A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

April 21, 2014

Rising tide: dividends hit a new high
S&P 500 12-month cash dividends per share

chart

Source: Standard & Poor's, as of 3/31/14. This information cannot be guaranteed and all liability is disclaimed on S&P's own behalf and on behalf of its information providers for any damages or losses arising from any use of this information.  Past performance is no guarantee of future results.  Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Companies in the S&P 500 have continued to increase their cash dividend payments to shareholders this year, with the 12-month cash dividend for the period ended 3/31/14 hitting a new high of $36.23.
  • Yet the dividend payout ratio—the percentage of companies' earnings distributed to shareholder as dividends—still remains well below average.
  • With investors still frustrated by low bond yields, dividends are highly valued by shareholders. Indeed, current stock dividend yields are in fact quite compelling relative to available fixed income investments.
  • And many large companies are well positioned to pay them, thanks to very strong cash positions on their balance sheets today.

The chart:

  • The chart shows the rolling 12-month cash dividend per share of the S&P 500 from March 2004 through March 2014.
  • From the previous peak in September 2008, it took the S&P 500 sixteen quarters to make a fresh high; cash dividends have set a new record high each quarter since.

Context & Perspective:

  • Of the companies in the S&P 500, there were 128 dividend increases in 1Q14, out of the 421 of the 500 companies paying a dividend in 1Q14.
  • The record high cash dividend of $36.23 in 1Q14 represented a 65.4% increase from the March 2010 low of $21.90, and a 25.5% increase from the previous peak in September 2008.
  • Recent dividend increases likely reflect strong balance sheets, strong corporate cash flow and business confidence in future earnings. But some observers see the increases as a sign of reluctance to increase capital spending and employment. The argument: If future growth opportunities were more robust, companies would be using cash to buy new equipment and hire new employees instead of returning it to shareholders via dividend increases.
  • Current dividend yields are compelling—the S&P 500 dividend yield of 2.00% (as of 4/14/2014) was notably higher than the yields on 2- and 5-year Treasuries (0.37% and 1.61%, respectively); moreover, at 2.33%, the yield of the S&P 500 Dividend Aristocrats Index—companies in the S&P 500 Index that have consistently increased their dividend payout for at least 25 consecutive years—was even more attractive.
  • The growth rate of dividends is also an important consideration—solid, consistent growth in dividends suggests both the ability and the confidence of management to generate free cash flow year after year.
  • In addition to compelling yields and the potential for dividend growth, other potential benefits often associated with dividend paying stocks are:
    • A long-term track record of higher total returns compared with non-dividend payers.
    • A solid dividend payout and consistent dividend growth can be a sign of a company's "quality" status.
    • Dividends may provide a cushion from volatility compared to the overall market—dividend-paying stocks in general have had a lower standard deviation historically than non-payers.

Definitions:

The S&P 500 Index is an unmanaged index of common stock performance.  The S&P 500 Dividend Aristocrats is Standard & Poor's Index comprising the S&P 500 Index components that have increased dividends for at least 25 consecutive years.Please note an investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

The dividend payout ratio is the percentage of a company's earnings paid to shareholders in the form of dividends.


The opinions and views expressed herein, as well as references to individual companies or securities, are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or recommendations to buy, hold or sell, or investment advice.

Past performance is not a guarantee of future results.

All investments involve risk, including possible loss of principal.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

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Poll

Go for growth: Where will a global recovery be strongest this year?








Poll

Go for growth: Where will a global recovery be strongest this year?

Europe, as countries emerge from bailouts
(43%)
US, as consumers regain optimism
(38%)
Japan, as stimulus programs begin to bear fruit
(7%)
China, as reform and pro-growth policies continue
(12%)



Previous month Poll

Expect the unexpected:
Which of these outcomes
do you think is the most likely
in the coming year?

US: economic surge spurs Fed to begin raising interest rates
(27%)
Japan: return to recession despite Abe's continued aggressive stimulus policies
(12%)
China: negotiate with neighbors over its territorial claims in the South China Sea
(5%)
Europe: Italy forms a government that lasts the entire year
(14%)
None of the above; business as usual worldwide
(42%)