Some of the biggest casualties during last year's bear market were dividend-paying stocks. After more than a year of seeing many companies slash dividend payments, it now appears that there's light at the end of the tunnel.
It's about time
The last two years have been among the worst in history for dividend stock investors. In response to the financial crisis and the economic recession, huge numbers of companies reduced or eliminated their dividend payments. Loss-hammered financial institutions like Citigroup
On a broader level, dividends had never taken so much damage. As early as mid-2008, companies began slashing their dividends at rates not seen in decades. Yet by the time the financial crisis was in full force, the earlier numbers looked positively tame, as the number of dividend cuts among 7,000 public companies surveyed by Standard & Poor's rose dramatically from 83 in the first quarter of 2008 to a record 367 in 2009's first quarter.
Meanwhile, the number of companies increasing dividends fell to record lows during most of 2009. In the second quarter, just 233 companies raised their payouts. Most recently, the third quarter saw only 191 companies finding more cash to send to shareholders.
From famine to feast
Now, though, appearances indicate that the cash crunch within corporate America is coming to an end, and companies may therefore be ready to loosen their purse strings and get dividends back on the increase. A recent prediction by Bloomberg, based on data obtained from company guidance, dividend history, and statistical analysis of the options markets, foresees nearly 80 companies raising their payouts in the near future. Dow components Wal-Mart
If these predictions prove correct, it will mark a watershed event in the turnaround for dividend investors. Yet it certainly makes sense. As brighter economic news starts to emerge, it's only a matter of time before profits follow suit and start rising again. Already during the third quarter, preliminary results show that the vast majority of companies beat analyst expectations on earnings. And although many of those expected numbers were both fairly low and well below their 2008 levels, analysts expect overall S&P earnings to start rising, and maintain an upward path in the quarters to come.
Sharing with shareholders
As profits start rolling in, companies will need to figure out what to do with the cash they receive. During the worst of the credit crunch, companies had a huge incentive to keep cash on hand: they couldn't count on being able to access capital by issuing stocks or bonds.
Now, though, regardless of whether the economy continues to improve, the Federal Reserve has made it pretty clear that keeping liquidity available is its primary concern -- at least for now. With interest rates low and funds readily available when needed, companies will start thinking about passing through their cash flows to investors.
In fact, we've already seen some action on that front. Some companies have announced huge stock buyback programs, with Hewlett-Packard
Following the trend
With investors increasingly seeking low-risk investments and wanting to see tangible results from the stocks they own, you can expect to see others follow suit in returning cash to shareholders through buybacks and higher dividends. After everything that dividend investors have suffered through over the past couple of years, that's music to their ears -- and it makes now an excellent time to join their ranks if you don't already own some strong dividend-paying stocks in your portfolio.
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