One of the hallmarks of the bull market of the 2010s was how many companies dramatically boosted the amount of capital they returned to shareholders. Although much of that capital return came in the form of stock buybacks, there was still a significant portion that companies paid out to their shareholders in dividends. Dividend growth played a key role in driving the stock market higher, and dividend yields stayed relatively stable even as share prices climbed.
Now, though, the coronavirus pandemic looks likely to change all that, and the impacts could be devastating for dividend investors. Although there was some good news on the dividend front in the first quarter of 2020, there were also some signs of things to come that don't look nearly as benign -- and some think it could spell the end of an era for dividend investors.
Record dividends -- one last time
On a positive note, large-cap U.S. stocks have never paid as much in dividends as they did in the first three months of the year. Total S&P 500 dividend payments amounted to $127 billion, up 8% from year-earlier levels, according to the latest data from S&P Dow Jones Indices. That works out to $15.32 in dividend payments for the index on a per-share basis, up from $15.21 just three months ago and higher by almost 10% from where they were a year ago. Over the past year, S&P 500 stocks have paid out more than $495 billion in dividends, or a record $59.58 per index share.
However, there were some signs of slowing gains on the dividend front. During the quarter, among the broader universe of U.S. stocks, 728 companies increased their dividends, compared to 777 during the first quarter of 2019. The amount by which those companies raised their payouts dropped roughly a quarter to $12.4 billion. Similar declines on a yearly basis highlighted the deceleration in dividend growth.
Some big cuts
Even worse, some signs of falling dividends became evident. Consider the following:
- 134 companies cut their dividends during the first quarter, up 24% from the 108 companies that did so a year ago.
- The amount of dividend decreases came in at almost $18 billion, up from just $4.75 billion in cuts in the first quarter of 2019.
- When you balance out the increases and decreases in dividends, the net amount was a drop of $5.5 billion. That's the worst net decline since the second quarter of 2009, at the end of the financial crisis.
Even worse hits are yet to come. S&P Dow Jones Indices cited 13 dividend cuts or suspensions in March that will slash $13.9 billion from their forward payout rates. Among the most prominent culprits are Boeing (BA -0.04%), which suspended its dividend that had paid $4.6 billion to shareholders in 2019, and Ford Motor's (F -0.17%) suspension of its $2.4 billion in annual dividend payments.
Why dividend investors shouldn't panic
As dire as this sounds, long-term investors should take solace from the fact that we've seen cycles like this before. During the financial crisis, banks and other financial institutions had been among the most reliable dividend stocks in the market, yet their payouts almost disappeared for years. Eventually, though, economic conditions got better, and the banks were allowed to boost their payouts back toward their previous levels. Now, many banks pay more in quarterly dividends per share than they did prior to 2009. As S&P Dow Jones Indices senior index analyst Howard Silverblatt put it, "The bottom line is that it was a good run, and eventually we'll get back to it; we just have to hang on until then."
Dividend investors never like to see payout reductions, and the rising dividends over the past decades have been a great time for those looking for income from their investments. Although those who own dividend stocks should watch out for potential cuts in the months to come, it's likely that those payouts will bounce back if the economy makes it through the coronavirus pandemic without too much permanent damage. Far from marking the end of dividend investing, the current challenges will likely highlight the importance of dividends in the long run.