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  Investments in a
Rising Rate Market By Dan Schuster Of late, it certainly hasn't been the best of times for young investors to try to learn to invest. The chance for rising interest rates, sky high oil prices, the upcoming Presidential election, and the war in Iraq have certainly lead to rocky times in the market throughout the first quarter of 2004. Especially at the beginning of the year, solid earnings figures were being overshadowed by uncertainty about these events. In fact, one of the anchors on CNBC referred to today's market as the "I.O.U. market: interest rates, oil and uncertainty." As we all know, uncertainty means risk, but the fact that some stocks have fallen despite strong first quarter results has lead to some great buying opportunities. In fact some analysts are now thinking the indexes could see a 10% rise from here. Still not confident enough? Well, there is one long forgotten way to help make a profit without too much downside risk: dividend yield. During the dot com boom of the 1990's, dividends were looked down upon because paying a dividend meant the company wasn't using that cash for future growth. During this time, dividend yields on stocks in the S&P 500 dropped considerably. A growth company declaring a dividend at the time was almost taboo. In fact, Microsoft, which has more cash on hand than any other company in the world, never paid a dividend until their eight-cent dividend last year. In today's
markets where it takes more than a dartboard and a copy of the WSJ
to beat the markets, companies with high dividend yields are becoming
more attractive investments for several reasons. First, President
Bush's plan that cut taxes on dividends effectively increased their
return. Second, since total return on a stock is comprised
of dividends and appreciation of the stock's value, it makes sense
that if a company can pay a dividend without hurting its growth,
it will have a higher return. Also, it shows that management
is attentive to keeping investors happy as well as maintaining strong
cash flows if they can find a way to consistently increase their
dividend. This strong management could in turn help lead to
the appreciation of the stock's price. In fact, research by
Eugene Fama and Kenneth French has shown that since 1926, stocks
in the S&P 500 with an above average dividend yield have typically
had above average total returns. Thirdly, dividend yields
historically rise as interest rates are set to rise. While
this by no means implies simply investing in any stock with a high
dividend yield will be a good investment, it is something to consider.
Either way, you should thoroughly research a stock before buying
it. For example, most stocks with high dividend yields are
financial companies or REIT's, which could see their price greatly
depreciate in a rising interest rate environment. On the other
hand, some of these fears may have already caused the firm's stock
price to go down since Greenspan warned of a "measured" increase.
As I previously mentioned, this presents a good buying opportunity.
One specific example is Commerce Bancorp (CBH). The stock
fell from around 61 to about 55 in late April when it released its
first quarter earnings. Even though its EPS of 75 cents was
directly in line with analysts estimates of a 25% increase from
that quarter a year earlier, the markets overreacted that they didn't
beat expectations. The stock has since risen back up to 61.50.
Lastly, some companies offer dividend yields that produce a higher
return than bonds, and the yield grows faster than the rate of inflation,
roughly 2.3%. This means that even if the price doesn't
appreciate at all, you will still have made a gain in real terms.
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