Increasing Dividends

By Gregory Dorsey, Leebs Market Forecast

Companies are returning more cash to shareholders in the form of stock dividends. According to Standard & Poor’s, net dividend increases for U.S. common stocks in the second quarter increased by a total of $12.6 billion. Although that trailed the $17.6 billion increase during the same quarter last year, it’s still an impressive figure. Taking a longer view, the 72 percent increase in dividends during the past four years is the fastest rate of increase in at least the last 60 years, and triple the average rate of increase over that time frame. The pace of dividend growth is likely to slow going forward, but should continue to increase at an above-average rate at least for the foreseeable future.

Also impressive is the sheer number of dividend increases among publicly traded companies, 696, compare to just 57 dividend cuts. That’s the largest number of increases since 1979. The trend among large-cap stocks is strong, too: 422 issues out of the S&P 500 Index currently pay a dividend, the highest percentage since September 1998.

In today’s world, where 2 percent yields are the norm, it’s easy to overlook dividends. Yet since the end of 1926, more than a third of the stock market’s total returns are attributable to dividends. And at times dividends’ importance has been significantly greater. You don’t have to delve deep into the history books for examples either. In this century, though 2012, dividends produced more than 100 percent of the market’s return. Those quarterly income checks add up, especially when we experience the inevitable downdrafts, something we’ve had little experience with during the last three years.

Returning to earnings and where we’re headed, analysts expect profits for the S&P to rise more than 16 percent in the next four quarters. That will be a tall order if the economy continues to expand merely in the 2 to 3 percent annualized range, as we expect. And even if companies do achieve that level of earnings increase, stocks appear to have already priced in the rosy scenario; they now trade at nearly 17 times projected forward profits—quite high by historical standards.

The takeaway: while the bull market should continue given current conditions, the ever forward-looking market has already discounted much of the good news. And increases in the market averages, therefore, are likely to be quite modest. Higher dividend payouts certainly won’t hurt.

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The D2 Capital Management Multi-Asset Income Portfolio is overweight in dividend funds. Current yield on the portfolio is 5.36% and year to date the portfolio is up 10.62%.

Disclosure:  I own the D2 Capital Management Multi-Asset Income Portfolio.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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