Daily Gains Letter

Mountains of Cash Growing; Will Corporations Stop Hoarding and Pay Out?

By for Daily Gains Letter |

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Corporations, like investors everywhere, are very reticent about current business conditions. They have been this way for years. And they have way too much cash, which is why dividends have been increasing.

The financial crisis really was the catalyst for a huge change in the way corporations allocate their capital. Corporations hunkered down on costs and became extremely tight with their money.

It is highly likely that large corporations will increase their dividends this earnings season. Of course, this will be great news for those investors who seek out dividends from blue chips.

This market is at a high, but it is fairly valued and has a lot of potential to increase further—if corporations can produce growth and there is no major new shock from an event, like a currency default in Europe, for example.

There is still tremendous reticence on the part of corporations to invest in new business operations, new plant and equipment, and new full-time employees. And while this is not a positive for the Main Street economy, it is a positive for shareholders collecting dividends.

Corporations are sitting on a mountain of cash. In many of the earnings results so far, large corporations are reporting too much free cash flow. And they need to do something with all this money, because cash does not earn a rate of return greater than the rate of inflation.

One of the easiest ways to do this is to return the money in the form of dividends to stockholders. I still firmly believe that blue chip investing will do well over the long term.

There may be some spectacular downside ahead, but my read is that this will be an attractive buying opportunity for the vast majority of investors. And if this occurs, without question, investors should be looking at the safer names—those blue-chip companies with increasing dividend rates.

Investment risk around the world is still high, but a lot has been learned after the financial crisis and the latest recession. This doesn’t mean that governments will act in a manner that they are not accustomed to, but corporations and individuals have learned to be more careful with their money. This is why I feel that dividends will continue to increase this year.

Even though it seems pretty unbelievable, the stock market will move higher for the simple reason that there is a tremendous amount of cash sitting on the sidelines. Institutional investors are paid to buy stocks. If you invest in a mutual fund, you don’t want to pay that investment manager to have your money in cash; you want him or her to invest that money and earn a rate of return that beats the main stock market averages.

The investing landscape is improving. This doesn’t mean that the Main Street U.S. economy is getting better, only that Wall Street feels more confident about buying stocks.

Dividends are going to have another good quarter. It’s an investment theme that, in my view, has real staying power, regardless of what happens to the stock market this year.

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