Now that 2012 is right around the corner, expect to see a bunch of articles popping up touting predictions for the coming year. Call me skeptical, but I tend to place little faith in these articles claiming to tell you exactly where the Dow Jones (DJI) or S&P 500 (SPY) will end up in the next 12 months, or what the price of Apple (AAPL) or Amazon (AMZN) will be in December 2012. Just for the heck of it, I went to CNN Money to dig up its "expert predictions" for 2011 to see how well they did. If you want to read the article, you can check it for yourself.
According to the panel of experts, this was the prediction for 2011: "Stocks have had a great run since bottoming out nearly two years ago, and Wall Street experts anticipate 2011 to be no different… 'Everything seems to be in place for the stock market to rise,' said Weeden & Co. market strategist Steven Goldman, whose twelve-month target for the S&P 500 fell right in line with consensus estimates of 1,390."
According to the projections by "expert" analysts interviewed by CNN Money this past January, the lowest year-end estimate for the S&P 500 is 1,300. The highest estimate came in at 1,520, and the consensus estimate was 1,391. In his interview with CNN Money, David Kostin of Goldman Sachs predicted that the S&P 500 would rise 15% to 1,450 by the end of 2011--he noted that company balance sheets have never been stronger (with more than $1 trillion in cash), and the path to earnings has rarely been smoother.
Of course, with the S&P 500 at 1,265 as of December 27, 2011, it is highly unlikely that the S&P 500 will reach the consensus estimates by year end. I didn't included this information to call out CNN Money or make fun of the experts for predicting that the S&P 500 would have hit 1,390 by year end, but rather, to demonstrate just how true Benjamin Graham's claim that "in the short run, the stock market is a voting machine; in the long run, it is a weighing machine" often turns out to be. It's foolish to pretend that we can exert control and tell when exactly stock market movements will take place. Even if you predict that Warren Buffett will manage to grow Berkshire Hathaway (BRK.A) earnings by 12% in the coming year (and Buffett indeed manages to do so), there is no guarantee that the price of Berkshire stock will increase by that amount. Most likely, yes, the stock price will eventually rise to reflect earnings growth, but it's foolish to pretend that you can control exactly when that will happen.
Analysts like Kostin are correct to note that many mega-cap American companies are flush with cash and have much more predictable earnings patterns than during the financial crisis, but I disagree with him when he takes the next step to give predictions on how exactly this will show up in the price of the S&P 500.
This is where it gets a lot easier being an investor focusing on dividend-growth companies with steady cash flows and long, predictable records of raising their dividends like clockwork. I included a chart of five of my favorite dividend growth companies-Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ), PepsiCo (PEP), and Colgate-Palmolive (CL). I posted their current quarterly dividend along with my best guess of the dividend that each of those five companies will be paying out this time next year.
(Click chart to expand)
I have absolutely zero ability to tell you what price shares of Coca-Cola will be trading at on December 27, 2012. But that doesn't have to make me helpless as an investor. I can look at charts noting Coke's stellar history of not only paying a dividend every quarter for the past few decades, but I can also recognize that Coke management has a record of raising the company's dividend by about 8% annually over the past decade. Coke generated billions of dollars in profits last year, is on pace to increase that amount by 6.5%-10% this year, and I'd be willing to bet that Coke will pass some of those additional profits on to investors in the form of a higher dividend (and even if Coke's earnings remained as flat as a warm soda for the next couple of years, the fact that only half of its earnings get paid out as dividends ensures that Coke could afford to raise its dividend by increasing its payout ratio for a few years in the event of a two to three year stretch of earnings stagnation).
If you focus on the increasing dividend income generated by your investments instead of the absolute return, you can shift the grounds of the conversation entirely and exercise more control over stocks than those who merely hope for stock price appreciation. Let's say you owned 15 companies like Coke, Pepsi, Johnson & Johnson, Procter & Gamble, and Colgate-Palmolive with strong records of earnings and dividend growth to serve as the backbone of your portfolio. I can't tell you with 100% certainty that Coke will raise its dividend in the coming year, but I can tell you that it's very, very unlikely that it won't. And if you own a dozen companies with decades of continued dividend growth under their belts, then you're going to be able to predict within a 10%-15% range exactly how much dividend income you will be generating in the coming year. And that's the kind of surety that those who play the total returns game wish they could have.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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