Daily Gains Letter

What Rising Dividends Are Telling You About the Market

By for Daily Gains Letter |

260213_DL_clarkThere’s a very good trend developing this year, and it’s benefiting the stock market and income investors. Dividends are going up, and not just with the usual suspects, like the big brand-name companies. Dividends are rising among smaller companies, and it’s a great sign of improving business conditions.

Right now, the stock market is highly uncertain about its future, and rightly so. Musings from the Federal Reserve’s last meeting showed the same sentiment. I don’t see Ben Bernanke suddenly withdrawing massive amounts of monetary stimulus, as he’s always been Wall Street’s biggest booster. Besides, interest rates are too artificially low and the Fed continues to increase the “M2” money supply (the amount of money in circulation, plus savings deposits, balances in money market mutual funds, and deposits) at a substantial pace. The Fed loves the stock market too much to quit.

What’s most important for your investment decisions going forward is what corporations report about their businesses. The numbers and corporate outlooks say it all. And the increased dividends we’re getting are a vote of confidence from corporations, which for the most part, are the strongest and healthiest participants in this economy.

One smaller company that just reported solid financial results and an increase in its quarterly dividends is McGrath RentCorp (NASDAQ/MGRC). This interesting company sells and rents modular buildings and containers to all kinds of customers in different industries. The company’s stock chart is below:

 

dl_0226_001Chart courtesy of www.StockCharts.com

 

In the fourth quarter of 2012, the company reported that its total sales grew 20% to $102 million. Earnings were down slightly to $11.9 million from $13.2 million in the comparable quarter, but the company increased its dividends by two percent to $0.24 a share, providing a stock market yield of just over three percent. McGrath’s recent revenue growth was impressive, considering we’re in a slow growth economy. And the fact that the company is consistently increasing its dividends suggests that it’s confident in its business.

Large-cap companies have consistently been increasing their dividends over the last few years. Many corporations have huge cash-hoards that aren’t being reinvested in new business operations. Instead, corporations are just giving the money back to shareholders; this keeps the stock market fairly happy, but it isn’t so great for employment.

This trend of slow employment growth and increasing dividends is going to be with us for a while. Countless smaller corporations are raising their quarterly dividends, and even though the stock market is gyrating, I view it as companies being more confident about their operations.

It won’t be too long before we get into first-quarter earnings season, and these numbers will actually be the deciding factor as to whether the stock market goes into a correction. So far, corporations have been pretty consistent, reporting decent, but not robust, financial results. The stock market doesn’t require robust earnings growth, but it does want to see revenue growth in the first quarter. Increased dividends always work to boost investor sentiment, and with stronger revenue growth, the stock market shouldn’t experience a correction in the near term.

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