Do Changes in Stock Prices Cause Recessions?

The economy and the stock market are closely related. Many people examine the stock market to find out how the economy is doing. It's long been known that if the stock market is in a period of decline, the economy is sure to follow. However there is little evidence that the stock market causes the economy to rise or fall. The stock market does not directly affect the economy. It is simply a mirror of people's generally correct beliefs about what is about to happen in the economy. The best way to understand this is to realize that a stock market index the Dow Jones Industrial Average (DJI) is simply a price. Because the value of index is a price, it only has two determinants: supply and demand.

Supply


Any first year college textbook in Economics states that for most goods if the supply increases in the short run then the price of the good should decline. For example, if the car companies suddenly doubled their supply of cars then we would expect the price of cars to fall.

If we thought that changes in the supply of stocks are the main cause of stock market rises and declines then, according to this rule, when a company issues new stock we would expect the price of stock to decline. If stock prices are largely determined by the supply of stocks and the market declines prior to an economic decline, we should see a flood of new stock issues before a recession. This does not happen in practice, as new stock issues tend to occur as the economy enters a growth period. This is because the money made from a stock issue is used to increase the output of the company, which causes economic growth to rise.

Demand


It appears that if we want to understand why the economy tends to move in the same direction as the stock market, we'll have to consider the demand for stocks. To do this, we'll need to understand what motivates an investors decision to buy or sell shares. Many investors such as Warren Buffett evaluate their stock portfolios on their inherent value. The inherent value is the total expected earnings of the company over a time period, discounted by the fact that a dollar today is not worth as much as a dollar tomorrow. If investors believe that a recession is coming, then they will believe that company earnings will be less in the future (since that typically takes place in a recession) which will decrease the inherent value of the stock. When the inherent value of the stock is far below its current price, investors will sell the stock, driving the price of the stock down. If investors believe a boom is coming, they will increase their estimates of the inherent value because future earnings should be higher than they previously expected. Often this will lead to the inherent value being far higher than the current price of the stock, so investors buy the stock. This leads the price of the stock to rise.

The belief that the stock market drives the economy is due to an error in logic. Generally we think that if A came before B that A caused B. Philosophers refer to this as the post hoc, propter hoc fallacy. In this case, the expectation of a decline in the economy causes the stock market to decline today. Or in logical terms, A came before B, because the expectation of B caused A. It's also important to realize that it's not the expectation of future economic changes that is causing changes in stock prices. It's the fact that people are acting on these expectations. If investors bought and sold stocks based on astrological factors or Barry Bonds' current homerun total then these would be causing the price of stocks to change. In a situation like that, it would seem that the stars are causing the price of stocks to change; the economy would have nothing to do with it.

It is because a large number of investors act on this inherent value principle that the economy tends to follow the stock market. Investors are constantly watching macroeconomic variables to try and determine when the next downturn in the economy will happen. Investors are often right when they predict the future growth rate of the economy. As a result, they often sell off their shares before the economy goes into a decline making it look like the stock market is causing a recession. In reality the causality runs the other way because the two things that causes price to change are changes in supply or changes in demand.

Does Wired's Page Count Predict NASDAQ Movements?

The thing I love the most about the internet (other than the fact it provides me with a steady income!) is that I get exposed to a bunch of interesting ideas and theories that I would otherwise not hear about. One such idea making it's way through the blogosphere is the relationship between the number of advertisements in Wired, a technology and society magazine, and the NASDAQ, an American market for high tech stocks. I first learned about this relationship from the blog Marginal Revolution, though the original idea seems to come from The Podcast Network. After correcting for a mistake in his statistics, the author found the following:

I received this months Wired yesterday. I sat down for a few moments to have a flick through, and noticed two things. Firstly, it has a nice swish glossy cover, and secondly, it's fat-just like the dot.com days.

That got me thinking. I wondered how Wired's page count might reflect the technology industry. So I plotted page count against the Nasdaq, and received this surprising result.

Other than a few missing magazines, I've got most of the collection since 1996. You'll note that the Nasdaq (red) tracks Wired's page count (blue). I'm not suggesting you go an buy technology shares, but gee, I'm thinking the reports of money pumping back into technology companies might just be true given the big up-tick in this months page count (294).

It's an interesting concept and would make for a terrific econometrics project for a student looking for ideas.

