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Dividends Boom

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In late February, Kaydon (NYSE: KDN  ) announced it was issuing a special dividend of $10.50 per share, equal to almost one-third its entire market cap. "In an unprecedented and prolonged period of historically low interest rates," the company wrote, "this new capital structure and significant return to our shareholders is both the appropriate corporate finance decision and right strategic action."

A few weeks earlier, CA Technologies (Nasdaq: CA  ) announced it was quintupling its dividend. "The board and management view returning cash to shareholders through dividends as an important component of our overall approach to enhancing shareholder value," it said later that day.

These are anecdotes, but the broader trend is clear: Dividends are making a comeback.

S&P 500 companies paid out 7.09 in dividends last quarter (in relation to the index, which currently trades at around 1,400). That tied 2008 as the highest first-quarter payout in history, and it was up 15% from 2011 and 30% from 2010. On an annual basis, S&P 500 dividends will likely hit a new record of $277 billion this year, up from the old record of $248 billion in 2008.

The gains have been broad-based, too. The number of dividend declarations this year is tracking at an all-time high, and it's up 9% over last year. There have also been more than 500 announcements of dividend increases. That's the most since 2007 and double the rate of 2010. Meanwhile, there have only been 65 instances of dividend decreases in the last year -- the fewest since 2007, down from 335 in 2010, according to Standard & Poor's.

Tellingly, companies now have a greater ability to raise dividends than perhaps ever before. The S&P 500 dividend payout ratio, or the percentage of earnings paid out as dividends, is still hovering near an all-time low, underlining how long the new dividend boom could potentially last and how sustainable it could be (assuming earnings don't drop):

Source: Robert Shiller; author's calculations. Years when ratio exceeded 100% omitted.

The S&P 500 currently yields about 2%. Returning to a historically normal payout ratio would roughly double that yield. Just going back to a payout ratio seen in the 1980s would add an extra $200 billion in S&P 500 investors' pockets every year. "Payout rates (which historically average 52%) remain near their lows at under 30%," S&P analyst Howard Silverblatt wrote earlier this year. "Yields remain relatively high compared to alternative investments, and companies have strong cash-flow and cash reserves giving them considerable room to increase payments."

That could end up being a boost for stocks. As I've shown before (and as several academic studies confirm), companies that pay higher dividends tend to produce higher returns. With interest rates near 0% and bonds offering negative real returns, the effect may be especially strong today. Indeed, S&P 500 companies with the highest dividend payouts are on average awarded the highest valuations:

Dividend Payout by Quartile

Average Forward P/E Ratio

Highest dividend payout 19.8
Second-highest 16.5
Third-highest 13.4
Lowest 13.7

Source: S&P Capital IQ; author's calculations.

Investors' admiration for big dividends may be a cause for alarm. I've gone so far as to call it a dividend bubble, though several rebuttals -- not least of which is the low payout ratio -- may render that call too extreme. You should always be careful when something becomes popular -- and dividends are right now -- but their potential is hard to ignore, particularly with interest rates this low.

In any case, the quick return of dividends shouldn’t be viewed as anything but a good thing. Profits bounced back almost immediately after the recession. Now patient shareholders are getting what they deserve: a four-times-a-year reminder that they, not management, own the company.

Several high-quality large caps already offer good yields. A few I like include Philip Morris International (NYSE: PM  ) , Paychex (Nasdaq: PAYX  ) , and Intel (Nasdaq: INTC  ) . For more ideas, check out The Motley Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." Just click here -- it's free.

Fool contributor Morgan Housel owns shares of Philip Morris, Paychex, and Intel. Follow him on Twitter @TMFHousel. Click here to see his holdings and a short bio. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Paychex, Intel, and Philip Morris International. Motley Fool newsletter services have recommended creating a write covered straddle position in Paychex. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (16) | Recommend This Article (63)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2012, at 5:33 PM, DividendsBoom wrote:

    Your welcome for the inspiration for the title to this article

  • Report this Comment On April 04, 2012, at 5:34 PM, TMFMorgan wrote:

    ^ Ha, I had no idea. Good name, though.

  • Report this Comment On April 04, 2012, at 5:39 PM, Lionel27km wrote:

    Maybe the trend to more and higher dividends reflects the corporate thinking that there is not enough growth in our economy and less need for the growing cash on their balance sheets. We know they are not hiring due to this lack of real growth and mask and support P/E with share buy backs. I like the dividends however at some point the market will see the lack of real growth trend and we will tank and give back those dividends in an instant and dividends will look even more plush and start going in reverse and our portfolio value will be depressed.

