Want income? In spite of all the uncertainty in the economy, stocks may be your best choice.
For many decades, investors who wanted steady income turned to the bond market, where high interest rates offered a steady income without too much principal risk. Those days appear to be over, at least for now: The severe recession of 2008 and subsequent central bank actions have pushed long and short-term rates down to historic lows.
Wharton School Professor Jeremy Siegel wrote in a New York Times op-ed, “Investors are now lending money to the government with the hope of receiving a sum 10 years from now that is worth less in purchasing power than the dollars they fork over today.”
After a decade of slow growth and two severe recessions, the low yields reflect extraordinary pessimism about the prospects for the U.S. economy. Professor Siegel recommends that income investors look to another source: dividends on common stocks.
According to Siegel, the average dividend on stocks in the S&P 500 Index exceeds 2% per year. U.S. corporations have been steadily improving their productivity and selling more goods overseas. Their dividends represent only about 30% of their profits, meaning they have room to increase dividends. Siegel believes that companies will do just that, as written in Stocks for the Long Run.
Professor Siegel’s research indicates that dividends on S&P 500 companies have increased by 5% annually since the early 1960s. And stock dividend growth beat inflation in both the low inflation decades and the high inflation decades.
Professor Siegel continues, “Despite the sluggish economy, the corporate sector is churning out record profits and increasing dividend payments. We believe dividend-paying stocks are the answer to a Treasury bond market that looks more dangerous than ever.”
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