Any good economic study should begin with a theory and a question with a testable hypothesis. A common theory is that the demand for labor is downward sloping - thus a rise in wages should, all else being equal, cause a reduction in the quantity demanded for labor. The question we can then test based on that theory is, "Have past rises in the minimum wage caused the unemployment rate to rise?" We can collect the data then run a number of statistical tests to see what our data tells us about the answer.

In this case our theory would be that just before or during a boom in a particular sector we should a rise in advertisements for that sector's products. Our particular question is "Does a high tech boom cause more companies to advertise in Wired Magazine?"

We've got data (though it's on the number of pages in Wired, not on the number of ads), but of course, there could be many other possible explanations why the number of ads might rise. We should try to control for these as much as possible. The obvious one, as brought up on Marginal Revolution, is that companies are probably more likely to advertise in the months before Christmas. This is something any good study should control for, by seasonally adjusting the data.

Is there anything else we might want to adjust for? If we're just concerned with fluctuations of the number of pages (or ads) and the level of the NASDAQ, we may want to de-trend the data, as there might be a natural growth trend to both. Is there other trends we might want to account for, such as the rise in personal disposable income?

There are many different directions you can take such a study in. Many economics students often think their project has to be about "classic" economic issues such as interest rates and GDP growth (I know I did when I was a student!), but if you look around the web, you can find all sorts of interesting questions (with data) to investigate. This one in particular interests me, but if it's not your cup of tea, I'm sure you can find something more to your tastes.

What does the value of the Dow Jones represent?

If you read the newspaper, listen to the radio, or watch the nightly news on television, you'll probably hear about what happened to "the market" today. It's all fine and good that the Dow Jones finished up 35 points to close at 8738, but what does that mean?

The Dow Jones Industrial Average (DJI), commonly just referred to as "The Dow", is an average of the price of 30 stocks. The stocks represent 30 of the largest and most widely traded stocks in the United States. The Dow Jones Corporation, the administrators of the index, changes the stocks in the index from time to time. On November 22, 2002, the following 30 stocks were components of the index:

3M, Alcoa, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, E.I. DuPont de Nemours, Eastman Kodak, Exxon Mobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Honeywell, Intel, IBM, International Paper, J.P. Morgan Chase, Johnson & Johnson, McDonald's, Merck & Co., Microsoft, Philip Morris, Procter & Gamble, SBC Communications, United Technologies, Wal-Mart, and Walt Disney.

The Dow Jones Industrial Average is computed by taking the average price of the 30 stocks and dividing that figure by a number called the divisor. The divisor is there to take into account stock splits and mergers. Otherwise the index would decrease whenever a stock split took place. Suppose a stock on the index worth $100 splits is split or divided into two stocks each worth $50. If we did not take into account that there are twice as many shares in that company as before the DJI would be $50 lower than before the stock split because one share is now worth $50 instead of $100.

The divisor is determined by weights placed on all the stocks (due to these mergers and acquisitions) and changes quite often; at November 22, 2002 the divisor was equal to 0.14585278. So if you took the average cost of each of these stocks on November 22 and divided this number by 0.14585278, you'd get the closing value of the DJI on that date which was 8804.84. You can also use this divisor to see how an individual stock influences the average. If the price of International Paper increases by two points, the DJI would increase by 13.7 points assuming none of the other stock values changed (13.7 = 2 / 0.14585278). Because of the formula used by the Dow a one point increase or decrease by any stock will have the same affect, which is not the case for all indices.

So the Dow Jones number you hear in the news each night is simply this weighted average of stock prices. Because of this, the Dow Jones Industrial Average should just be considered a price in itself. So when you hear that the Dow Jones went up 35 points, it just means that to buy these stocks (taking into account the divisor) at 4:00pm today (the closing time of the market) it would have cost 35 more dollars than it would have cost to buy the stocks the day before at the same time. That's all there is to it.

Globalization, Unemployment and Recessions. What is the Link?

We do not see great differences in firm closures between periods of high growth and periods of low growth. While 1995 was the beginning of a period of exceptional growth, almost 500,000 firms closed shop. The year 2001 saw almost no growth in the economy, but we only had 14% more business closures than in 1995 and fewer businesses filed for bankruptcy in 2001 than 1995.

