Having risen from the ashes of the financial crisis in 2008 and early 2009, hundreds of companies have put in a full recovery. You can see the clearest sign of the stock market's health by looking at how many companies are paying and increasing dividends on their stocks. Yet as good as things are going now, prudent investors have to wonder whether the good times have to come to an end -- and if so, when.
What a long strange trip it's been
Two years ago, you might not have thought we'd ever get to this point. Back then, the history of dividend-paying stocks had been turned upside down, as more companies were cutting their payouts than raising them. During the second quarter of 2009, Standard & Poor's said that fewer companies raised their dividends than ever before -- just 233, which was less than the 250 that made dividend cuts in the same period.
Fast-forward to today, however, and the picture is entirely different. Last quarter, 444 companies paid more in dividends than in the previous quarter. Meanwhile, dividend cuts were practically nonexistent, with just 21 companies wielding a knife to their payouts.
Broaden the time horizon a bit, and the news is even better. For the first half of the year, a whopping 954 companies raised or resumed paying dividends, up 30% from the previous year. The total dollar amount of added dividends was more than $30 billion -- more than the corresponding increase for the entire year of 2010.
Where the dividends rose
In an attempt to understand the full extent of this dividend-hiking trend, Barron's recently took a look at some of the companies that increased their dividends during the second quarter. Its research revealed a wide array of companies throughout the economy:
- Among the 30 Dow Industrials stocks, 10 raised their dividends, including Intel
(Nasdaq: INTC) (NYSE: UTX) - Four of the 20 Dow Transports hiked their payouts, with railroad stocks CSX
(NYSE: CSX) (NYSE: UNP) - Among the 15 Dow Utilities, Duke Energy
(NYSE: DUK) (NYSE: SO) (NYSE: WMB)
It's clear that largely favorable trends throughout the economy have helped companies find the courage to increase their dividends despite some concerns about a potential premature economic slowdown. The big question going forward, though, is whether those trends can continue -- and when they stop, whether dividend increases stop with them.
Behind the payout
Based on arguably the most important factor behind a company's decision to pay dividends, I think dividend increases can continue even if the recovery stalls out. First, companies have more cash on their balance sheets than ever, and with such a huge cash cushion, the liquidity concerns that prompted many blue-chip stocks to slash their dividends simply don't exist this time around.
Also, strong earnings have made many companies' dividend policies look fairly conservative. For instance, among the companies mentioned above, all four of the industrial and transport stocks have payout ratios of 35% or less. If there's any danger of unsustainable payouts, it would come from the utility sector; its earnings payout ratios are consistently much higher, leaving shareholders without the same margin of safety that investors in other sectors enjoy.
Let the dividends continue!
Perhaps most importantly, investors have made it clear that they'd prefer to see healthier dividend payouts over other, less efficient uses of capital. Too often, corporate management wastes cash on overpriced acquisitions or ill-timed share buybacks. The easiest way to avoid criticism for a bad strategic decision is simply to turn the money over to shareholders and let them make their own capital investment decisions.
The rapid acceleration of dividend payouts will come to an end at some point. In the meantime, though, dividend investors have a lot to celebrate -- and at least for now, the party doesn't look like its set to end anytime soon.
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