When is 1.5% greater than 5%?

Dividends, Interest, and More!

This is an important issue for clients, as markets have done well for them recently. The 1.5% figure is the current dividend rate on the Standard & Poor's 500 Index now. Standard & Poor's 500 Index is composed of some of the best run, rationally managed, best capitalized, profit-oriented companies on the planet.

The 5% interest rate is the amount that you could receive by lending money to these companies or lending money to the United States government. Of course, the interest rate that you receive by lending to these companies (by buying their bonds) or lending to the US government (by buying their bonds) is a fixed rate of return for a fixed period of time.

The dividend yield from the Standard & Poor's 500 is not guaranteed, and importantly, is not fixed. The Board of Directors of a Standard & Poor's 500 Company declares dividends and attempts to increase dividends on a regular basis. However, there is no guarantee that the Board will do so. There is also no guarantee that the dividend payments will be maintained. However, it is our belief that overall the history of dividend payments will be maintained. In fact, history has shown that dividends and dividend increases have been a characteristic of stock ownership for decades. Historically, the rate of increase in the dividends paid by the Standard & Poor's 500 companies has been more than inflation. Now we are starting to answer our question.

Although we do not know what the future will hold, the past is telling us something about the goals of corporate management. It tells us that the management of these companies will attempt to maintain and to increase the dividend rate over your lifetime.

We do not know the rate of dividend increases in these companies going forward. There is no way to know the rate of earnings increases that these companies will experience as they grow, as they attempt to reduce costs, or as they employ new technologies to reduce the cost of production and expand into new markets. We do not know how future interest rates will affect the cost of financing company operations. However, I believe that companies will continue to grow earnings and then their dividends. On balance, corporate America will succeed.

Importantly, when the 1.5% dividend yield grows beyond 5%, I believe that those dividends will continue to grow. Meanwhile, the 5% interest rate on a bond is fixed and will not be increased going forward.

When we make these calculations in a world of inflation, which is currently 4% (but the Federal Reserve is targeting 2%), we must realize that the value of the 5% interest rate payments are being reduced by this inflation. The dividend rate is fighting back against inflation. Our expectations are that the dividend rate will grow faster than inflation.

We accept that there are no promises on the dividend rate. Please consider the dividends in your accounts, as well as the growth of the dividends, in your accounts, as an important part of your decision to invest in equities. An important part of our service to you is advocating for equity. It is one reason why you are paying our fee, for us to relentlessly advocate for a substantial portion, an ever-increasing portion, of your investment program to be invested in equities.

Although we do not know when 1.5% will be greater than 5%, we are confident that it will. We will continue to have this conversation with you. As always, we are available to introduce this concept to your colleagues, your children and other family members.