Typically there are more firm closures in recessions than in periods of growth, but the difference is very small. We see firm closures in boom periods as well, for several reasons. Two of the larger factors are:

1. Competition between firms in periods of growth: During a period of high economic growth, some firms still perform better than others. Those high performing ones can often squeeze weaker performing ones out of the marketplace, causing firm closures.

2. Structural changes: High economic growth is often caused by technological improvements. More powerful and useful computers can drive economic growth, but they also spell disaster for companies that manufacture or sell typewriters.

Globalization can be considered a structural change just as technological growth is. As such, the resulting job losses and wage reductions fall into the structural category of unemployment that we saw in Would 0% Unemployment Be a Good Thing?:

1. Cyclical Unemployment is defined as occuring "when the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high." When the economy goes into recession and workers are laid off, we have cyclical unemployment.

2. Frictional Unemployment: The Economics Glossary defines frictional unemployment as "unemployment that comes from people moving between jobs, careers, and locations." If a person quits his job as an economics researcher to try and find a job in the music industry, we would consider this to be frictional unemployment.

3. Structural Unemployment: The glossary defines structural unemployment as "unemployment that comes from there being an absence of demand for the workers that are available". Structural unemployment is often due to technological change. If the introduction of DVD players cause the sales of VCRs to plummet, many of the people who manufacture VCRs will suddenly be out of work.

Overall, I believe the rules aren't changing. We've always had structural unemployment, whether it be from technological change or from plants moving to other locales (such as a chemical factory moving from New Jersey to Mexico, or a car plant moving from Detroit to South Carolina). Overall the net effect of technological growth or increased globalization tends to be positive, but it does create winners and losers, something we must always remain aware of.

Why Don't Prices Decline During A Recession?

[Q:]When there is an economic expansion, demand seems to outpace supply, particularly for goods and services that take time and major capital to increase supply. As a result, prices generally rise (or there is at least price pressure) and particularly for goods and services that cannot rapidly meet the increased demand such as housing in urban centers (relatively fixed supply), advanced education (takes time to expand/build new schools), but not cars because automotive plants can gear up pretty quickly.

First, do you agree with this and if not, how do you see it?

Second, when there is an economic contraction, supply initially outpaces demand. However prices for most goods and services don't go down, and neither do wages.

My main question is why don't prices go down for goods and services? I expect for wages, it's just stickiness from the corporate/human culture... people don't like to give pay cuts... managers tend to lay off before they give pay cuts (though I've seen exceptions). Why don't prices go down for most goods and services?

[A:] Great question! Your analysis is spot on. Now on to your question:

In my article titled Why Does Money Have Value we saw that changes in the level of prices (inflation) was due to a combination of the following four factors:

1. The supply of money goes up.


2. The supply of goods goes down.


3. Demand for money goes down.


4. Demand for goods goes up.

In a boom, we would expect that the demand for goods to rise faster than the supply. All else being equal, we would expect factor 4 to outweigh factor 2 and the level of prices to rise. Since deflation is the opposite of inflation, deflation is due to a combination of the following four factors:

1. The supply of money goes down.


2. The supply of goods goes up.


3. Demand for money goes up.


4. Demand for goods goes down.

We would expect the demand for goods to decline faster than the supply, so factor 4 should outweigh factor 2, so all else being equal we should expect the level of prices to fall.

From my article titled A Beginner's Guide to Economic Indicators we saw that measures of inflation such as the Implicit Price Deflator for GDP are procyclical coincident economics indicators, so the inflation rate is high during booms and low during recessions. The information above shows that the inflation rate should be higher in booms than in busts, but why is the inflation rate still positive in recessions?

The answer is that all else is not equal. The money supply is constantly expanding, so the economy has a consistent inflationary pressure given by factor 1. The Federal Reserve has a table listing the M1, M2, and M3 money supply. (To learn about these definitions, see How much is the per capita money supply in the U.S.?). From Recession? Depression? we saw that during the worst recession America has experienced since World War II, from November 1973 to March 1975, real GDP fell by 4.9 percent. This would have caused deflation, except that the money supply rose rapidly during this period, with the seasonally adjusted M2 rising 16.5% and the seasonally adjusted M3 rising 24.4%. Data from Economagic shows that the Consumer Price Index rose 14.68% during this severe recession. A recessionary period with a high inflation rate is known as stagflation, a concept made famous by Milton Friedman. While inflation rates are generally lower during recessions, we can still experience high levels of inflation through the growth of the money supply.

