Dividends: Yields Are Rising, But Will Growth Continue?

The falling stock prices have pushed dividend yields on major US indices like S&P 500 and Dow Jones to levels not seen since the early 1990’s. The current trailing 12 month dividend rate for the Dow Diamonds ETF (DIA) that tracks Dow Industrials average is $ 3.02, which makes for a dividend yield of 3.64%.

The current trailing 12 month dividend rate for the SPDRs ETF (SPY) which tracks the S&P 500 is $2.78 which makes up for a current yield of 3.20%.
Given the uncertainty of corporate earnings amidst the current recession, the market is probably pricing in the fact that the dividend cuts which have largely been concentrated to the financial sector, would spread over to other industries as well.

S&P didn’t help either as it lowered its dividend growth forecast for the S&P 500 dividends to a little over 1% from the 2007 dividend rate of $27.73. Furthermore S&P maintained a cautious outlook for dividend growth in general in 2009, since some of the recent dividend cuts by financials won’t be felt until next year.

The current crisis will most probably result in a halt to the strong dividend growth experienced by S&P 500 companies over the past 30 years. It would be interesting to see whether the dividend growth would plateau like it did during the 2000-2002 bear market or it would reverse as many companies across all industries are affected by the slowdown.

As the current yields on stock market indexes are going up north, I would update my screening model to reflect the current marke conditions and to only select issues which have current yields of at least 3.00% up from 2%.

Comments

[notsosmart:]

big deal.why dont you include the true inflation rate(not the gov.figure) in all your div articles.that will give folks some idea of whats really going on.this could be shown as the last sentence in all your articles.

2008 Oct 30 11:02 AM

[BloggingBanks:]

Last time I checked oil prices were over 50% lower than what they were in July. In addition oil is lowest since 2007.

Notsosmart, I like your choice of a handle :-)

2008 Oct 30 03:32 PM

[Old Trader:]

BloggingBanks,

Yeah, oil is down...but for how long? To a large degree, low prices are "self-correcting". NG has dropped as much as, if not more than, oil, and producers have already shut in production. I'll guarantee that all of those hard/expensive to tap tar sands projects up in Alberta are grinding to a halt. That huge oil/gas find off the coast in Brazil (VERY deep water)??? ....with oil at $63, or less, its going to stay RIGHT where its at.

Anyway, back to the post, I believe Ben Graham preferred to use the 10 year trailing average earnings when computing P/E, and defining what is "cheap". By that standard, we're not there yet.

2008 Oct 30 10:25 PM