Are Dividends Shrinking? - Bezek's Daily Briefing

| About: SPDR S&P (SPYD)


A recent report stated that global dividend payments shrank compared to the same quarter last year.

That's technically true, but somewhat misleading.

Some thoughts on slowing dividend growth rates.

A popular article recently here at Seeking Alpha ran with the headline: No Surprise Here, Dividends Are Shrinking. With the recent focus on dividend investing, particularly as other trustworthy sources of yield have lost allure in recent years, the suggestion that dividends are "shrinking" would be a scary one indeed. But is it true?

Based on the link that the original author referred to, the claim is technically true, but in practice, it's not nearly that simple. Here's more context from the cited CityWire Money article:

Global dividends fell 4% year-on-year during the third quarter, as US dividend growth slowed to a fresh low since the financial crisis.

US payouts fell 7% to $100.4 billion, largely due to a decline in special dividends, according to the Henderson Global Dividend Index. These are one-off payments that are separate from the normal dividend cycle, usually as a result of exceptional profits. The US accounts for two fifths of global dividends, so this is why the slowdown has had an impact at a global level.

On an underlying basis when special dividends and currency effects are stripped out, dividend growth was 3%. This represents the slowest rate since the financial crisis in 2009[.]

As we can see, the overall level of dividends paid out over the quarter did, in fact, decline slightly. However, the level of recurring dividends increased.

The average dividend growth investor "DGI" reading this or other investing websites isn't relying on special dividends to pay the bills. You look at the recurring payments a company offers, and plan your budget around those, with the companies' dividend increases over the course of the year amounting to your net "pay raise."

In these terms, dividend payments rose by 3% - that's not a great figure, indeed, the lowest since 2009 - but it still beats inflation, and relatively few companies have outright cut payments recently, now that the energy bust has already made its mark and largely been digested by the dividend-investing scene.

I'd argue that the decline of special dividends isn't necessarily terrible news either. Sure, it's always fun receiving a large unexpected cash bonus from our investments. But generally the share price will drop by an equivalent amount - there's generally no economic gain from special dividends.

And many special dividends have been powered by the increasing amount of financial machinations over the past few years. To the extent that we were getting more "dividends" due to financial gimmicks rather than growing profits, it's hardly a tragedy for these special dividends to recede.

I'd rather that management focus its attention, in most cases, on improving their underlying businesses rather than spending time on clever M&A activity, tax inversions, fancy currency or interest rate swaps, and other such elaborate financial activity.

While the impact of the Fed's interest rate hiking cycle remains to be seen, to the extent it reduces the amount of time spent on financial paper shuffling, it's bound to be good for both the economy and investors.

Switching gears, more specifically, we can check the dividends in decline narrative in another way.

What has the S&P 500 (NYSEARCA:SPY) paid out to holders so far in 2016, versus 2015? If dividends are shrinking, we'd expect to see SPY paying a stagnant or falling dividend.

In Q1 of 2015, SPY paid a distribution of 93 cents. This jumped up to $1.05 for the same quarter of 2016, a 13% increase. That's nice. In Q2 '15, SPY paid $1.03, in Q2 this year, SPY paid $1.08, a 4.9% increase. Q3 '15 and Q3 '16 showed the same $1.03 and $1.08 payouts, again a near 5% year-over-year increase.

For long-term investors in the S&P 500, there isn't any sign that dividend increases from the market as a whole are coming to an end. 5% is slower than growth in recent years, there's a slowdown, but no outright shrinkage.

Finally, I'd note that slower dividend growth rates - on a broad index level - aren't always bad news either. It's been widely theorized that the economy's recovery from 2009 onward has been fairly weak in part due to banks and large corporations hoarding capital rather than investing in new projects.

Many companies, across a huge swath of the economy, have taken to share buybacks, higher dividend payouts (often driven by ballooning payout ratios rather than robust earnings), while foregoing capital expenditure in new projects.

With the rise in interest rates and potentially very stimulative new government fiscal policy, there's a real chance that more companies will start investing in the economy by hiring more workers, building new infrastructure, and upping marketing/research/etc. budgets. If that causes faster economic growth but temporarily reduces the amount of excess capital leftover for dividends, investors will fare better in the longer term.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.