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Weekly eLetter 5/7/2021 -– The Return of Dividends

I’m sure it happens to you too, a couple of days of just feeling blah. Not really ill but not bright-eyed and bushy-tailed either. Nothing to see the doctor about (not yet anyway) but you might check your temperature and, just for good measure, your blood pressure. Once you see that these are OK, you might actually start to feel better. Why do I bring this up? Because, there is an analogy in the markets. (See what I did there? Snuck it right in.)

When we attempt to get a reading on how the markets, in general, feel about current and future financial conditions we take a look at corporate earnings: as the quarterly reports come in, we start to tally the scores. If earnings are good and forecasts are positive, we see those as strong indicators of rising confidence. Good news usually produces more good news. A couple more things are also great indicators: Capital inflows and the paying of dividends. In a recovering economy these last two indicators tend to tell more of a story than do earnings, per se.

According to a report from Bob Pisani at CNBC: “In April 2020, two dozen companies in the S&P 500 reduced or suspended their dividends — more suspensions and dividends came later in the year.”

Indeed, a year ago we were still in the early days of the Covid Pandemic and nobody had an inkling of the scope and magnitude of its eventual impact. Now, the general feeling is that 1) most of the trouble is behind us and 2) we have visibility of where we might be going. Here’s the evidence: In April of 2021 rather than seeing companies reduce or suspend dividends, a lot of them are re-instating and / or increasing them. Howard Silverblatt, senior index analyst from S&P Global Indices tells Pisani “…remember, when a company pays a dividend, it is expected that it will keep that dividend going. That is a commitment from the company, and they don’t make that decision lightly.”

And, about those capital inflows, Exchange Traded Funds (ETFs) continue to garner attention from various quarters. Inflows to ETFs have increased every month thus far (into 2021). Also getting attention is the ‘socially conscious’ subset referred to as ESG (Environmental, Social and Governance). It seems that it is becoming quite popular to make ‘changing the world’ part of one’s portfolio. Trendy? Yes. But we’ll have to see how this goes. We are just cynical enough to suspect that the whole movement could be hijacked by various marketing departments. Meanwhile, putting considerations of motive aside, ESG is welcome – as is anything that attracts liquidity to the trading floor.

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