We estimate that dividends for S&P 500 companies will rise by over 10% this year. If we are right, it will be the first year since 2007 that dividends for the S&P will have risen on a year over year basis. Indeed, dividends have taken a beating over the last two years, and there are those who say that dividend investing is dead.
You won't be surprised if we don't see it that way. Our analysis of the dividend cuts for 2008 and 2009 reveals that the preponderance of the cuts were in the financial sector. Additionally, over the last three years, six of the nine major S&P industry sectors have raised their dividends (Consumer Cyclicals, Consumer Staples, Energy, Health-care,Tech, and Utilities), one sector kept dividends about the same (Industrials), and only two sectors cut dividends Financials and Materials). Here are five reasons that we believe dividends will rise in the coming year:
- Corporate earnings are projected to grow by nearly 25%, with free cash flow growing even faster.
- Loan loss reserves are peaking at many banks, and we are convinced that banks will begin hiking dividends as soon as the regulators allow it.
- Corporations don't need to hoard cash since the capital markets have returned to near normal functioning.
- Even among companies that don't want to commit to permanent dividend hikes, we believe many will choose to pay special one-time dividends as a reward to their shareholders.
- In our judgment, corporate America is growing very weary of the run and gun stock trading crowd. Companies are becoming more and more anxious to attract shareholders who are interested in the long-term success of the company. The quarter-to-quarter trading crowd can never be successfully sold on the idea of investing in companies as opposed to stocks.
We'll report periodically in future blogs on how dividend growth is faring.
Disclosure: No positions