  • Report this Comment On April 04, 2012, at 6:42 PM, hemifan426 wrote:

    Wow, I wish the recession was over, the depression has been and continues to rage as I write this. While I agree that dividends are the way to go, it is irresponsible at best to talk about a rosy economy while the economy continues to plummet. I wish we could get to a recession, that would mean recovery. With the national debt, devaluation of the dollar, real inflation (everything factored in that the government factors out) around 30% a year, real unemployment (real unadjusted government numbers) at about 25% and oil 80 bucks a barrel to high, there will be no recovery for many years to come. Only a fool would believe that the issues were dealt with and the economy actually turned.

    I realize now that at 52 years old, any chance of retirement in my life has disappeared. All I can hope for is having enough investment income to keep up with inflation.

  • Report this Comment On April 04, 2012, at 7:12 PM, seattle1115 wrote:

    @hemifan426: When I'm helping my son with his arithmetic, I always suggest that he step back after solving a problem and ask himself "do the numbers I just calculated conform to my observations and common sense?" I fear that your post leads me to ask the same question.

    I'm you're age, so I know you remember what double digit inflation looks like (remember "Whip Inflation Now" during the Ford administration?). Now look around you. Is that how you remember things looking? Because I've gotta tell you, I don't see it. I see most people's spending power eroding very little, if any. Likewise, while I've never seen anything like 25% unemployment, I've seen times when it was over 10%, and it was horrible. It seemed like nearly every family you knew were touched in some way or another by joblessness. These days I know a few people looking for work and a larger number looking for better jobs (higher pay, longer hours), but by and large most folks in my modest, middle-class community seem to be doing alright. Everyone seems to agree that we're better off than we were a few years ago, anyway.

    Are your observations really so bleak? Because if they are, I'm very much surprised by how one part of America could be suffering so when all the parts of the country that I, my friends, and my family know seem to be doing okay. Maybe you need to step away from the numbers (whatever you or I or anyone else may claim they are), and instead look around at the world around you. I bet it's not really so bad.

  • Report this Comment On April 04, 2012, at 7:55 PM, TMFDarwood11 wrote:

    I think the renewed interest in dividends is a good thing. Buying "growth" stocks is a gamble that some day, one day, that stock will be worth more than I paid for it.

    It may, or it may not.

    Then there is the likes of Apple, which teases people to purchase it's stock with a dividend that is closer to what I earn with my savings at the local credit union, with no risk. Suckers are born every day, it is said!

  • Report this Comment On April 04, 2012, at 9:53 PM, payoffplane wrote:

    seattle1115: In our little town (population 100K) things really are that bad. I own a small business and am just barely surviving. We're walking way from our house so the business can survive.

  • Report this Comment On April 05, 2012, at 12:27 AM, Merton123 wrote:

    Morgan - what do you think about convertible securities (bonds that can convert into stocks if earnings take off)? May be good fooder for your next article

  • Report this Comment On April 05, 2012, at 4:56 AM, hohocake wrote:

    I am a fan of dividend growth stocks (subscribe to Income Investor in fact), but I keep hearing the same statement and my business degree tells me to beware.

    "companies that pay higher dividends tend to produce higher returns"

    This is a correlative statement, not a causation. It is very, very, very, likely that the reverse is actually the cause: Companies that are doing better have better returns and therefore, can afford to pay higher dividends.

    This would mean the "right" thing to do is invest in good companies. Duh. Always be aware of correlative statements everyone! I'll share a few more famous ones:

    "The [American] football team that runs the ball more wins the game."

    (Reality: The team that is winning runs the ball to run the clock down)

    "Every time skirt length gets shorter, the stock market improves."

    (True statement, but both are correlated to time, not to each other. As time has moved forward skirts got shorter and the stock market improved.)

    Ok lessons in correlation over :D Always fun!

  • Report this Comment On April 05, 2012, at 7:41 AM, SAMSCREEK wrote:

    I agree with hemifan426 and Darwood11.

    If you add the things that the government leaves out of the CPI, inflation would be much higher.

