Vincent Rooney CEO of Rooney Gallagher Private Equity Partners LLC. says it a great time to buy!!

Dec. 22, 2010 - PRLog -- One of the biggest reasons I believe its a great time to load up on stocks is quit simple, there are still extremely undervalued equities out there. More important is stocks , for the first time  in over half a century, the Dow Jones's dividend yield exceeds the yield on 10-year Treasury bonds. This is a significant shift and not one to be ignored


There's really only one way to justify this: Panic-driven fear over deflation that could make the Great Depression look like the “good old days”. The market is saying, and saying loudly, that dividend payouts are going to be butchered over the next 10 years CONSIDERABLY!! Unless you think this is likely and if you do, bask in your bond bubble there’s practically no way to justify the current divergence between dividend and bond yields.


One popular argument making the rounds comes from a group who says the past 50-some-odd years of bonds yielding more than stocks was the anomaly, not the current reversal. Their evidence seems bulletproof saying before the 1950s; stocks almost always yielded more than bonds. And shouldn't they? Stocks have a nasty tendency of blowing up, and stockholders stand second in line to bondholders, so investors are right to demand extra yield. Only from the 1950s to circa-2009 was this view thrown out the window.  


But if you look at the markets from a historical perspective, the implications are grim. Perhaps the past 50 to 60 years was one giant equity bubble that's now at capacity and just about to blow. Have we actually been just fooling ourselves for generations, glued to a cult mentality that says stocks are forever and always superior to bonds? But with this sentiment dying bit by bit, and maybe we're headed back to the pre-1950s days when stocks consistently out-yielded bonds. Woe is our future, basically. That's the argument I've been hearing a lot lately.


But this has 1 major flaw and it’s undeniable. To only way to accurately compare dividend payouts over bonds is by assuming that dividend payouts as a percentage of net income stay the same. But this is simply not the case infact it’s not even close to how history has played out.


In one of my favorite books “The Intelligent Investor” by Ben Graham, a mentor to Warren Buffett, he notes something quit significant.


Years ago it was typically the weak company that was more or less forced to hold on to its profits, instead of paying out the usual 60% to 75% of them in dividends. The effect was almost always adverse to the market price of the shares. Nowadays it is quite likely to be a strong and growing enterprise that deliberately keeps down its dividend payments...


The point he was making was that dividend payouts as a percentage of net income were falling. And that's exactly what happened. From 1920-1950, the average S&P 500 company paid out 72% of net income in the form of dividends. From 1950-2010, that number dropped to 51%. From 1990-2007, the average was 45%. Over the past year, it's down to 33%. Today, some of the most profitable and fastest growing companies in the world industry giants like Apple, Google, and Cisco pay no dividends at all. It’s the slow growers like Altria, Verizon and Consolidated Edison are where you find yield. That was unheard of 60 years ago.


This emphatically explains just why stocks had consistently out-yielded bonds before 1950. Back then, stocks were essentially just high-yield bonds with variable-rate coupons. Today, companies tend to hoard net income to finance growth, acquisitions, and buybacks. It's inane to compare the two periods without adjusting for that paradigm shift, or else the information is quit simply not accurate.


What happens when you do? Well, if you model the past to assume that S&P companies have always paid out 33% of net income as dividends, like they do today, then prolonged periods of stocks out yielding bonds become incredibly rare. There would have been only two such periods in modern history: from 1940-1944, and 1947-1955.


What stands out for me about these 2 periods in time is they were both phenomenal times to buy stocks. In the 10 years after 1944, stocks surged 161%. In the 10 years following 1955, investors were rewarded with a 145% return and both figures don't include dividends.
I have always been of the thinking that history always repeats itself and when stocks out-yield bonds, it's a great time to buy them. Yes patience may be required, but the rewards for the patient few the profits will make that wait worthwhile. Today, with the average large-cap stock out-yielding Treasuries, there's little reason to think patient investors won't be rewarded for their vision 10 years from now.


The words of my dear friend Brendan Gallagher, and co-founder of Rooney Gallagher, now sadly passed away but his words still live on. He would say Vinnie what we need now is common sense so you leave this to me!!! He would always start things with joke; his theory was “The market price is frequently out of line with the true value. There is, however, an inherent tendency for these disparities to correct themselves”. It is having the foresight to recognise these   market trends and not to follow the crowds that will make fortunes.

# # #

Rooney Gallagher offer the highest quality support and have strong relationships throughout the worlds financial network . We have a large clint base of sophisticated investors, HNW, advising some of the worlds finest institutions for almost 25 years