Weak dividends may be warning signal on market

Andrew Leckey

April 02, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Red alert: Weak dividend yields are pointing to the possibility of a stock market correction.

The average dividend yield on stocks has slipped below 3 percent. It's fallen this low only four times previously -- in 1961, 1968, 1972 and 1987 -- and each time the market experienced a sharp correction.

Dividend cuts by giants such as IBM and Sears have worsened the situation.

"It's a warning signal, because rarely in history has the market been able to maintain price levels when the yield has been this low," observed Michael Metz, chief investment strategist for Oppenheimer Inc., who believes increased taxation under President Clinton will give even less encouragement to boost dividends.

"Low yields indicate that, no matter what you're reading or hearing, stocks are expensive as measured by this reliable historical evaluation."

There's controversy on the importance of dividends, however. R. S. Salomon Jr., chairman of Salomon Brothers Asset Management, contends investors shouldn't worry.

"The reason why I'm not concerned is that inflation is likely to stay fairly subdued, corporate earnings will be increasing and dividend growth is likely to escalate," explained Salomon. "An investor should only get out of stocks if he believes inflation will rise significantly and President Clinton's deficit reduction plans won't prove to be serious."

Corporate dividends increased dramatically until 1991, when they suffered their first decline and fewest individual increases in two decades. There was modest improvement in 1992. This year they're also up a tad, but they haven't kept pace with the run-up in stock prices.

"Managements realize the money-market fund is paying only 2.5 percent, so they don't feel pressure to provide higher yields to shareholders," said Arnold Kaufman, editor of Standard & Poor's The Outlook, 25 Broadway, New York, N.Y., 10004 ($280 annual subscription). "I don't think we can escape a market correction, because dividends are still extremely important."

Whatever the market consequences, the high-yield investor, seeking to preserve capital with a minimum of risk, faces a challenge.

There are the stalwart high-dividend groups: Average yield for electric utilities is 5.71 percent, natural gas distributors 5 percent, telephone companies 4.85 percent and oil companies 4.55 percent.

In electric utilities, Kaufman recommends TECO Energy (recently yielding around 4 percent), holding company for Tampa Electric, thanks to its growth region and diversification. Wisconsin Energy Corp. (4.8 percent) has excellent cash flow and good dividend growth. In natural gas, Atlanta Gas Light (4.9 percent) is seeing ,, earnings rise despite an unfavorable rate decision.

In oil companies, Kaufman chose Mobil Corp. (4.6 percent) because it emphasizes the high-growth segments of its industry. Metz's favorite is Chevron Corp. (4.3 percent).

Among telephone companies, Kaufman and Metz like Ameritech percent) and BellSouth Corp. (5 percent).

"Drug stocks are the only industry group that currently offers really excellent value, having declined to extraordinarily low price levels over worries about health care changes in Washington," said Geraldine Weiss, editor of the Investment Quality Trends, 7440 Girard Ave., La Jolla, Calif. 92037 ($275 annual subscription).

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