Public Cartel: In the public cartel a government is involved
to enforce the cartel agreement, and the government's sovereignty
shields such cartels from legal actions.
Quietly, CEOs of large-cap, dividend-paying companies have
become the most powerful people in the world.
All because right now large-cap, dividend-paying companies - and
their stocks - are the most sought after asset class in the
Their quiet rise to fiefdom has been largely aided by the
Federal Open Market Committee ((FOMC)), and its low interest rate
Last week's announcement by the Fed that it "currently
anticipates that economic conditions... are likely to warrant
exceptionally low levels for the federal funds rate at least
through late 2014" has only helped fuel investor demand for
large-cap, dividend-paying stocks.
No longer do investors seem to care what business these
companies are in, as long as they pay dividends.
And as long as their yield is similar to the competition, the
cartel will remain intact. That means the paltry payouts from many
large-cap dividend companies will continue.
I realize this might be an unpopular stance. But consider the
S&P 500 (
) dividend payout ratio is close to its all-time low
. It currently pays out around 30% of earnings in dividends versus
an average payout of around 50% during the past 60 years.
This low payout ratio means that the yield on the S&P 500 is
also near a historic low, at less than 2% (the following three
charts are courtesy Standard & Poor's and Robert Shiller).
S&P 500 Dividend Yield Near Historic Lows
Yet at the same time, earnings in the S&P 500 are near
S&P 500 Earnings Are Near Historic Highs
Why would S&P 500 companies be holding so much cash instead
of returning it to investors in the form of dividends?
There are a couple of theories...
First, managers could be concerned about a 2008-like melt-down,
and they want to be financially prepared.
Or possibly concern over a European financial crisis, which
would precede the above scenario, has managers choosing to stash
cash instead of distributing it.
I have my own theory. These CEOs didn't get where they are by
giving things away. They are seasoned executives that make tough -
and not always popular - decisions.
They fight tooth and nail to gain market share for their
companies by keeping costs down, passing price increases on to
consumers when they can and finding whatever loopholes possible to
keep taxes and other payments to the government to a minimum.
In short, they are capitalists.
So when the benchmark 10-year Treasury is yielding only 1.9%,
almost exactly the same as the S&P 500, there is little
competitive rationale for these managers to dramatically increase
their dividend payouts.
10-Year Treasury Rate Yielding Same As S&P
They don't need to out-pay the competition. In this case the
field has been set by the Fed and its low interest rate policies.
And large-cap, dividend-paying companies are playing ball by not
breaking with the cartel and increasing their payouts to historical
norms. No reversion to the mean here.
But cartels don't last forever. That's because there is always
an incentive to cheat the cartel agreement.
Each company will want to attract more investors, and at some
point this will lead large-cap dividend companies to increase their
stocks' yields. When that time comes, you should buy these stocks,
but not now.
For the record, I'm not saying to SELL your large-cap dividend
stocks. I'm just saying to be very careful piling more money into
them right now at low yields. The way to make money as a dividend
investor is to buy at an attractive yield, hold, and collect the
ever-increasing dividend as the company grows.
Buying when yields are near historical lows runs counter to this
effective wealth-generating strategy.
Right now there is a better way for investors to capture yield
and expedite the large-cap dividend cartel's breakup.
Buy the new entrants and mavericks.
These are companies that are going their own way, and initiating or
steadily increasing their dividend payouts far above the historical
In many cases, the new entrants and mavericks are mid- and
small-cap dividend paying companies.
While many investors are seeking the safety and stability of the
large caps, many smaller companies are offering higher yields and
better growth prospects.
These smaller companies will grow faster as the economy
continues to recover. And they have a history of performing far
better than large-cap dividend stocks.
The following two charts show the performance of three of
Vanguard's value ETFs: the large-cap
Value Fund (
Mid-Cap Value Fund (
Small-Cap Value Fund (
The first chart shows the mid-cap VOE (in blue) and the
small-cap VBR (in green) clearly outperforming the large-cap VTV
(in red) since the market bottomed in March 2009.
Both the mid- and small-cap ETFs returned around 50% more than
the large-cap ETF over this time frame.
The myth that mid and small caps get hurt far worse during
recession is demolished in the next chart, which shows these three
ETFs from the market's high in 2007 to its low in March 2009. As
you can see, all of these funds lost the same amount, around 60%.
Big, medium and small were all treated equally.
Right now, these three funds are yielding between 2.1% and 2.6%,
and have PEs between 10 and 12. In other words, the cost to
investors - and the payout - is essentially the same.
But history has shown that smaller dividend-paying companies
outperform over the long term, and hold their own during
Right now - with investors literally crawling over each other to
buy defensive large-cap dividend stocks - I think it is wise to
step back and assess the situation to decide what strategy will
work for you over the long term.
And that means not playing directly into the hands of the
large-cap dividend stock cartel. Be a maverick, and buy only
dividend stocks that offer sustainable and superior yields. Hold
them for the long term as the benefits of compounding interest set
in (that takes around 10 years).
If you can't find any, then wait. The cartel will break up -
cartels always do. And then you'll get the yield your hard-earned
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Apple: When The Music Stops