Dividends Are Stronger Than Ever
Dan Caplinger - October 12, 2012
With dividend-paying stocks more popular among investors than ever, some controversy has arisen about whether there's a dividend bubble that could send those stocks plunging in the future. Yet despite extreme investor optimism about dividend payers, one fact is clear: On the whole, stocks are doing a good job of boosting their payouts to keep up with rising share prices.
Gauging dividend health
Every quarter, S&P Dow Jones Indices provides commentary (link opens PDF file) about the state of the dividend-paying stock universe. Looking at the figures that S&P compiles provides a useful snapshot of what's happening among dividend stocks and which way prevailing trends are moving.
By all accounts, dividend stocks had an extremely strong quarter from July to September. With stocks in aggregate giving shareholders $8.8 billion more in dividends during the third quarter of 2012, S&P believes that the U.S. stock market has never paid more in aggregate dividend distributions than it's paying currently.
Moreover, many more companies are financially secure enough to raise their payouts than are nervous enough to cut back on their dividends. During the quarter, 439 stocks implemented dividend increases, while just 53 reduced their payouts.
Taking a broader view to encompass the past 12 months, you can see just how important dividends have been to the stock market's general health. Since this time last year, a whopping 2,270 companies have boosted their dividends, the highest level since 2007. Even more impressive is the $42 billion in extra dividends coming from companies that raised their payouts, as well as $17.7 billion in new initial payouts.
Where's the growth coming from?
Obviously, some well-known names account for a lot of the dollar volume of new dividends going out. Apple (Nasdaq: AAPL) just started its dividend, but at its current rate, it will distribute $10 billion in payouts to shareholders each year. Cisco Systems (Nasdaq: CSCO) will give shareholders more than $1.25 billion extra in dividends annually, thanks to its recent 75% boost in its payout rate. And while Dell (Nasdaq: DELL) is a much smaller company than it used to be, its yield of more than 3% equates to an annual payout of more than half a billion dollars -- not small change for a stock with a market cap of just $16 billion.
But with hundreds of stocks boosting their payouts, this isn't just an isolated phenomenon. Companies have realized how much investors want to see the confidence that dividends communicate, and they're responding by putting their money where their mouths are.
What goes up must come down, right?
The obvious question is whether the current love-fest for dividend stocks will eventually come to an end. On one hand, companies aren't just raising dividends arbitrarily; in most cases, improving profits underlie the payout hikes. Moreover, better profits have pushed payout ratios to extremely low levels, leaving companies with more room than usual to increase the portion of earnings they return to shareholders.
In some areas, dividends are coming down. Mortgage REITs American Capital Agency (Nasdaq: AGNC) and Chimera Investment (NYSE: CIM), for instance, have cut their payouts in the past year as conditions in the mortgage-backed securities market have deteriorated somewhat. Yet mortgage REITs have mandated minimum dividends based on earnings that can lead to more volatility than with other businesses, which can implement more stable dividend policies that better account for cyclical movements.
The longer-term answer to the question of whether dividends must fall at some point in the future is that it depends on what happens with earnings. If high margins and strong corporate performance prove unsustainable, then pressure on profits could bring dividend expansion to a halt. In all likelihood, though, it would take a disruption on a similar scale to 2008's bear market in order to bring on waves of dividend decreases. For investors hungry for income, good news is likely to keep coming for a while.