THE headlines about stock dividends have been remarkably bleak.
Earlier this month, for example, BP announced that it would suspend its large dividend payments to deal with costs of the Gulf of Mexico oil spill, becoming the latest cautionary tale of the risks of staking one’s fortune on a single stock. And dozens of banks and brokerage firms cut or eliminated payouts during the financial crisis in 2008 and 2009.
Look more closely at the category, though, and dividend-paying stocks are much more appealing. A widespread recovery is under way among companies that throw off cash to shareholders.
Since January, 136 companies in the Standard & Poor’s 500-stock index have either increased their payouts or initiated new dividends, collectively bolstering payments by $11 billion this year. The list includes companies in a broad array of industries, like Starbucks, which initiated its first dividend; Marriott International, which reinstated its cash dividend; and Travelers, which raised its dividend.
At the same time, only two companies in the S.& P. 500 have decreased or suspended dividends since January.
The recent trend is a big improvement from 2009, when there were 157 dividend increases and initiations versus 78 decreases or suspensions. Over all, those actions collectively cut payments to shareholders by $37 billion, a record.
To be sure, this year’s moves have put only a “dent into last year’s devastation,” noted Howard Silverblatt, senior index analyst at S.& P., in a recent report. He added that it might take years for the market to fully recover from the dividend damage.
But over all, the resumption of dividend payments can be seen as a sign of improved financial strength and confidence. “Usually, boards of directors won’t declare dividends or certainly won’t increase them if they feel that the companies need those resources for other purposes,” said Robert Zagunis, chairman of the investment committee at Jensen Investment Management in Lake Oswego, Ore.
As corporations have tried to cut debt and improve their finances, they have been amassing a mountain of cash. A recent S.&P. report showed that nonfinancial companies in the S.& P. 1500 index — which includes large-, midsize and small-company stocks in the United States — have more than $1 trillion sitting in cash and short-term investments on their balance sheets.
David R. Kotok, chief investment officer at Cumberland Advisors in Sarasota, Fla., said that despite this seemingly good news, investors might be reluctant to embrace this group of stocks. Many people, he said, were hurt by financial companies’ dividend reductions during the recent credit crisis — and by the poor performance of those shares in the recent bear market.
Dividend-paying stocks lost more than the broad market in the bear market of October 2007 to March 2009, even though investors typically expect these stocks to hold up better in a downturn because of their yields.
But the picture is more complex than this. “If you take the financial stocks out of the equation, and look at the rest of the market — the dividend record has been relatively good,” Mr. Kotok said.
Brian G. Belski, chief investment strategist at Oppenheimer, added that after periods when dividend payments hit a trough — as they did at the end of 2009 — the broad market has historically rallied. Since 1970, the S.& P. 500 has returned an average 9.7 percent annually during periods of dividend recoveries.
What’s more, those rallies tend to last several years. Over the last 40 years, in the first year after dividend recoveries, stocks have returned 10.6 percent, on average, Mr. Belski said. The second years of such rallies have had smaller gains, of 3.4 percent on average, followed by gains of 10.8 percent in the third year and 20.1 percent in the fourth.
ARE there signs that dividend-paying shares are starting to rally?
Yes. While dividend payers started the year running about neck and neck with the broad market, they’ve held up better in recent weeks as global markets have become volatile because of the European debt crisis.
So far this year, the Dow Jones Select U.S. Dividend index is up 1.9 percent, while the S.& P. 500 is down 2.5 percent, including dividends.
And this is before the market enters the third and fourth quarters, periods when shares of companies with rising dividends tend to perform better than in the first half of the year, according to Oppenheimer research.
“The past is never a perfect predictor of the future, but this portends a potential upside for the market,” Mr. Belski said. “More than anything, it’s a sign that the economy and the markets are in a sustainable recovery mode.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
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