The New York Times published an interesting article this week discussing dividends paid by U.S. companies. The author Christine Hauser noted that the increased dividend payout last year is a sign of recovery.
Companies listed in the Standard & Poor's 500-stock index paid $240.6 billion in dividends in 2011, up from $205 billion in 2010. The 2011 payout was the largest since 2008, when firms had not yet been hit by the full brunt of the financial crisis and paid a record $247.8 billion in dividends.
Dividends are on track to set a record of more than $252 billion in 2012, according to data released by S.& P. that is based on the current dividend rates of 394 companies. While there could be some changes as the reporting season begins this week, analysts said companies were expected to continue to pay shareholders, possibly at the same rates or higher, as some of the economic and fiscal headwinds from 2011 tapered off.
“Dividends have been rising strongly,” said Binky Chadha, the chief strategist at Deutsche Bank. “And the rise that we have seen has plenty of upside.”
Companies that pay high dividends were some of the best performers in the markets last year.
Telecommunications, utilities and health care shares had the highest yield rates at the end of 2011, at 5.86%, 4.13% and 3%, respectively.
I agree with the author’s conclusion since dividend payments come out of profits earned and is a strong indicator of a company’s financial performance.
Though it is commendable that U.S. companies are increasing their dividend payouts, they still lag when compared to the payouts of foreign companies. Relative to their overseas peers, U.S. firms hold over $1 Trillion in cash and equivalents on their balance sheets. So much higher payouts are possible.
The current yield on the S&P 500 is 2.08%. At the end of 2011, the yield of the MSCI Index for U.S. stood at just 2.2% compared to much higher yields in other countries as shown in the graphic below:
Click to enlarge:
Source: Guide to the Markets, 1Q 2012, J.P. Morgan Asset Management
While companies in certain industries in the U.S. have higher yields than the S&P 500, most of the others still hold a significant portion of profits as retained capital for future investment. Invariably these firms squander the funds on share buybacks, expensive acquisitions and other corporate actions due to short-term thinking by the management. In a majority of the cases, these actions hurt long-term shareholders. Hence instead of narrowly focused on U.S. firms, investors looking for dividend income should consider investing in foreign stocks. For example, most European companies have a tradition of paying high dividends in two installments per year. Though markets in Europe were crushed last year, excluding financials one can find other sectors which offer higher yields and growth.
SPDR S&P 500 ETF (SPY)
SPDR STOXX Europe 50 ETF (FEU)
iShares Dow Jones Select Dividend Index (DVY)
Vanguard European ETF (VGK)
Disclosure: No positions