So the key point here is that while the inflation rate rises during a boom and falls during a recession, it generally does not go below zero due to a consistently increasing money supply.

Why Do Government Budget Deficits Grow During Recessions?

There is a relationship between budget deficits and the health of the economy, but is certainly not a perfect one. There can be massive budget deficits when the economy is doing quite well - the past few years of the United States being a prime example.

That being said, government budgets tend to go from surplus to deficit (or existing deficits become larger) as the economy goes sour. This typically happens as follows:

1. The economy goes into recession, costing many workers their jobs, and at the same time causing corporate profits to decline. This causes less income tax revenue to flow to the government, along with less corporate income tax revenue. Occasionally the flow of income to the government will still grow, but at a slower rate than inflation, meaning that flow of tax revenue has fallen in real terms.

2. Because many workers have lost their jobs, their is increased use of government programs, such as unemployment insurance. Government spending rises as more individuals are calling on government services to help them out through tough times.

3. To help push the economy out of recession and to help those who have lost their jobs, governments often create new social programs during times of recession and depression. FDR's "New Deal" of the 1930s is a prime example of this. Government spending then rises, not just because of increased use of existing programs, but through the creation of new programs.

Because of factors one, the government receives less money from taxpayers, while factors two and three, the government spends more money. Money starts flowing out of the government faster than it comes in, causing the government's budget to go into deficit.

Do Changes in Stock Prices Cause Recessions?

The economy and the stock market are closely related. Many people examine the stock market to find out how the economy is doing. It's long been known that if the stock market is in a period of decline, the economy is sure to follow. However there is little evidence that the stock market causes the economy to rise or fall. The stock market does not directly affect the economy. It is simply a mirror of people's generally correct beliefs about what is about to happen in the economy. The best way to understand this is to realize that a stock market index the Dow Jones Industrial Average (DJI) is simply a price. Because the value of index is a price, it only has two determinants: supply and demand.

Supply


Any first year college textbook in Economics states that for most goods if the supply increases in the short run then the price of the good should decline. For example, if the car companies suddenly doubled their supply of cars then we would expect the price of cars to fall.

If we thought that changes in the supply of stocks are the main cause of stock market rises and declines then, according to this rule, when a company issues new stock we would expect the price of stock to decline. If stock prices are largely determined by the supply of stocks and the market declines prior to an economic decline, we should see a flood of new stock issues before a recession. This does not happen in practice, as new stock issues tend to occur as the economy enters a growth period. This is because the money made from a stock issue is used to increase the output of the company, which causes economic growth to rise.

Demand


It appears that if we want to understand why the economy tends to move in the same direction as the stock market, we'll have to consider the demand for stocks. To do this, we'll need to understand what motivates an investors decision to buy or sell shares. Many investors such as Warren Buffett evaluate their stock portfolios on their inherent value. The inherent value is the total expected earnings of the company over a time period, discounted by the fact that a dollar today is not worth as much as a dollar tomorrow. If investors believe that a recession is coming, then they will believe that company earnings will be less in the future (since that typically takes place in a recession) which will decrease the inherent value of the stock. When the inherent value of the stock is far below its current price, investors will sell the stock, driving the price of the stock down. If investors believe a boom is coming, they will increase their estimates of the inherent value because future earnings should be higher than they previously expected. Often this will lead to the inherent value being far higher than the current price of the stock, so investors buy the stock. This leads the price of the stock to rise.

The belief that the stock market drives the economy is due to an error in logic. Generally we think that if A came before B that A caused B. Philosophers refer to this as the post hoc, propter hoc fallacy. In this case, the expectation of a decline in the economy causes the stock market to decline today. Or in logical terms, A came before B, because the expectation of B caused A. It's also important to realize that it's not the expectation of future economic changes that is causing changes in stock prices. It's the fact that people are acting on these expectations. If investors bought and sold stocks based on astrological factors or Barry Bonds' current homerun total then these would be causing the price of stocks to change. In a situation like that, it would seem that the stars are causing the price of stocks to change; the economy would have nothing to do with it.

It is because a large number of investors act on this inherent value principle that the economy tends to follow the stock market. Investors are constantly watching macroeconomic variables to try and determine when the next downturn in the economy will happen. Investors are often right when they predict the future growth rate of the economy. As a result, they often sell off their shares before the economy goes into a decline making it look like the stock market is causing a recession. In reality the causality runs the other way because the t

Recession? Depression? What's the difference?

