Investing

Higher Dividends from Cash-Rich Companies


Companies that hoarded cash during the recession and financial crisis are giving a bit more back to shareholders. About 15 percent of the companies in the Russell 3000 index, which includes the 3,000 largest publicly traded U.S. companies, raised their dividends last quarter, double the percentage a year ago. And the trend will continue, according to Bloomberg's latest dividend forecast, with 14 percent of Russell 3000 companies likely to boost their payouts during the next three months, up from 9.7 percent in the same period last year.

In the aftermath of the global economic collapse, "there was real uncertainty and fear, and even companies with tens of billions of cash were unwilling to do much with it," says Kennard Allen, manager of T. Rowe Price's Science & Technology fund. "Companies have felt better about their business in the last couple of quarters."

Russell 3000 index companies have $2.9 trillion in cash and short-term investments, 19 percent more than the year before, according to the latest quarterly data compiled by Bloomberg. "Companies have so much [cash], and they're looking for different ways to put it back to work," says Walter Todd, who helps manage $800 million at Greenwood Capital.

The trend is even playing out in the tech sector, not generally known for lush yields. IBM (IBM) announced a dividend boost of 18 percent in April, almost doubling last year's increase. Chipmaker Analog Devices (ADI) also had an 18 percent hike. Looking ahead, Philip Morris International may lift its dividend 10 percent this quarter, according to the Bloomberg forecast, which is based on seven criteria, including a company's guidance and dividend history. The Bloomberg analysis also suggests that News Corp. (NWS), owner of The Wall Street Journal, will increase its dividend 20 percent in the quarter, while Virgin Media (VMED) and cruise ship operator Carnival will lift their payouts by 50 percent.

Todd recommends dividend-paying stocks to investors as a way of earning yields similar to Treasuries, with the bonus of a potential appreciation in share price. Bloomberg forecasts that yields for utilities, financial, and communications stocks will be more than 3.78 percent this quarter. Technology, consumer, basic materials, and industrial companies are likely to pay more than 2 percent. Yields on the benchmark 10-year Treasury note are below 3 percent. "You've got dozens of large-cap names with dividend yields in excess of Treasuries," says Todd. "To me it just makes a lot of sense to use some of these names as substitutes for fixed income."

Bahl & Gaynor Investment Counsel, which has $2.7 billion under management, invests only in dividend-paying stocks. "Dividends are and have been a crucial part of the stock market's total return," says Matt McCormick, a portfolio manager at the firm. "The way people are starting to pay attention to them," says McCormick, "it's almost like they're discovering one of the lost gospels."

The bottom line: With growing amounts of cash on hand, companies are increasing dividends to return money to shareholders.

Clothier is a reporter for Bloomberg News in Detroit.

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