Record Cash Stockpiles Point to Fatter Dividends

(page 2 of 2)

On Mar. 16, GE's chief financial officer, Keith Sherin, said the conglomerate, after cutting its dividend 68% last year, may begin increasing its payout again next year.

Amid a tough environment, even many financially secure companies played it safe and held off on dividend increases.

"The pessimism was so bad toward the end of 2008 and beginning of 2009 that companies just cut their dividends even [if] they didn't have to," says Stanley Nabi, vice-chairman and chief strategist at Silvercrest Asset Management.

By slashing expenses, companies have been generating more cash than they know what to do with, Nabi says.

Baby Boomers Want Income

Companies can deploy their cash by buying back stock, boosting dividends, buying other companies, increasing capital expenditures or hiring workers. With economic conditions still uncertain, executives are still figuring out how to use their hoards, says Buckingham, though he expects a substantial amount of cash to go toward higher dividends. "The nice thing is that Corporate America has a lot of flexibility," he says.

Health-care companies in particular have a lot of cash on hand, says S&P's Silverblatt, who expects dividend payments by S&P 500 companies to rise 5.6% from 2009 to 2010. His 2010 projection is still 16.6% below the peak in 2008, but 2011 could see a further rise as companies announce dividend increases in the second half of the year, he says.

Silverblatt warns his estimates are based on continued improvements in the economy and a fall in unemployment.

By increasing dividends in the next few years, companies could be responding to demands from investors, particularly baby boomers approaching retirement, "who want income," Genter says.

Sales and Orders Are Crucial

Stocks that pay dividends are seen as less risky and less volatile than other equities, he adds. Dividend-payers can also provide a better payout than bonds, especially while interest rates are low.

According to Bloomberg data, the current dividend yield for the entire S&P 500 is 1.87%, based on the past 12 months, and 2.01% based on the announced payout in the next year. Only 363 of the S&P 500 companies pay dividends.

The yield on the risk-free 10-year Treasury note was 3.7% on Mar. 16.

Higher taxes proposed on dividends could reduce their appeal to investors, but dividend-focused portfolio managers like Nabi and Genter point out that taxes on dividends would still be lower than those on bonds.

The biggest threat to a full rebound for dividends could be the economy. Companies can't afford to share the wealth with shareholders if they don't see their sales and orders heading higher.

Absent another downturn, dividend-paying stocks look increasingly appealing in a low-yield world.

Steverman is a reporter for Bloomberg BusinessWeek's Finance channel.

Business Exchange

Track and share business topics across the Web.