The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. I will try to summarize both terms and explain the differences between them in a way that almost all economists could agree with.

Recession: The Newspaper Definition


The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.

Recession: The BCDC Definition


The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a better way to find out if there is a recession is taking place. This committee determines the amount of business activity in the economy by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.

Depression


Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

The Difference


So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.

By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn't had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition.

Now you should be able to determine the difference between a recession and a depression without resorting to the poor humor of the dismal scientists.

The Insider Trading Scandal - What did Martha Do?

Martha Stewart has been in the news for several months because the U.S. Securities and Exchange Commission believes that Martha Stewart was told by her friend Sam Waksal that his company ImClone's cancer drug had been rejected by the Food and Drug Administration before this information was made public. This rejection was a huge blow to his company and the price of its stock went down dramatically. However, Martha Stewart wasn't financially hurt because she had her broker sell her 4000 shares before this news was made public. If this is true, and it should be noted it hasn't been proven yet, then Martha Stewart is guilty of insider trading.

What Is Insider Trading?

When most people hear the term "insider trading" they think of the illegal version. However, the term "insider trading" can also mean the perfectly legal buying and selling of stock by a company's corporate insiders. Insider trading is legal when these corporate insiders trade stock of their own company and report these trades to the U.S. Securities and Exchange Commission (SEC). That way the insider trading is not kept a secret and anyone can find out a corporate insider's opinion of his or her company.

Insider trading is only illegal when a person bases their trade of stocks in a public company on information that the public does not know. It is illegal to trade your own stock in a company based on this information but it is also illegal to give someone that information, a tip, so they can trade their stock.

Why Is Insider Trading Illegal?


The SEC's job is to make sure that all investors are making decisions based on the same information. Insider trading can be illegal because it destroys this level playing field.

Punishments and Rewards Associated With Insider Trading


According to the SEC website there are almost 500 civil enforcement actions each year against individuals and companies that break securities laws. Insider trading is one of the most common laws broken. The punishment for illegal insider trading depends on the situation. The person can be fined, banned from sitting on the executive or board of directors of a public company and even jailed.

The Securities Exchange Act of 1934 in the United States allows the Securities and Exchange Commission to give a person a reward "a bounty" to someone who gives the Commission information that results in a fine of insider trading.

Microsoft: employee stole documents for patent lawsuit

Microsoft is accusing ex-employee Miki Mullor of using his inside access to download internal documents for a patent complaint that his startup company, Ancora Technologies, has since filed against Dell, HP, and Toshiba. The suit alleges that the companies are infringing on Ancora's patent by selling computers with Windows Vista preactivated, which is possible thanks to one of Microsoft's anti-piracy technologies, System Locked Preinstallation (SLP). When Seattle Tech Report covered this story, the publication noted that Ancora's website described the case as follows:

To secure each copy of (Windows), without burdening the honest user, (PC makers) use a technology known as System Locked Pre-Installation (SLP) to protect Windows against piracy. SLP is Ancora's technology and is covered by our pioneer patent, US Patent 6,411,941. This lawsuit is about protecting our patent rights from being infringed by HP, Dell and Toshiba. This is not David vs. Goliath. This is David vs. three Goliaths.

On January 22, Microsoft filed its own lawsuit in King County Superior Court in Seattle, which claims Mullor wrote in his October 2005 Microsoft employment application that he no longer worked for Ancora because it was out of business. Nor did he disclose when hired that he believed SLP infringed on an Ancora patent. Microsoft, which is intervening in Ancora's patent lawsuit to defend its technology (and the PC makers) against the patent-infringement claims, now becomes Goliath number four.

Mullor, on the other hand, said he informed Microsoft about his patent in his résumé and employment agreement, though he notes that Ancora had ceased business operation before he applied to Microsoft. The documents Mullor downloaded from Microsoft before Ancora filed the lawsuit included information on the SLP and the upcoming Windows 7 operating system, according to Microsoft's complaint. They were downloaded onto Mullor's company-issued laptop, after which Mullor allegedly deleted them, then tried to hide his tracks by using software that overwrites deleted files.

