Dividends: A Macro Look at Yields, Past and Future

Feb.14.11 | About: SPDR S&P (SPY)

It is said: An Investor is someone who buys asset for income, a speculator is someone who buys assets in the hopes of selling it at a higher price.

The current average dividend yield on the S&P 500 is only 1.71%. With the yield being so low, I wanted to check out the historical data of dividends to better give justice to any conclusion about dividends being either high or low currently.

Over the last 30 years now, the average dividend yield has been lower than historical average. Below is a chart from Doug Short showing historical perspective of Dividend yield and the S&P 500.

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(Click charts to enlarge)

Taking data from the Federal Flow of Funds reports, compiled by the St. Louis Fed, I pulled corporate net cash flow and net corporate dividend charts off their website.

Here is a chart of Corporate Net Cash Flow up to the 2nd Qtr. 2010.

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Now here is a chart of Corporate Net Dividends up to the 3rd Qtr of 2010.

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Dividends are part of the profits a company will share with their shareholders. Shaerholders normally receive X amount per share quarterly for their share of the profits.

Here I created a chart by dividing net corporate dividends by corporate net cash flow up to the 2nd Qtr of 2010. This is to see what percent of the cash flow went out back to owners as a share of the profits.


Interestingly, the average percent of net corporate cash flow being used as a dividend from 1947 - 1981 was 30.95%. From 1982 up till 2010, the average % of net corporate cash flow being used as dividends has been 38.18%.

The most recent percent of net corporate cash flow being used as a dividend was 48.77%! This is from an annual rate of $745.3 billion in dividends Vs Net Corporate Cashflows of $1510.0 billion.

I'm curious to see net corporate dividends as a % of GDP since 1947. Here is a chart of that I compiled showing just that.

Not surprising, as we've seen a greater percent of cash flows being payed out as dividends, dividends as a percent of GPD has also risen.

I pointed out in a recently written article about how Corporate profits as a % of GDP have become, in the last 10 years especially, well above average. Corporate profits as a percent of GDP are around 10% when the historical average is closer to 6%. I have a bias that corporate profits will fall as a percent of GPD in the years ahead. That should prove a major headwind for stocks.

Lastly, a look at the Average Dividend Yield of the S&P 500 historically.

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Source

Here is what we have now:

  • Well below average Dividend yields
  • Near Record high percent of cash flows being used as dividends
  • Near Record high total Dividends as a % of GDP

Conclusions

There will be many headwinds for dividend growth ahead.

For dividends to grow in the years ahead, they will have to remain at record high percent of cash flows and cash flows will need to grow. With corporate profits as a percentage of GDP near record high levels today, that may well prove difficult.

As inflation picks up from QE2 and possible (very likely in my judgment) QE3, low yields won't be attractive to equity buyers and that should put pressure on share prices. In other words, share prices need to fall to bring up the dividend yields.

If regression to the mean of dividends as a percentage of cash flow were to take hold, then investors should have very low expectations of rising dividends for the next 2-5 years at least. With the S & P 500 dividend paying less than 2% means investors should also have very low income expecations and in many cases, negative real returns.

Note: Good luck saving for your kids' college when tuition at the univerity close to where I live for example goes up year 4.5% this year and will go up 4.7% next year.

Market sentiment: Bearish


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.