With investors feeling more confident than ever about the state of the economy as we approach retail’s biggest day of the year, Black Friday, it’s time to take a sober look at where things really stand. Two very serious metrics stand to trip up and hopes of a sustained recovery – unless you’re positioned to ride out the storm. Here’s everything you need to know…

As you might expect from the editor of a dividend advisory, I spend quite a bit of time focusing on income stocks. And over time, I’ve noticed some dividend trends that have had serious implications in the larger economy.

In the past, I told you about the crossover between dividend increases and dividend cuts in the market. All signs point to a bottom in the income market. This month, let’s take a wider view:

It looks like we are reverting to the means, but we aren’t out of the water just yet. When you look back over the last five years, the number of increases is still low and the number of decreases is still high.

Regardless of this trend, and where these numbers were historically, we can make a few conclusions about where these might go from here.

If you’ve been following some of our sister publications, you’ve already heard about the coming “second wave”. The chart from Whitney Tilson and Glenn Tongue of T2 Partners — based on a now-infamous Credit Suisse chart — we showed you does a better job of describing what to expect than words can:

The chart shows the number of resets in variable rate mortgages. If you compare the dividend movement chart with this, you can see the spike in payment cuts correlates to about six months after the peak in subprime resets. That’s all it took for these homeowners to get over their heads, have the homes foreclosed and send the economy into a tailspin. Companies quickly realized that credit was impossible to find and had to reserve capital by cutting or suspending dividend payments.

As this next mountain of resets approaches, you can bet S&P companies will keep a closer eye on the mortgage industry this time around…even if they aren’t in the financial sector.

Companies that have already increased their payments gained confidence in the stock market rally and rise in available credit. A second downturn would devastate both. We can only guess what that’ll do to dividends in the S&P.

And don’t think we’ll have the same size of rally after that downturn. There won’t be any TARP 2.0. At least it won’t be nearly the same size. There’s just no money left. Obama is running out of political capital, and it looks like the worst will occur during an election year. No one will want to spend trillions more to fund another bank bailout.

It could be one of the worst times to be a speculator in the market… unless of course you’re shorting it. It’s also a pretty bad time to be an income investor, if you don’t know what you’re doing. This year is already on record as the worst for dividends since 1955.

My Lifetime Income Report readers, however, haven’t suffered a bit. Of the 491 dividend cuts so far this year, not a single one affected us. Our income plays have only gone up, faster and faster. We’ll be able to take advantage of these paychecks in coming months as others face recession round two.

As usual, we’ll be keeping close tabs on the situation and filling you in as things develop.

Sincerely,
Jim Nelson

November 25, 2009

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

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