Investors might be wise to hone in on firms with swollen bank accounts
Investors have been gun-shy about jumping back into the stock market after the Great Recession and turbulent recovery that followed. But there’s one category of equities that has posted a relatively even performance since 2009: dividend-paying stocks.
Though still below pre-recession peak levels, dividend payments per share among S&P 500 companies have climbed 30 per cent over the past two years and the trend seems poised to continue, according to a recent report by BMO Capital Markets. After cutting their workforces to the bone in 2009, many U.S. companies (with the notable exception of those in the hard-hit financial sector) saw profit margins spike when demand returned, and are now sitting on US$1.3 trillion in cash, or about nine per cent of GDP—almost twice the peak before the downturn. Many also took advantage of low borrowing rates to further shore up balance sheets. In Canada, meanwhile, where cuts weren’t as deep, rising commodity prices have still elevated profitability above long-term averages.
Policy makers are hoping the money will eventually be used to expand factories and hire workers. Until then, however, investors might be wise to avoid growth stocks and zero in on those firms with swollen bank accounts instead.