Mullor was still a Microsoft employee when Ancora filed the suit against the PC makers; he was hired as a program manager in the Windows Security Group in November 2005. But in June 2008, four days after allegedly trying to hide his downloading activities, Ancora filed its patent lawsuit. In September 2008, Microsoft intervened as a party-defendant in the case and fired Mullor.

The Ancora patent is dated June 25, 2002, and Mullor claims he approached Microsoft in 2003 to discuss the "benefits Microsoft could realize by using it," but Microsoft wasn't interested. He believes Microsoft developed technology that is the subject of the patent lawsuit after his offer. Mark Cantor, an attorney representing Ancora in the patent litigation, said Mullor denies any wrongdoing, and described the Microsoft complaint as "simply a retaliatory lawsuit by Microsoft to get the patent case transferred to Seattle."

The patent case is scheduled for trial in a Los Angeles federal court on January 26, 2010, but Microsoft is seeking a court order barring Mullor from any involvement in the patent claim, which would bar him from assisting Ancora with prosecuting the suit with or without the documents he downloaded from the software giant. Mullor has given a statement on the situation, which you can read most of at the Seattle Tech Report.

The Best Stock to Own

Do you have a very best stock? A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years with dividend reinvestment? In terms of returns, Kraft has quite literally been the very best stock of the past half-century.

I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders like Oracle (Nasdaq: ORCL) are underserving their owners.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Procter & Gamble (NYSE: PG) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 2.8%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.

Speaking of companies with strong brands, I'm taking a hard look at Mattel, which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. The stock has been beaten down hard in the last year, unlike its competitor Hasbro (NYSE: HAS). But I believe brighter days lie ahead as the company continues to work with A-list partners like DreamWorks (NYSE: DWA). The 4.9% dividend yield should make the wait that much easier.

But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine StatoilHydro (NYSE: STO), a big-name in North Sea energy exploration and distribution. The company has been battered by declining energy prices across the world, but remains well-positioned to serve energy consumers in Norway, the U.S. and the rest of Europe. Like ExxonMobil (NYSE: XOM), StatoilHydro should benefit from a long-term increase in fossil-fuel demand. Plus, you'll be collecting a healthy dividend yield along the way.

The Foolish bottom line
These stocks aren't companies that are perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.

Looking for more stock ideas? Income Investor is beating the market by more than seven percentage points -- and I'm offering a free guest pass. Simply click here to learn more.

More togetherness now for Bill and Melinda Gates

Since Bill Gates left his full-time job at Microsoft Corp., his wife sees much more of him during the day - but not because he's at home. They work in adjoining offices running the world's biggest philanthropic organization, the Bill & Melinda Gates Foundation.

"We have offices that are side-by-side now at the foundation," Melinda French Gates said. "That's really nice because we have a door that passes between them in the back. We can pop into each other's office."

They share ideas about foundation projects for the health and development of the poorest people in the world and to improve education in the United States.

And, put in Bill Gates, they travel - sometimes together and sometimes apart - as they look into the best ways to help the world's poorest people in remote corners of the globe.

They were together for a series of appearances and meetings at the World Economic Forum. Melinda Gates has come from Tanzania, where she was looking into work against malaria, and Ethiopia, where she was seeing what the foundation can do to help make 3,000 new rural health centers more effective.

He's been in Belgium checking on progress toward a malaria vaccine. After Davos, he heads to Nigeria for a couple of days to encourage immunization against polio in one of the world's most affected countries. He visited the other, India, several months ago. He's convinced the world can wipe out the disease with a little more effort.

The couple, sitting next to each other, looked relaxed during an interview Friday with The Associated Press at the World Economic Forum in the Swiss Alpine resort of Davos. They alternate in answering questions, picking up where the other leaves off.

"It's my full-time job," said the co-founder of Microsoft who left his full-time job at the software giant last July amid concerns from friends that he wouldn't find his new role as engaging or rewarding. "Even though I loved my old one a lot, this one's every bit as good."

He said he was "maniacally" devoted to developing software aimed at making computers cheap and available for everyone.

Melinda Gates is heading back home to Seattle to be with the couple's children - Jennifer, 12, Rory, 9, and Phoebe, 6 - the major constraint on their travel.

"We have three young kids, so we're obviously very committed to being in Seattle and being there when they're in school, and then they travel with us quite a bit to," she said. "They're too young to get involved in the foundation. That will be still yet to come."