THE UNYIELDING MARKET

By Daniel Kadlec

People once bought stocks primarily because of the notion that the company would return a chunk of its earnings to them in the form of a hefty dividend. How quaint. The average blue-chip company now pays such a stingy dividend that the yield, which is the dividend divided by the stock price, is less than 2%--a payout so low it had been considered imponderable for most of this century. Yet here it is, another landmark racing past the windshield of this bull-market dragster. Should you care if the typical stock now yields a paltry 1 point something? After all, it's not as though your baby sitter were paging you at the opera. But yes, you should. For a lot of reasons, this is worrisome.

Today's unspeakably low dividends are a smack-between-the-eyes testament to dramatic and fundamental changes in the stock market in the 1990s. That's not to say the market has changed for the worse. Stocks have been a phenomenal investment this decade. But don't kid yourself. Risks have escalated. Investors failing to recognize that could get blindsided by a market drop. Or maybe they'll just become disenchanted, either by a return to far lower rates of return or by a dearth of the conservative widows' and orphans' stocks that used to make investing safe and simple.

I'll get back to all that. But first consider just how out-of-the-box this dividend score is. Since 1928, when record keeping started, the dividend yield of the widely watched Standard & Poor's 500 stock index has tended to float between 3% and 6%. Until now, the lowest it ever got was 2.6% in both 1973 and 1987--just ahead of huge market declines.

Don't let that scare you, though. Much has changed, which is why the yield sank to last week's low of 1.99% without disrupting the bull market. Today companies hold back more of what they earn, opting not to increase dividends but to reinvest in operations or buy stock on the open market. This year, for example, blue-chip companies will report record high earnings but pay out a record low portion of those earnings as dividends (37%, vs. a post-World War II average of 52%).That's O.K., so long as reinvesting and buying back shares have their intended effect of pushing the stock higher. Tax issues aside, a stock that carries a meager 2% dividend yield but goes up 10% is every bit as good as a stock that has a 7% yield and goes up 5%. Both return a total of 12% to the stockholder.

But how would you rather be paid? The dividend is far more certain. There's never a guarantee a stock will go up, even if business is great. With few exceptions, dividends get paid and often raised, especially if business is great. For conservative income-oriented investors, shriveling yields mean greater risks.

All but gone are the days when you could easily buy a quality bank or phone stock, live off the dividends and still watch the stock rise. Now, if you crave big dividends, you're pretty much stuck with the tainted tobacco industry or iffy electric utilities. You could choose other stocks, sell them as they rise and live off the gains. Indeed, tax law favors such capital gains over dividend income for most people. But the hitch appears when the stock market reverses or slows, which it eventually must. Then, investors seeking steady income are stuck with a sickly 1 point something. And given today's record-high profits, that's a crime.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at kadlec@time.com