Great companies know how to treat their customers right. When those companies need to manage their capital, their investors are their customers -- and treating them right means giving those investors what they want and need.
That's why it's great to see so many companies starting to respond to their shareholders' demands. While shareholder initiatives on a wide range of topics have started to gain traction among certain companies, one of the most beneficial things a company can do for its shareholders is happening more and more often: many companies are starting to pay dividends for the first time.
Getting on the bandwagon
Dividends have made a huge comeback since the market's meltdown in 2008 and 2009. Back then, dividends were being cut left and right as companies did everything they could to conserve capital. For instance, S&P 500 companies cut dividends more sharply in the first three months of 2009 than they did for the entire year of 2008, which itself was a record. In 2009's second quarter, a record low number of stocks raised their dividends, and that number was less than the number of companies cutting their payouts.
Fast-forward to 2010, and the picture has changed in a hurry. In the first quarter, only 48 companies cut dividends, while nearly 400 raised them. With earnings rebounding and record-low interest rates restoring cheap access to capital, hoarding cash is no longer most companies' top consideration -- and many of those companies have finally decided to return more of their cash to shareholders in the form of dividends.
Feels like the first time
Indeed, some companies have decided to pay dividends for the first time after long histories without payouts. Here are some of the big companies that have started paying dividends this year:
|
Stock |
Current Dividend Yield |
Payout Ratio |
|---|---|---|
|
Starbucks (Nasdaq: SBUX) |
2% |
49% |
|
Broadcom (Nasdaq: BRCM) |
0.9% |
27% |
|
Tellabs (Nasdaq: TLAB) |
1.1% |
15% |
|
Expedia (Nasdaq: EXPE) |
1% |
21% |
|
Viacom (NYSE: VIA) |
1.5% |
20% |
Source: Yahoo Finance.
In addition, some even bigger fish have decided to join the dividend pond. Cisco Systems (Nasdaq: CSCO) said that it had definitive plans to start paying a dividend by next summer. Many other cash-rich tech giants may follow suit.
It's obvious that none of these new dividend payers is jumping in over its head to start out. With yields in the 1% to 2% range and very comfortable payout ratios, these companies have more than sufficient financial resources to cover the dividend obligations they've assumed going forward.
Yet it's significant that these companies are making this decision now, after years of successful business. What's motivating the move, and what should investors expect in the future?
Brother, can you spare a dividend?
The biggest motivator toward dividend payers is the fact that now more than ever, shareholders need dividends. As the baby-boom generation approaches retirement, an increasing number of people will need to start drawing income from their investment portfolios. Yet for those who feel uncomfortable spending down their nest eggs, the substantial income available from dividend stocks right now makes them an appealing investment right now. Because of rock-bottom interest rates on bonds and other fixed-income alternatives, investors are increasingly turning to dividend stocks as their only chance to earn enough from their investments to finance their living expenses without invading the principal of their retirement nest eggs.
Meanwhile, the opportunity cost for companies of paying dividends is at historic lows. Microsoft (Nasdaq: MSFT) recently announced a plan to issue debt solely for the purpose of financing share buybacks and dividend payments. That raised a few eyebrows from analysts looking at the business implications, but for investors, the availability of cash has become extremely important. Any way to produce income without forcing shareholders to sell and realize what in some cases are large capital gains is a definite plus.
Get on the dividend bandwagon
A first-time dividend isn't necessarily the defining moment of a company's success, and some in fact bemoan it as the end of a company's period of high growth. For long-term investors seeking solid returns and convenient income, though, seeing a company join the ranks of dividend-paying stocks is a happy event indeed -- and one you can expect to see more of in the months and years ahead.
