Schwartz Financial Weekly Commentary
September 26, 2011
The Markets
The Federal Reserve did “The Twist,” but the financial markets ended up in “A Knot.”
In a much anticipated action dubbed “Operation Twist,” the Federal Reserve announced last week it would reshuffle its balance sheet by selling $400 billion of shorter-term Treasury securities and use the proceeds to buy longer-term securities. The Fed said it hopes the action will lower longer-term interest rates and, “contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery.”
So far, as it relates to interest rates, the Fed’s action has worked. The yield on the 30-year Treasury bond declined from 3.2 percent the day before the Fed’s announcement to 2.9 percent just two days later, according to data from Yahoo! Finance. That’s a rather dramatic decline for such a short period.
Unfortunately, the stock market failed to respond positively to the Fed’s announcement as the S&P 500 index lost 6.4 percent for the week. The market’s drop, though, went beyond disappointment in the Fed’s action. The following also contributed to the market’s red ink:
· Intensified fears of a Greek default.
· Rising concern of a world-wide financial crisis, with sovereign debt at the epicenter.
· Growing signs of sluggish economic growth in China
· A 13 percent drop in the price of copper on Thursday and Friday of last week, which is concerning because the price of copper is often viewed as a proxy for worldwide industrial growth.
Sources: Wall Street Journal, MarketWatch, Bloomberg
With the market’s blood pressure rising, it reminds us of what flight attendants often say, “Ladies and gentlemen, the Captain has turned on the fasten seat belt sign. We are now crossing a zone of turbulence. Please return to your seats and keep your seat belts fastened. Thank you.”
Likewise, as your “Financial Captain,” we know there may be market volatility along the way, but, as always, we’re focused on trying to help you arrive safely at your financial destination.
Data as of 9/23/11 | 1-Week | Y-T-D | 1-Year | 3-Year | 5-Year | 10-Year |
| Standard & Poor's 500 (Domestic Stocks) | -6.5% | -9.6% | -1.1% | -1.5% | -3.0% | 1.3% |
| DJ Global ex US (Foreign Stocks) | -8.2 | -20.3 | -13.0 | -4.4 | -3.7 | 5.2 |
| 10-year Treasury Note (Yield Only) | 1.8 | N/A | 2.6 | 3.8 | 4.6 | 4.7 |
| Gold (per ounce) | -5.9 | 19.8 | 30.9 | 23.4 | 23.6 | 19.3 |
| DJ-UBS Commodity Index | -9.1 | -11.9 | 3.3 | -7.3 | -1.9 | 4.3 |
| DJ Equity All REIT TR Index | -8.8 | -5.2 | 3.7 | -0.9 | -2.0 | 9.9 |
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
AN OFTEN OVERLOOKED ASPECT OF SUCCESSFUL STOCK INVESTING is the importance of dividends. In bull markets, investors tend to focus on price appreciation, meaning, they look for stocks that can increase in price. In heady times like the late 1990s, investors feasted on stocks that would double or triple in a matter of months. Watching a stock go from $20 a share to $40 or $60 a share is exhilarating and makes for good cocktail party chatter. On the other hand, watching a stock sit at $20 a share for several years while you collect and reinvest a 3 percent dividend is rather boring and not worth sharing on the social circuit.
However, just like the old story about the tortoise and the hare, the slow and steady growth of dividends plays a very important role in making money grow over time.
The past 10 years is a great example of how dividends have helped improve the returns of an otherwise disappointing stock market. Here’s the data:
· For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 1.3 percent excluding reinvested dividends.
· For the 10 years ending September 23, 2011, the S&P 500 index had a positive average annualized return of 3.6 percent including reinvested dividends.
· As shown above, receiving dividends and reinvesting them added 2.3 percentage points per year to an investor’s return compared to the return generated by price appreciation alone of the underlying stocks in the S&P 500.
Sources: Morningstar, Yahoo! Finance
In today’s environment of low returns, finding a way to possibly eke out an extra 2.3 percentage points of return per year is attractive.
Over a longer period, receiving dividends and reinvesting them has accounted for one-third of the total return of the S&P 500 index over the past 80 years, according to Standard & Poor’s.
Standard & Poor’s also points out the following benefits of dividends:
· Dividends allow investors to capture the upside potential while providing some downside protection in the down markets.
