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Wells Fargo & Co
Pressure is building for companies to raise dividends as they amass record cash stockpiles. “Why are they sitting on all this cash, earning close to zero, when they could at least be putting it in the hands of shareholders?” asks Michael A. Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston.
The average yield for companies in the Standard & Poor’s 500-stock index was 2.31 percent as of Oct. 4, the highest since November 2009. Even so, dividends paid to shareholders represented only 27 percent of earnings in the second quarter, down from 30 percent in 2008 and below a 30-year average of 41 percent, according to Wells Fargo (WFC). Meanwhile, companies’ cash, cash equivalents, and short-term marketable securities jumped 63 percent, to $2.77 trillion, in the same period, according to Bloomberg data.
Financial companies account for a lot of the dividend malaise, says Gina Martin Adams, a Wells Fargo equity strategist. U.S. banks are holding cash as Europe grapples with a debt crisis and as they await changes in regulations, she says. Tech companies also have been hesitant to pay dividends because investors might view that as a sign of dwindling growth prospects. Google (GOOG), which has $39 billion in cash, and Apple (AAPL), which holds $76 billion including long-term investments, don’t pay dividends.
The S&P index fell 11.4 percent in the five years through Oct. 10 and is down 5 percent so far this year. In this low-growth environment, quarterly payouts become even more important as a way to lure investors back to equities from bonds, according to Mullaney. “One way companies can differentiate themselves,” he says, is to pay “more in dividends during rough times.”
The bottom line: With yields averaging 2.31 percent and companies holding almost $3 trillion in cash, investors want to see higher dividends.