In late February, Kaydon
A few weeks earlier, CA Technologies
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|
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