    All of my utilities have increased in the past 12

    months, and groceries have gone thru the roof,

    especially meat, and coupled with the increase in

    gasoline cost, inflation is alive and well.

    I love the dividend stocks. I only have 7, but they

    are up over 34% in the last 19 months. They

    are CBOE, MAIN, MKC, PNY, HRL,CBL and WEC.

    Of course, i'm going by the price I paid and the

    dividends I have collected in that time.

    Waiting for a pull back or correction to purchade more.

  • Report this Comment On April 05, 2012, at 8:37 AM, FutureMonkey wrote:

    I don't recall Morgan writing anything about inflation, unemployment, gas prices, or whether or not individuals are doing well or near collapse. He was writing about dividend pay-out ratios and trends in the broad market relative to historical cycles to support his thesis that dividend "bubble" is not likely to end anytime soon.

    Surprised nobody leapt in with an amusing anectdote about returning to the gold standard.

  • Report this Comment On April 05, 2012, at 10:12 AM, 48ozhalfgallons wrote:

    seattle1115: spoken as an over compensated and over valued academic through the rose colored glasses of arrogance.

  • Report this Comment On April 05, 2012, at 10:47 AM, 48ozhalfgallons wrote:

    hemifan: I recall the '70's. Inflation was an honest 12%. Wages kept up. Everyone working excepting 6% had great medical insurance. National debt was measured in billions. State college tuition was $250-$400 per semester. Professors earned about 25-40 grand. Houses cost about 2.5 times average wages. Gas was around 85 cents per gallon. Times were considered unacceptable and Europeans viewed America as declining. Carter gave an executive order that allowed 10% tax free interest on savings accounts. I was employed by a company which put me through college. One could vacation with his family for a week at a national park for $500.... and remember, times were bad. Farmers did have it rough borrowing @ 18% interest and there was no ethanol.

    Your situation is reality for those of us caught as inelite (new terminology). You probably should give up your Hemi as I must my capable 25 year old Jeep.

    The elite want the riches of this planet for themselves. I have never observed an elite indebted, living in a 1000 sq ft home driving a Fiesta and avoiding medical care while working 60 hours per week and eating peanut butter which was 70% cheaper last year. However, I

    am constantly reminded by the elite that it is my fault that I have not risen to their material standards.

  • Report this Comment On April 05, 2012, at 2:15 PM, TzingerToo wrote:

    I'm happy to see dividends come back into fashion. The basic concept of stock buybacks is similar and should have some tax advantage but the reality is few stock buybacks have the desired effect. Companies can award stock to employees or sell it at a discount. Stock buybacks are also intended to influence the market (improve the price of my options) so they are a selfish motive more so than dividends.

    Frankly, I like to see a 3-5% dividend and 5-8% profit growth. These numbers are sustainable for many years in good companies. I'm tired

  • Report this Comment On April 07, 2012, at 9:15 AM, circa1850 wrote:

    Hemifan426, Darwood, et. al.,

    While I dislike the doom and gloom, I'm afraid it is a fact that this nation should face.

    The government and "powers that be" (the elite) are misrepresenting the true state of the nation by failing to compare apples to apples and giving a false sense of recovery. Would they not use their creative accounting to misrepresent what the true bottom line is, as outlined by hemifan 426, we'd have a clearer picture of where the U.S. economy really is. Our buying power in Ohio definitely has been stagnant and is dipping.

    There are geographical differences in economic states, which may account for seattle1115's perception of the economy. Good for him, that he can feel good about it.

    And to quote a wise comment by TzingerToo, "Frankly, I like to see a 3-5% dividend and 5-8% profit growth. These numbers are sustainable for many years in good companies. I'm tired"

  • Report this Comment On May 01, 2012, at 7:40 PM, Friesian7 wrote:

    Every time I hear "professor" in a blog I cringe. I have not had a raise in 6 years. And I am successful professional-wise by any standard. This after putting in more apprentice schooling than any MD or lawyer, Historically my fringe benefits were a plus, but retirement & health coverage have now dived. No COLAs. In fact my administration has required that I pay back from outside grants 15% of my salary and 50% of my staff....on top of a 45% indirect tax on all grants coming in. Wish I was "small business" so I could get some respect. Not sure where the increase costs in higher Ed went, but it was not for my salary. Admin seems to be doing well tho. Health care ate much and the state has reduced support for our "public" school to less than 15%.

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