After a rough couple of years for investors who rely on cash dividends from U.S. stocks, 2010 is shaping up to be a year when a dividend strategy actually pays off.
"We've definitely turned the corner," says Howard Silverblatt, a senior index analyst at Standard & Poor's.
Historically, dividends have provided a significant portion of investors' total return. For the last 20 years the prices of the S&P 500 stocks have risen an average of 6.1% per year, according to Bloomberg data. If dividends are reinvested, however, the total average annual return for the S&P 500 has been 8.4%.
A year ago many companies—particularly financial outfits—were slashing or ending dividend payouts amid a 45% plunge in fourth-quarter earnings for the broad, large-cap S&P 500-stock index. In the first three months of 2009, 46 members of the S&P 500 index either reduced or canceled their dividends. So far in 2010 only two have done so.
"There has clearly been a tremendous reversal," says Dan Genter, chief executive of RNC Genter Capital Management in Los Angeles. Companies haven't just stopped cutting dividends. They're also starting to raise them.
Other big companies hiking dividend payouts this month include Applied Materials (AMAT), with a 16.8% hike; General Dynamics (GD), up 10.5%; Public Storage (PSA), up 18.2%; Qualcomm (QCOM), up 11.8%; and Wal-Mart (WMT), which raised its dividend 11%.
The reason companies can be so generous is that many are flush with cash. By one measure, U.S. corporations have a record amount of cash and equivalents. An initial estimate based on fourth-quarter earnings issued by S&P on Mar. 9 calculates that large-cap companies have $832.4 billion, up 36.5% from when the recession began two years ago. (The estimates look at the S&P 500 index companies, excluding financial firms, utilities, and transportation outfits, all of which typically maintain high cash reserves to operate.)
That companies can have so much cash on hand after a recession is a sign of how aggressively they slashed spending during the downturn. Companies saved cash by canceling capital expenditures, laying off employees, and squeezing dividend payments. "A year ago, everyone was getting lean and mean," says John Buckingham, chief investment officer at Al Frank Asset Management.
Many companies, even those with stellar records of consistent payouts, had no choice but to cut dividends. Standard & Poor's keeps a list of "Dividend Aristocrats," S&P 500 companies that have increased their dividend payments for at least 25 consecutive years. In 2009 two companies joined the list, Brown-Forman (BF/B) and Cintas (CTAS). However, 10 companies left the list, including General Electric (GE), pharmaceutical giant Pfizer (PFE), newspaper owner Gannett (GCI), and U.S. Bancorp (USB).
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