Tuesday, October 06, 2009

Two stories in search of a train wreck

The WSJ posted two stories today that just seemed to Guambat to be somehow incongruous.

First, in the pump and dump meme, was:
Stocks with Rising Dividends Are Fewer, but Worth the Hunt

Investors seeking income growth with less risk than that posed by the broad stock market have long bought shares of companies that regularly boost dividends.

Many such funds posted returns of minus 25% or worse for 2008. Although that wasn't quite as bad as last year's almost 40% drop in the Standard & Poor's 500-stock index, the poor performance of such funds stunned shareholders who thought they had chosen a fairly conservative investment approach.

But if you are thinking about throwing in the towel on dividends and dividend-focused funds, there may be reasons to reconsider.

And so on.

But, whether mere coincidence, Reg D, or simply mischievousness, there was this:
Borrowing for Dividends Raises Worries

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets [now there's a chicken and egg question], investors have been driven to take on more risk.

In any event, neither story referenced the other.

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