Now may be the time to seek dividends

Here's another way to look at the stock market, and thepossibility of making money. It comes from Eugene Lerner.

Lerner has had a good handle on this bull market in stocks,although he tends to shrug off praise. As he says, he's been bullishin a bull market, not a difficult position to take. But then thereare others who have been predicting doom since August, 1982 when themarket started moving from the 777 mark on the Dow Jones industrialaverage.

In any event, Lerner is professor of finance at NorthwesternUniversity's Kellogg Graduate School of Management. He is alsopresident of an Evanston money managment firm called DisciplinedInvestment Advisors. The firm has $300 million under management.

Lerner now is talking about dividends.

In a bull market aggressive investors don't even think aboutdividends. Capital gain is the thing. Why consider a dividend basedon a yield of 3 or 4 percent, or even 6 or 8 percent when you candouble you money in a stock that is marching right along from $20 ashare to $40?

Lerner has been over in that camp. Normally, his disciplinedapproach to buying a stock demands good, solid fundamentals and afavorable long-term outlook for earnings.

But there was a time when he was even buying Union Carbide.That was shortly after the disaster in India had knocked the propsout from under the stock. Texaco was also a favorite of his. Theoil stocks were no good, and Texaco had that multibillion-dollarjudgment against it in the Pennzoil acquisition case. In both caseshe was buying into major corporations and looking for a good bounceback in the stock price from panic lows, and he was right.

Now Lerner is intrigued by total return, that is, stocks thatmight edge up in price so that they could be sold at a profit, butstocks that also offer a healthy dividend.

You have this very simple proposition, he says. Congress in itswisdom has done away with the special tax treatment previouslyaccorded capital gains. This year, what remains of it, provides amaximum tax of 20 percent on the profits from long-term investment.Next year stock market profits will be taxed at the same rates asordinary income. Thus the 20 percent rate could go to 28 percent oreven 33 percent for 1987 gains.

So, says Lerner, "a dividend stock may be better than one thatdoes not pay a dividend. There's no sense in killing yourself, thatis, taking big risks in the hopes of capital gains, when you can lockin a good divident yield from a solid stock."

The trend is already going that way, Lerner says, offering thissubstantial evidence:

The Dow Jones industrial average has gained more in the lastmonths than the Standard & Poor's 500 index, and the Standard &Poor's 500 has turned in a better showing than the Value Line index.

The Dow clocks only 30 stocks, those huge industrials likeGeneral Motors and IBM. Most of the 500 stocks in the S&P index areof good size, but the spectrum is broad in size and in activity.

Then there's the Value Line covering 1,500 companies of varioussizes, the managers of which are only hoping they could declare adividend.

"The trend toward the dividend stocks is rather obviously underway," Lerner says, "and should continue for quite some time. Thecorporations themselves will be recognizing the value of dividendsincreasingly in the future."

By that Lerner means that corporate managers will be inclined togive stockholders a break by increasing the dividend instead ofinvesting corporate money in expansion and growth. If expansion isindicated, he says, the corporation may opt for bank borrowings whileusing corporate cash for a dividend increase.

Rather obviously that might be good for stockholders and stockprices. But long term there's the question: Should profits goimmediately to stockholders in the form of dividends or should themoney be plowed back into growth?