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Dividends and Consumers: Hanging with the Seniors

 June 16, 2008 12:27 PM

Today's WSJ has a data packed piece on why the US market is at "fair value." Translated, this means a few things, if we assume that the WSJ article is right.

First, indexers should expect volatility that goes no where. Perhaps the ride will be interesting.

Second, for active managers, moving sideways is known as a stock pickers' market. But as all stock pickers know, every market is a stock pickers' market. That is why we wake up without alarms and run to our computers in the morning, and get to work before everyone else. It is what we do. Pick stocks with the intent of beating the market.

Third is my real topic: how important is the stock market to consumers. Not the speculative consumers who live life paycheck to paycheck even as their income rises. I mean the "silent majority" types. This weekend I went to the beach where I found myself discussing various topics with fellow visitors, many of whom are regulars, and about one third are retirees.

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One senior described how she rides out market volatility. She is no multimillionaire with a huge cushion. Most of my fellow beach people are teachers, social workers and middle managers.

She struck me with the wisdom of her buy and hold strategy. She is a Warren Buffet type investor not selling on volatility. She would only sell if either she no longer trusts the firm, or the stock deteriorates beyond reconciliation.

"I'm OK waiting for the market to return." She says. "It's the dividends: if they cut those, then I'm not sure what to do."

She lives off social security, a very modest pension and her dividends. Her holdings and her home will hopefully be passed onto her kids and grandchildren, and she will not ever have to sell them for necessities. Inflation cuts heavily into her earnings and she recognizes that. If the market goes higher, and she realizes capital appreciation, that will offset some of her erosion, and she is aware that the market rising is no reason to go out and spend. The best way for her to keep up with inflation is higher dividends.

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Buy and hold and take the dividends. Not a bad investment philosophy.

This year we will see how the market and the big cap stocks hold up. We will also see how and if these firms can actively affect consumer spending through their dividend policy. The big question and source of anxiety for my friend and thousands like her is dividends, not 6-18 month market fluctuations. She is the type of consumer that is the backbone of the economy. She pays her bills on time. She eats out and goes to the movies with her grandchildren. She travels to see relatives and for pure adventure.

She is a core consumer. Let's see if public companies cut her pay. They may be cutting off their noses to spite their face.



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