If you're an income-seeking investor, then you have to be pleased with the level of corporate givebacks we're witnessing from S&P 500 (^GSPC -0.46%) companies.
Aggregate dividend payments for the first quarter, according to FactSet Research's Dividend Quarterly, totaled $90.5 billion, a 12.5% increase year over year. Further, if you couple this figure with total share buybacks you're left with $249.1 billion in shareholder distributions in Q1, the highest level since 2005. Even total payers rose with 425 companies, or 85% of all S&P 500 businesses, paying shareholders a dividend in the first quarter.
Source: Tax Credits, Flickr.
This is great news, as dividends are an important source of income for both old and young investors. For retired and soon-to-be retired individuals dividends provide an added source of income that can supplemental their Social Security check or retirement account disbursement income. For the younger generation, which has a long investing timeframe, dividends offer the ability to compound and reinvest what is essentially free money.
Not all dividends are created equally
But, as we've observed in the past not all dividends are created equally. Some sectors are dividend stars, while others tend be duds. For example, only 61% of all health care stocks within the S&P 500 pay a dividend despite 85% of total S&P 500 stocks paying a stipend.
Over the past two years the information technology sector has led the way, topping all sectors in terms of dividend growth for six straight quarters. In Q1, for instance, information technology stocks saw their dividends surge by 24.2% year over year.
However, the main reason IT stocks have been dividend leaders is that a number of them have initiated stipends over the past three years. Between 2010 and 2013 the number of dividend-paying information technology S&P 500 companies has soared from just 42% to 68%. Think of a technology giant like Apple which went more than a decade without a dividend payment and then in March 2012 introduced a $2.65/quarter payout (which has since been split-adjusted). Apple's payout has since been boosted twice and the company is now yielding better than 2%.
When these dividend initiations in IT do slow down, as FactSet expects will happen later this year, the real and surprising reason behind the S&P 500's steady increase in dividend payouts is likely to emerge: namely, consumer discretionary stocks.
Source: Ford.
The surprising sector leading the way
The consumer discretionary sector doesn't have nearly the same growth potential as the information technology sector, but its constituents have done a good job boosting organic dividends in order to attract long term buy-and-hold income investors, as well as initiate dividends which have been the main source of growth for IT-based stocks.
A double-dose of good news came from the auto industry with Ford (F 0.69%) and General Motors reinstituting their dividends which had been suspended during the great recession. GM, which is now free the U.S. federal government owning its shares and is fully capable of standing on its own two feet, began paying $0.30/quarter in March, while Ford initiated a $0.05/quarter payout in 2012 and has since boosted this twice to what now amounts to $0.125/quarter. Ford has found incredible success in China where sales have risen 32% in May and 39% year-to-date. With improved fuel economy, spot-on pricing, and high-tech interiors, Ford has done a great job reaching multiple generations of car shoppers.
Beyond dividend initiations, the sector has seen impressive growth from the media, leisure, and restaurant industries.
Source: Loren Javier, Flickr.
Over the past three years Comcast and Disney (DIS -1.01%) have been absolute superstars, with compounded dividend growth rates of 27% and 29%, respectively. Comcast's pending merger with Time Warner Cable should help expand its market reach while reducing distribution costs and improving its media clout, ultimately resulting in beefier profits for shareholders over the long run and hopefully a sustainable increase to its quarterly payout. For Disney, its diversified business model of theme parks, media, and movie franchising, as well as collaborations, has delivered a number of record quarterly profits.
I'd also be doing a disservice if I failed to mention resort and casino operator Wynn Resorts (WYNN -0.47%) which has relied on rapid growth in Macau and a stabilization of high-end table play in the U.S. to issue bountiful special dividends. In total, its compounded three-year dividend growth is a whopping 100%!
According to FactSet the consumer discretionary sector is expected to lead all sectors in 2014 with a dividend per share growth rate of 21%. This growth rate might appear unsustainable, but with cost-cutting being one factor that's driving EPS growth in a number of consumer discretionary stocks, and the payout ratio for the sector as a whole actually running below its historic average, it should be possible for consumer discretionary stocks to lead all sectors in dividend per share growth for the next two or three years, in my opinion.
In other words, if you're looking for solid long-term investment ideas and are stumped where to start, consider the consumer discretionary sector as this group as a whole is paying out less than it has historically and is likely to close that gap in the coming years. And if picking out individual companies is too time consuming or a daunting task, perhaps it could be time to consider the SPDR Consumer Discretionary Select ETF (XLY 0.09%), which has a minuscule gross expense ratio of 0.16% and currently holds 87 consumer discretionary companies with an average three-to-five year EPS growth rate of 16.7%.