· When bond yields are low, like they are now, dividend paying stocks might be a way to enhance an investor’s current income.
Just like any other investment, though, you need to figure out how dividends fit within your overall investment strategy. Are you looking for dividends to provide stability, income, or growth within your portfolio? Or, perhaps it’s some combination of all three.
Considering how dividends fit within our clients’ portfolios is just one more way that we’re trying to add value.
Weekly Focus – Think About It
“Do you know the only thing that gives me pleasure? It's to see my dividends coming in.”
--John D. Rockefeller
Value vs. Growth Investing (9/23/11)
| -6.82 | -8.74 | -2.14 | -11.82 | 3.58 | 1.19 | -0.14 | |
| -6.39 | -7.83 | -2.00 | -10.22 | 3.33 | 0.40 | -0.75 | |
| -6.04 | -7.96 | -1.69 | -10.44 | 2.93 | 0.11 | 0.36 | |
| -6.09 | -5.20 | 0.24 | -5.83 | 7.87 | 3.74 | 1.70 | |
| -7.20 | -10.95 | -4.93 | -14.63 | -1.24 | -2.74 | -4.57 | |
| -7.76 | -10.13 | -2.16 | -15.37 | 4.40 | 3.34 | 1.36 | |
| -7.54 | -9.79 | -2.04 | -15.03 | 5.61 | 4.20 | 1.63 | |
| -7.93 | -7.36 | -1.25 | -14.47 | 8.66 | 4.36 | 3.26 | |
| -7.83 | -13.31 | -3.23 | -16.66 | -1.10 | 1.31 | -1.10 | |
| -8.79 | -14.51 | -3.61 | -18.12 | 2.75 | 1.93 | 0.98 | |
| -9.94 | -16.18 | -5.44 | -20.09 | 1.28 | 1.07 | -0.20 | |
| -7.89 | -11.15 | -1.66 | -16.17 | 7.74 | 2.81 | 2.37 | |
| -8.44 | -16.07 | -3.56 | -17.87 | -0.72 | 1.81 | 0.46 | |
| -6.57 | -8.82 | -1.99 | -11.97 | 3.48 | 1.19 | 0.72 | |
| -6.57 | -5.92 | -0.18 | -8.37 | 8.25 | 3.88 | 2.14 | |
| -7.42 | -11.82 | -4.48 | -15.30 | -1.21 | -1.63 | -3.50 |
©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results. Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase. This can only be done by prospectus and should be on the recommendation of a licensed professional.
Office Notes:
| With the news out of Europe over the weekend, along with the market drop of last week, if your financial advisor is not contacting you, then feel free to contact our offices and speak to me. I can be reached at 215-886-2122, if I am on the phone or out of the office when you call, my office will be happy to set a phone appointment with you. Find out what our latest advice is for clients and their money. |
Last Week’s Fire Sale
This week, once again, we are seeing investors panic over fears that this economy will never find its footing.
It is usually (read: always) wise to step back for a moment and look at the alternatives you have for investing your money. Here are some that come to mind:
1. Your mattress. 0% return and pray you don't get robbed or have a fire.
2. 10-year treasuries. 1.75% yield before taxes and inflation. About equal to the mattress.
3. High-quality, dividend-paying stocks ... you know the type —Fast food Restaurants or over the counter Family Healthcare and Pharmaceutical companies, (speak with me about your particular situation). Some of these types of stocks pay you 3% to 4%, and in many cases, raise their dividend every year. That means more income today and increasing income tomorrow. For most, this is way superior to options 1 and 2, which really are not options at all.
One thing about investing has always baffled me. Every place we shop, we are always more likely to buy when things are on sale. That new big screen TV. That “buy one get one free” deal at the local mall. But when stocks are finally “on sale” most of us are too scared to buy.
Nothing as far as I know has changed with the above mentioned company types or many other companies like them—except that you can become a part owner of these great companies for less than you could have yesterday for no good reason.
Maybe it’s time to go shopping?
Best regards,
Michael L. Schwartz, RFC®, CWS®, CFS
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.
Securities and advisory services offered through First Allied Securities, Inc., Member FINRA/SIPC
Schwartz Financial Service, Inc is not an affiliate of First Allied Securities, Inc.
This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed. Any opinions expressed herein are subject to change without notice. An Index is a composite of securities that provides a performance benchmark. Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is not a guarantee of future results.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
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