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Why Dividends Aren't Keeping Up With the Dow

By Dan Caplinger - Apr 19, 2013 at 2:33PM

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It's not from a lack of payout growth.

Many investors follow the Dow Jones Industrials (^DJI 0.00%) not just because of their selection of high-quality blue-chip stocks, but also because of their history of generous payouts to investors. All 30 of the Dow's components pay a dividend, and many of them offer above-average yields with solid histories of growth.

That's why it may come as a big surprise to discover that over the past year, the dividend yield on the Dow has actually fallen. Should dividend investors be worried that the Dow isn't a good place to find strong income-paying stocks anymore?

What's behind the Dow's yield drop?
Admittedly, the decline in the Dow's dividend yield hasn't been all that substantial -- from 2.53% last year to 2.45% this year. But it stands in stark contrast to other major indexes: The yields on the S&P 500 and Nasdaq 100 have both risen, and even the Russell 2000 index of small-cap stocks has seen its dividend yield grow substantially from last year's levels.

Moreover, it's not as if Dow stocks haven't delivered some solid dividend increases lately. Just earlier this week, Procter & Gamble (PG 0.06%) declared a payout 7% higher than what it paid in the previous quarter, marking its 57th straight annual dividend increase. Back in February, Coca-Cola (KO 1.63%) came through with an even more aggressive increase of 10% in its quarterly payout, while 3M (MMM -2.13%) hiked its dividend by 8%. Both companies also have half-century streaks of increasing payouts annually.

The problem -- if you can call it a problem -- is that the total return of the Dow has managed to outpace even these substantial dividend increases. At current levels, the Dow is more than 1,500 points higher than it was at this time last year, representing a gain of almost 12%. That has made it tough for dividend increases to keep up with the Dow's gains. Payout increases of such magnitude aren't unheard of, but in an economic environment that's far from ideal, they've become increasingly rare.

Don't panic over dividends
That the Dow's yield has declined so little in the face of the index's impressive total returns is a testament to the Dow's dividend-paying power. Investors should look forward to further rises in total dividends from Dow stocks well into the future.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,253.13 (0.00%) $0.00
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$60.98 (1.63%) $0.98
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
$141.79 (0.06%) $0.09
3M Company Stock Quote
3M Company
$143.83 (-2.13%) $-3.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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