How To Play Strong Balance Sheets

Even during tough economic times, profits of US companies are rising.  However, the benefits are not flowing through to the labor market (see previous post) or the broader economy.  These profits are increasing mainly due to cost cutting, and firms are paying out higher dividends to shareholders or increasing the amount of cash held on the balance sheet as opposed to investing the excess funds.  

This New York Times article goes into greater detail regarding the profit situation for US firms.  There are numerous options for investing with an attempt to take advantage of this environment.  Here are a few:

1. M&A:  One may expect M&A activity to pick up at a time like this, but deal flow has not increased to the extent you might expect.  
2. Pick high dividend stocks
3. Dividend ETFs:  A safer play than trying to pick individual stocks and be exposed to idiosyncratic risk is to hold an entire index of dividend-paying stocks.  I personally like Vanguard High Dividend Yield (VYM) for this purpose.  The fund holds large cap U.S. stocks and charges a low expense ratio of 0.20%.  The current yield is 3.17% which might increase if companies continue to pay out higher dividends.  Another dividend play is the iShares DJ Select Dividend (DVY).  The main difference between VYM and DVY is that DVY holds smaller firms and pays out a slightly higher dividend.  The current yield is 3.94%.  However, while still affordable, DVY's expense ratio is 0.40%.