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Market Commentary - 1.11.12

We Continue to Favor Dividends

2011's equity market performance provided a rare opportunity to highlight the relative importance of dividend payments in overall portfolio total return. The S&P 500, a proxy for domestic equities, began 2011 at 1,257.64 and ended the year at 1,257.60 for a loss of just 0.04 points. This broad market benchmark index finished nearly unchanged for the year and actually experienced its closest flat line performance since 1947 when it closed exactly unchanged. While the S&P 500 was essentially flat last year, when we include dividends, the index had a positive performance of 2.11%. This is a clear example of the power of dividends in total return investing.

There are 394 companies within the S&P 500 that pay dividends and they collectively paid over $240 billion in cash dividends last year, up from $205 billion in 2010. Furthermore, according to S&P, the 2011 payout was the largest since 2008, before the brunt of the financial crisis hurt companies' balance sheets. Analysts are forecasting that S&P 500 companies will, in all likelihood, pay out a record $267 billion in annual dividends in 2012.

Indeed, a growing number of firms are realizing that paying out higher dividends (and/or increasing their open-market stock buybacks) is supportive to their overall market capitalizations (values). On an overall basis, dividends have risen for seven consecutive quarters. Even more noteworthy, during this past fourth quarter, dividends grew 20.6% year-over-year, representing the highest dividend growth rate in 35-years.

From a performance standpoint, companies that paid high dividends were among some of the best performing stocks last year. Looking at the top twenty large-cap S&P 500 stocks, having a combination of high dividends, low historic volatility and strong balance sheets delivered an average yield of 4.0% during 2011 and a positive total return (price appreciation plus dividend yield) of 21.3%. This again compares favorably to the S&P 500's 2011 total return of 2.11%.

We continue to believe cash rich companies, particularly technology firms which traditionally have not paid dividends, will increase – or initiate dividend payments. At a time when traditional income-oriented investments such as CDs and Treasury securities are at historically low yields, we continue to find quality stocks that pay above average dividends attractive. Keep in mind that unlike fixed-income investments that promise to pay their interest distributions, common stock dividends are under no such obligation and dividend payments may be reduced or discontinued. Companies generally try to avoid cutting their dividends, but they will if their capital structure becomes compromised, or forced to by regulation.

In addition to a bias toward dividend-paying companies, as we highlighted in our 2012 Market Outlook, within a strategically diversified portfolio and given risk tolerances, we recommend an allocation to defensive-oriented equities. Of the ten major sector groups, stocks within the Utilities, Consumer Staples and Healthcare sectors are generally considered defensive as opposed to cyclical performers. Defensive sectors provide some upside potential in times of improving market conditions, while also remaining less likely to pullback during recessionary periods. Generally, defensive-oriented companies provide "consumer necessities" needed even during times of hardship.

In general, we foresee market volatility to remain elevated throughout 2012 and both dividend-paying companies and defensive sectors should help cushion portfolios against the anticipated market gyrations.

This information is compiled by Cetera Financial Group from source material obtained or provided by US federal and state departmental websites, equity index sponsors Standard & Poor's, Dow Jones, and NASDAQ, credit ratings agencies Standard & Poor's, Moody's Ratings, & Fitch Ratings, domestic and foreign corporate issued newswires and press statements, and from referenced compilations and index readings by Bloomberg Professional. The information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular news update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security covered in this material may not be advisable or suitable. Please consult your financial professional for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

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