What stocks to invest in
The 1980s were the inverse of the 1970s as far as dividend stocks are concerned.
Dividends were back in!!
Three factors were involved:
Paul Volcker was appointed as chairman of the Federal Reserve in 1979, with a mandate to break the inflationary spiral that was under way in the late 1970s–and which was poisn for dividend stocks. He did so by raising interest rates sharply, thereby causing a deep recession in 1981-82 that erased the persistent belief that prices would be able to rise in an uncontrolled way. Disinflation, slow but continuously reduction in the level of inflation, replaced accelerating inflation as the watchword of the 1980s.
As the rate of change in the price level slows, the ability to raise prices by, say 4% – 5% annually (and therefore profits and dividends) becomes progressively more valuable. So the stocks that exhibit these characteristics become worth more as well.
commodities price declines
To the degree that the price of commodities inputs stabilizes or falls, and a firm is not forced to pass these savings on to customers, profit growth is enhanced further.
Dividend stocks–mature companies with slow-but-steady growth and substantial free cash flow–were crushed in the inflation-fear frenzy that characterized the late 1970s. After the worst of the ensuing 1981-82 downturn, investors began to notice how startlingly cheap stocks sporting, low PEs, 10% dividend yields and offering moderate growth were. Adding 5% in earnings growth that causes a 5% rise in the stock price to a 10% yield would produce a 15% total return. That’s without the higher risk attendant on holding a more cyclical name than a public utility or a cereal company. And it ignores the possibility that the PE might rise.
The success of dividend stocks in the 1980s was not about a change in investor preferences–that would come after the turn of the century. This was all about valuation + change in the direction of monetary policy.
Tomorrow, the 1990s.
– What stocks to invest in