Making money.

Big confab in the North Office. Bad news. The manuscript sucked.

“Look you’re working too hard to avoid saying what you really feel and it doesn’t have your usual good insights,” I finally told Andy. “Why not put the truth down in its total brutal honesty?”

And thus he began again… “Man oh man… I am bored… so bored… bored stiff… bored, bored, booooooored!

“Bored with financial news, that was. "Season’s Beatings", IDE 12-26-08. Even though he overcame it for his Asia Business & Investing readers. What he finally said was, “Inside this issue you’ll find two great single-stock recommendations… But, I have to tell you, that is nearly the extent of the enthusiasm I was able to muster for the financial world this month… last month… even the couple months before that, too.”

“Man oh man….”

Amen to that, and ditto for me.

In most shops, the financial writers probably aren’t supposed to say that they find the markets and recent market news boring. It’s a little like a schoolteacher telling the whole PTA that he’s sick of their kids. But here at Investor’s Daily Edge, we’re allowed to tell it to you straight. And that’s a good thing. Because if even we hardcore types have grown bored with financial news, that’s newsworthy in itself. It has meaning, and you can benefit. In fact, I hope this aura of boredom looms over us for years. 

Here’s where we are. See if you agree:  Another scandal? Phhhth. We’ve had our fill, thank you. Another bank failing? Same old-same old, what’s Britney up to lately?  Another journalist tells us he’s outraged, OUTRAGED, I tell you at bailouts, blowouts blackouts, whatever sticks in his craw…. Oh yawn. Why doesn’t he go buy a pulpit and bully somebody who wants to hear the preaching.

But with everything in investing, extremes bring reversions. And even bad news has good uses. The current state of deep boredom as more and more high drama unfolds with a dead thud is a clue to our future.  

The anecdotal evidence I have from various corners of the financial publishing world is that this boredom is widespread. Marketing is not working like it used to. Nobody’s interested. That’s not so good for me, as I make my living on subscription income. But it is very good news for you—and for me as an investor. It’s about time investors got bored. Now maybe they will quit thinking that 1000 to 1 payoffs happen overnight and take a bite of reality.

Now maybe they will expect investments to be nothing more than good investments, not wishes only a genie would grant.

Historically, stocks should bring investors a little in the way of capital gains growth and the bulk of returns coming in the way of interest. It hasn’t been that way for the past 20 years, but maybe now that everyone’s so bored that even ads promising the sun, moon and stars are falling flat, plain old dividend investing could come back into fashion.

For most of history, strong dividends were the primary reason to invest in stocks. Here’s a great chart from Robert Shiller for the situation from 1871 to early this year. Interpret it upside down, as it is a chart of stock price to dividends (P/D). So, the higher the P/D, the lower the dividend is. When a stock is priced at 40 times its yield, the dividend is only 2.5%. When the P/D drops to 20, it means dividends are up to 5%.

As you can see, price has soared compared to yields in recent years. We have been completely unhinged from historical norms. That high peak was the year 2000, when the P/D reached 88—which implies a dividend yield of just 1.1%. The lowest point was 1932, when the P/D was 7.9—meaning an average yield of 12.6% for the S&P 500.

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You can see Shiller’s chart itself at http://www.tradersnarrative.com/price-dividend-ratio-offers-lessons-from-history-2023.html. It’s interactive, so as you scroll over, it will give you year-by-year ratios.

Price to dividend for S&P 500 from 1871 to June 2008, Source, Robert J. Shiller

Historically, the P/D ratio runs from 12 to the low 30s. That is, dividends are usually from 3% to 8%. They are now on their way back to those levels. And if we can get a little more boredom, they’ll get to the historical level again. This past week, the S&P 500 hit an average dividend yield of 3.2%.

Even better, about a fifth of S&P stocks are now paying 5% or better.

Go back to the old days of 6% gains in the stock market, add a 5% yield, and while others are sleeping through the boredom, you will be doing quite well, quite safely.

How well? In 10 years, you would nearly triple your money. In 20 years, you will increase it eightfold. Even if you don’t add a penny after the first purchase.

And if you put the same amount in the S&P every year as you did to start, you will really see some wealth develop. At $100 a year for 10 years, you’d grow your account to $1,956.

Add $100 a year for 20 years (a $2000 investment), and you’d have $6,420, and in 25 years ($2,500 invested) you’d be sitting on $12,799.

I’d do samples with $10,000 contributions, but then we’d be talking millions of bucks… and I don’t want to cause a curse to fall on our heads by creating excitement here.

Please bore me, Mr. Market. I can use some steady, single-digit gains, regular dividends and a good night’s sleep. How about you?

This entry was posted on Tuesday, January 6th, 2009 at 12:40 am and is filed under Resources. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.