Now that the first quarter is over, we have some stats on dividends. The S&P 500 paid out 7.09 in dividends (that's the number adjusted for the index) which is a 15.06% increase over the first quarter of 2011.
I think this will be a very good year for dividends, especially with the dividend news from Apple ($AAPL). The market also responded very well to the five-fold dividend increase from CA Technologies ($CA), plus the recent increase at JPMorgan ($JPM). So far this year, there have been 122 dividend increases in the S&P 500, plus seven new dividend payers. Only three companies have lowered their payouts.
Looking at dividends has been a surprisingly good way of valuing the market over the past few years. You can never be quite sure about a company's earnings or cash flow since accounting rules allow for enormous latitude. But if a company is willing to send shareholders a check, you can be pretty certain those numbers are legit (though not always).
Dividends also tend to be very stable. Once a company raises its quarterly dividend, there's an implicit understanding that that's the new level. Shareholders will put up with a lot, but they do not like cuts in dividends, and woe be unto the company that lowers their payout. The recent recession, however, saw an unusually higher number of cut dividends or suspended payouts altogether. In 2009, annual dividends dropped by 21%. Contrast this with 2001 when the stock market crash led to dividends falling by just 3%.
The lower dividends this time around have been largely concentrated in the financial sector. Part of this is due to rules around receiving TARP payments. I don't have the exact numbers for the financial sector but the quarterly dividends for the Financial Sector ETF ($XLF) fell about 70%. The Financial Sector currently makes up 15% of the S&P 500.
The good news is that higher profits are leading to higher dividends. Dividends are on pace to hit a new record this year. On top of that, the dividend payout ratio"”the percent of profits paid out as dividends"”is still below 30% which is far below normal.
Here's a look at the S&P 500 in the black line along with its dividends in the blue line. The black line follows the left scale and the blue line follows the right. The two lines are scaled at a ratio of 50-to-1 which means that the S&P 500 yields exactly 2% whenever the lines cross.
I think the chart shows some interesting facts. For example, you can see how different the market crashes of 2000-01 and 2008-09 were. In the first, prices soared above fundamentals. In the latter, fundamentals crumbled beneath the price. From 2003 to 2007, stock prices generally followed the trend in dividends. We can also see how much investors panicked during the financial crisis. In March 2009, the S&P 500's dividend yield eventually reached 4%.
I asked Howard Silverblatt, the head stat guy at S&P, to tell me the dividend estimate for this year. He said it's $29.70. To equal a dividend yield of 2%, the S&P 500 needs to get to 1,485 which is a 4.6% jump by the end of the year.
Posted by Eddy on April 3rd, 2012 at 11:04 am
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Tickers: aapl, CA, JPM, XLF
Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 for the last five years in a row. (more)
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