Two bullish reports see stocks and dividends rising in 2010

Goldman Sachs (GS) strategists predict the S&P 500 rally will continue in 2010 with a further increase of 13%, hitting a top of 1,250. S&P analysts also see better times coming: They predict that total dividend payouts from S&P 500 companies will rise by at least 6.1% and in the most optimistic scenario could go up by as much as 8.9%.

Both predictions will be welcome to those who missed the 63% rally in the S&P 500 since March 9 because at least there would still be a wave to catch. Most of the rally was spurred by about $12 trillion in spending by governments worldwide. And as interest rates remain low and corporate revenue grows, more investors are turning back to stocks.Goldman Sachs analysts expect that "continued profit margin resiliency" helped by aggressive cost reductions will boost returns in 2010 and push the S&P 500 toward 1,300. But the report projects that as interest rates tighten in 2010, equity investors will begin to exit the market. So if you do plan to invest in stocks to get in on the gains, watch interest rates closely for your exit timing.

In a related report, Standard & Poors forecasts at least a 6.1% raise in total dividend payouts from S&P 500 companies. That will reverse the estimated 21.4% decline in 2009. If S&P's prediction proves correct, that will be the first time since 2007 that the S&P 500 dividend payments have risen.

Over the past two years, $60 billion in dividend payments have been lost even as more U.S. companies raise their payouts than cut them. To date there have been 388 dividend increases in 2008 and 2009, compared with 140 decreases or suspensions.

Beware of Rising Unemployment

So why have cuts and suspensions outpaced the increases? The 147 dividend increases so far this year totaled $9.5 billion, while the 78 dividend cuts and suspensions combined totaled $48 billion.

S&P still expects to see some dividend decreases, but it projects that improving economic conditions will finally result in companies slowly increasing their payouts. Don't expect huge increases though. S&P sees them ranging in the mid- to high- single digits, with 2010's second half looking better than the first.

But all bets are off if U.S. unemployment continues to rise. In that scenario, S&P projects that dividends could fall another 20% next year.

So in addition to watching rising interest rates as a signal to begin exiting stocks, also follow the unemployment statistics. If joblessness goes down, dividends could rise. But if it goes, look for a further fall in payouts.

Lita Epstein has written more than 25 books including Trading for Dummies and The Complete Idiot's Guide to Value Investing.
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