do the other people stand for it? That’s the general subject of these little reflections. There must be at least 10,000 commandments we Americans are expected to obey. The IRS code probably has that many alone. We cannot build a house or cash a check without fulfilling hundreds of (often invisible) requirements. We pass through an airport and we submit to indignities, usually without question. We know the TSA agent is a moron. But “dress’d in a little brief authority,” as Shakespeare put it, “most ignorant of what he’s most assur d, glassy essence, like an angry ape, plays such fantastic tricks before high heaven, as make the angels weep.” Whence cometh that authority is our question. If it comes from God, who are we to question it? We accept God’s authority, at least when He’s looking. And if Pharaoh were divine, we would have certainly buckled to his power too. How could we do anything else? And yet, many people did not. For the two thousand years of the 30 dynasties, men killed each other to determine who would hold the pharaonic power. The last of them was clearly an interloper. The Ptolemies weren’t even Egyptian. They were Greeks, who conquered Egypt with Alexander. Then, finally, Julius Caesar and his nephew Octavian put an end to the divine tradition in Egypt forever. God either abandoned His man on the Nile, or he is playing tricks with us. Caesar took the role of emperor of the whole Roman world. He did not seem to be too concerned about the theory of it. People bowed to him and paid tribute. That was how an empire worked. And he never had too much time to think about it anyway. He was cut down on the Ides of March at the age of 55 in 44 BC. But the appeal of divinity did not die with the Ptolemies. Four score years after Cleopatra’s death the emperor Caligula declared that he was a god. This didn’t seem to take him very far. Romans came to the conclusion that he was not divine at all, but insane. He was murdered soon after by his own guards. Rome struggled on for another 4 centuries. If there was a theory to dignify one man’s bending to another we aren’t aware of it. It was considered normal and natural. Those who got control of the government of Rome were able to exercise the rights of governors. They were victors on the field of battle...and in the halls and assemblies of Roman government. What did they do with this power? “Ad victorem spolias.” Simple enough. You defeat someone. You take his stuff. His land. His wife. His children. At least there was no humbug about it. And the rules were simple. Government operated its naked form. As Mao described it two millennia later, political power came “from the barrel of a gun,” not from the Rights of Man or the Social Contract. In the exploits of Genghis Khan and Tamerlane, too, we find a very pure form of government at work...and a very clear theory about it. Genghis announced his theory of government as follows: “Man’s greatest good fortune is to chase and defeat his enemy, seize his total possessions, leave his married women weeping and wailing, ride his gelding, use his women as a nightshirt and support, gazing upon and kissing their rosy breasts, sucking their lips which are as sweet as the berries of their breasts.” Tamerlane was no less direct. He saw government as a legitimate enterprise. He raised troops with the intention of conquering other peoples and replacing their governments with his own. His warriors were paid in booty ‘ jewels, coins, horses, women, and furs. He was paid in loot, tribute and taxes. This is not to say that there was anything wrong with running a government in such a way. We are not giving advice or making suggestions. We are just trying to understand the essence of what government is. In the case of Egypt, people listened and obeyed ‘ at least, as much as they did ‘ because Pharaoh was, in theory, a god. In the case of Rome ‘ with the exception of Caligula’s claims ‘ and the Mongol empires, the theory was similarly simple, though different. Tamerlane made no claim to divinity. He merely made it clear what he would do to you if you resisted him. Towns that submitted were generally governed passably, according to the standards of the day...and taxed, but not razed to the ground. Those that contested his authority were destroyed, often with all the inhabitants killed. In Rome and out on the steppes, those who controlled the ‘government’ were in the favored position. They could reach out and impose their will on those who were not favored. Which is exactly what they did. As long as they were able, the insiders took from the outsiders. In both cases, the outsiders were literally outside the ruling group and its homeland. This is perhaps a good point to introduce our new theory about what government really is. It is a phenomenon, not a system. It is best understood as a fight between the outsiders and the insiders. The insiders always control the government...and use it to conquer and control the outsiders. Why do they want to do so? The usual reasons. Wealth. Power. Status. Everybody ‘ or everyone who isn’t either feebleminded or a saint ‘ wants wealth, power and status. And the easiest, fastest way to get it usually is to take it away from someone. That is government’s role. Only government can take something away from someone else lawfully. Why? Because governments make the laws. More to come...on the Divine Right of Kings...the Social Contract...and the Greatest Good for the Greatest Number.... Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com A New Theory of Government... Zombified Government Spending Misunderstanding Capitalism Brazil Quietly Scraps its Tax on Foreign Investment China Still Finding Ways to Gain Wider Renminbi Distribution Did the Jobless Rate Really Fall? The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. © 2010-2011 Agora Financial, LLC. All Rights Reserved. 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