Posted by: Howard Silverblatt on March 12, 2010
A year ago dividends were dying, now they are being reborn – HALLELUJAH AND PRAISED BE THE PAYOUT GODS.
The first quarter of last year was the worst period in dividend history. For S&P 500 issues, Q1 2009 had 46 decreases that cost dividend investors $42 billion annually in lost income. Back then it was one bad announcement after another: GE, BofA, Citi, JP Morgan, Pfizer, and increases, most of which were of small single digits, were a lot fewer. Today however is the rebirth, or at least the start of it. What I’ve seen over the past three months is a lot less decreases in both numbers and dollars and lot more increases. Quarter to date there have been 70 increases with only two decreases, with the net dividend dollar change being a gain of over $4 billions, compared to a net decrease last year of $39 billion.
So have companies regained the faith, no, not yet. But those which have been paying a dividend are showing more faith in their own ability to pay, which speaks to the general improvement in the economy, and they are translating that faith into more dividend increases. And in this environment you really have to believe if you are putting your money down, much less committing to putting it down quarter after quarter.
Currently, I see increases in companies that tend to increase more, but the message is clear – better dividend times are here. While Q1 payments were down 9% from last year, I see Q2 as a break even, and I expect the third and fourth quarter to post year-over-year gains in payouts, with another run of dividend increases in late Q3 and Q4. Of course I need to add that the increases are based on continued economic improvement, meaning jobs, which by Q3 should give companies a lot more confidence in their products, and therefore more confidence in their ability to pay. For the full year I expect actual payments to be up 5.6%, which will not make up for the 21% 2009 decline, but is at least a step in the right direction. Overall I expect dividend growth to be remain slow, in the mid to high single digit range, as companies slowly commit to future payouts.
One of the major questions is when will the Financials come back. They were 30% of all dividends and now they are just 9%. The answer is not too soon. I do expect to see some Financial issues increase their dividend rate later in the year, and given that their current rates are so low, the increase will appear large and get significant attention. But while the run from 30% to 9% was short, the road back up will be much longer, and I wouldn’t want to ‘put’ money on 30%. As an example, if Citigroup decided to pay its old dividend rate it would be paying out over $60 billion a year due to their increased shares, which certainly would increase my 2010 estimate of $206 billion for the entire index (2009 was $196 billion, with 2008 being $248 billion).
Bottom-line -> Dividends are starting to get back in vogue, but picking them is still not easy. Dividend investors need to start with issues that pay a moderate dividend which is not a high yielder, have a history of increasing them, and then do an additional check on their cash flow, to insure that the company is generating sufficient cash from current operations to cover expenses, expansion, pay dividends, as well as have a little left over for growth. And most importantly, since dividend investors typically invest for year or decades, using the DRP program, investors need to be comfortable with the company’s long-term business model, if for no other reason than to let them sleep at night.