Word: dividend
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Dates: during 1990-1999
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...conventional measures of Wall Street, the market seems ripe for a setback. Not only are stocks heavily overpriced in relation to corporate earnings--the P/E ratio is now about 19--but the average dividend yield, which measures dividends as a percentage of prices, has fallen to an all-time low of less than 2%. Both gauges suggest the type of heedless buying that often precedes a bust. The public's hunger for shares has led Austin Grill, a chain of Tex-Mex eateries in the Washington area, to offer diners a helping of its new public offering along with their...
...back to all that. But first consider just how out-of-the-box this dividend score is. Since 1928, when record keeping started, the dividend yield of the widely watched Standard & Poor's 500 stock index has tended to float between 3% and 6%. Until now, the lowest it ever got was 2.6% in both 1973 and 1987--just ahead of huge market declines...
...that scare you, though. Much has changed, which is why the yield sank to last week's low of 1.99% without disrupting the bull market. Today companies hold back more of what they earn, opting not to increase dividends but to reinvest in operations or buy stock on the open market. This year, for example, blue-chip companies will report record high earnings but pay out a record low portion of those earnings as dividends (37%, vs. a post-World War II average of 52%).That's O.K., so long as reinvesting and buying back shares have their intended effect...
...would you rather be paid? The dividend is far more certain. There's never a guarantee a stock will go up, even if business is great. With few exceptions, dividends get paid and often raised, especially if business is great. For conservative income-oriented investors, shriveling yields mean greater risks...
...gone are the days when you could easily buy a quality bank or phone stock, live off the dividends and still watch the stock rise. Now, if you crave big dividends, you're pretty much stuck with the tainted tobacco industry or iffy electric utilities. You could choose other stocks, sell them as they rise and live off the gains. Indeed, tax law favors such capital gains over dividend income for most people. But the hitch appears when the stock market reverses or slows, which it eventually must. Then, investors seeking steady income are stuck with a sickly 1 point...