The Meaning Of The Dividend Boom

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Includes: CAT, DELL, TGT, UTX
by: Dana Blankenhorn

Dividends are back.

I wrote yesterday how tech giants like Dell (NASDAQ:DELL) have started giving money back to shareholders, but the trend isn't isolated to tech.

Caterpillar (NYSE:CAT) and Target (NYSE:TGT) are just two of the non-techs that are now raising dividends. United Technologies (NYSE:UTX) is also raising its pay-out.

USA Today illustrates this news with a fat cat sitting on a pile of money, but I think there is more to it than that.

Sure, there's cash on corporate balance sheets, and it's responsible to eventually give that cash to shareholders. But a dividend isn't a one-off. It's a commitment. And it's an acknowledgment, both of the company's maturity and its confidence in the future.

Dividends go away, and in the Great Recession they went away in a big way. So the fact they're coming back is evidence that CEOs believe the worst of that is behind us. They wouldn't be obligating themselves into the future (if only by inference) if they thought Europe was about to collapse the U.S. economy. They would be husbanding their resources.

Another important point. Investors are changing. Many of us are even aging. As we age we change our investment preferences, from capital appreciation to income. The dividend boom is thus catnip for the Baby Boom demographic.

Getting income investors in the present environment is pretty easy. You're competing with bond yields, and bond yields are at near-record lows. When the government can borrow for 30 years at 2.5% why not get a good dividend stock with a similar yield, plus the possibility of gains down the road?

Income investors, those interested in yield, can also be easier to hold than those going after capital appreciation. After all, they came in at a fixed price - unless you lower your dividend their yield will remain where it is. Increasing your dividend raises that yield and makes you more attractive to those who've been in your stock for a while.

So there are lots of good reasons for management to be raising dividends. You put a floor under your price, you attract longer-term baby boom investors. And there are good reasons for investors to be chasing yield. Bonds aren't doing any better, your downside is limited, the income is welcome, the upside is real.

Dividends, in short, are a return to normalcy.

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