Dividend payouts are at record highs, but yields are down

Dividend payouts are at record highs, but yields are down

Merchants work on the ground of the New York Inventory Change (NYSE) on October 15, 2021 in New York Metropolis.

Spencer Platt | Getty Photos

After a disastrous 2020, when many firms have been compelled to chop dividends, these funds to shareholders have been rising for the final a number of quarters. The greenback worth of dividends paid on the S&P 500 will seemingly hit historic file ranges within the third quarter and for the total yr, as nicely. 

“Dividends are again,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, advised me.

S&P 500: Yearly dividend payouts

  • 2017   $420 billion
  • 2018   $456 billion
  • 2019   $485 billion
  • 2020   $483 billion
  • 2021 so far:  $522 billion, up 8.1%
    Supply: S&P Dow Jones Indices 

Almost 300 corporations within the S&P 500 have raised their dividend this yr. 

Total, dividends within the second quarter have been up 4% from a yr in the past, and 6.5% increased than the pandemic low set within the third quarter of 2020, in accordance with BMO Capital Markets.

“Elevated money ranges, under common payout ratios… and an unprecedented restoration in company earnings are setting the stage for an prolonged rebound in shareholder distribution, in our view, which ought to finally be a constructive for U.S. inventory market efficiency as we look forward to 2022,” Brian Belski, BMO’s chief funding strategist, stated in a word to shoppers.

Particularly, vitality corporations have been both assuring buyers the dividend is safe (ExxonMobil) or mountaineering the dividend after many slashed these funds previously a number of years. Prior to now month, Viper Vitality, Devon Vitality, Chesapeake Vitality, DTE Vitality, Marathon Oil, Oasis Petroleum, and Diamondback Vitality have all hiked their dividends. 

Different corporations which have not too long ago raised their dividend embrace Estee Lauder, Simon Property Group, U.S. Metal, and Voya Monetary.

Here is why dividend payouts are at a file

The explanation company America is making file dividend funds is straightforward: Money flows have been getting stronger because the restoration has proceeded, so firms are in a position to divert more cash to buybacks and dividends.

Dividends and buybacks each come out of money move. Right here is how company America spent its money move within the second quarter:

Money move, second quarter

  • Dividends: 21%
  • Buybacks:   33.8%   
  • Capital expenditures:   27.8% 
  • Retained earnings, paying down debt:   18%
    Supply: S&P Dow Jones Indices

Whereas the greenback worth of dividends has risen this yr, dividends as a share of money move has decreased barely in recent times.

“Dividends have certainly gone up as a result of money flows have elevated,” Silverblatt stated.

“Nonetheless, you aren’t getting a much bigger piece of the pie, as a result of cash is being spent in different areas,” he stated. “During the last a number of years, firms have been spending extra on buybacks than dividends, and in addition much less on capital expenditures.”

Why the emphasis on buybacks over dividends? “Buybacks are simpler to regulate,” Silverblatt stated. “You’ll be able to cease or enhance a buyback. Dividends and capital expenditures are long-term and tough to reverse.”

Here is the unhealthy information

The unhealthy information: Due to the relentless rise within the S&P this yr (up about 24% year-to-date), dividend yields, at 1.3%, are close to historic lows. 

The final time yields have been this low was September 2000, after they hit 1.14%.

The long-term common (since 1936) is 3.54%. 

That could be a bit unusual: Company America is paying out more cash than ever in dividends, however dividend yields are close to a file low.

Which may be why buyers are usually not throwing cash into dividend-yielding shares this yr.

For instance, there have seen modest inflows previously a number of months into exchange-traded funds that pay increased dividends, such because the Vanguard High Dividend Yield Index, the ProShares S&P 500 Dividend Aristocrats ETF, and the WisdomTree Quality Dividend Growth Fund. However, this pales in comparison to the huge inflows into plain-vanilla index funds like those that are tied to the S&P 500 (say, the SPDR S&P 500 ETF or the iShares Core S&P 500 ETF) or to the Russell 2000 (iShares Russell 2000 ETF), or the Nasdaq 100 (the Invesco QQQ ETF).

“Investors are choosing more targeted value-oriented ETFs, or they’re choosing more broadly diversified ETFs, rather than owning companies that have historically increased dividends,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research, told me. 

He explained there were two problems. “The stocks with attractive yields are in more defensive sectors like Utilities and Consumer Staples, and investors are favoring growth over those defensive sectors. Second, yields are low,” which makes dividend investing unattractive for many.

Silverblatt concurred. “If earnings continue to rise, you should continue to see dividends rise,” he told me. 

“However, it’s hard to live on dividends because those yields are so low,” he added.

There is hope, Belski says that those yields will start to rise as cash flow continues to improve into 2022. “Even with dividend payments for the S&P 500 already on pace for a record-setting year, we believe there is further room for growth in the coming periods,” he said.

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