How Reliable Is Dividend Income: A Deep Dive Into S&P 500 Dividend Payers

Includes: SPY
by: Brian Ditchek


Dividend reliability is critically important to the dividend growth investor.

To assess a potential worst case scenario, the dividend reliability of S&P500 stocks over the past 10 years is analyzed.

A proposal is made for the maximum percentage a dividend growth investor should plan on withdrawing in retirement.

Can I rely on my dividend income? As a recent convert to the dividend growth portfolio strategy for investing, I am putting my money into dividend growth stocks and will plan on taking out the income in just a few years to partially fund my expenses in retirement. Now that I have oriented my nest egg into a range of dividend growth stocks, how secure should I feel that my income will go up each year, through good investment times and bad? As a corollary to that question, should I plan on withdrawing my entire dividend income each year or should I plan on living on a fixed percentage of this income and just sock the balance away to enhance dividend growth rates and give myself a little buffer just in case the bad times bring dividend income drops? I am a conservative investor; should I also be a conservative dividend income withdrawer?

To answer these questions for myself and other dividend growth investors, I decided that I had to better understand the dividend growth behavior of all S&P500 stocks. I limited myself to the S&P since that is where better than 90% of the stocks I own are housed and I suspect that most dividend growth investors look to the US large caps represented in the S&P 500 for their investments. As research for the article, I tabulated all the regular dividends paid for each of the S&P 500 stocks over the past 10 years, from 2005 to 2014. All dividend data came from Charles Schwab and a list of the current 500 stocks in the S&P 500 came from the ETF channel's listings for the SPDR S&P 500 ETF (NYSEARCA:SPY). In what follows, I am only referring to regular dividends. Special dividends are not included.

Categorizing the current S&P 500 stocks

Let's start with a breakdown of the SPY stocks into categories:

1) those that haven't issued any dividends through this 10-year period

2) stocks that had one or more years of dividends

3) stocks that issued dividends in each of the 10 years, but had one or more years in which the dividend was decreased

4) stocks that issued dividends in each of the 10 years and never decreased them but, in some years, the dividends were kept unchanged

5) stocks that increased their dividend in each year over this period.

The below pie chart shows the make-up of the current 500 S&P stocks into these categories.

As you can see, 77 or 15.4% of the S&P 500 stocks have not offered any dividends during this period. Think Berkshire Hathaway (NYSE:BRK.B) or Facebook (NASDAQ:FB) as examples in this category. As a dividend growth investor would not consider these as investment choices, I did not include these stocks in the balance of the analysis. I did include stocks with partial dividend years. In this case, think Apple (NASDAQ:AAPL), which started issuing dividends in 2013, or a stock like Seagate Technology (NASDAQ:STX), which paid a dividend each year, except 2010. Most of the stocks in this category have paid dividends continuously for at least the last several years. As I am not including the first category, the analysis of dividend reliability presented will include a total of 423 stocks, 77 short of the 500 in the current S&P 500.

The main highlights from the pie chart are:

  • A total of 125 of the stocks or 29.5%, increased dividends each of these 9 years.
  • A total of 95 stocks, or 22.5% of the total, either increased their dividend or kept them the same for each of the years considered.
  • 91 or 21.5% of the stocks that did offer a dividend each year had one or more years in which the dividend was decreased.

Dividend growth investors want to hold some of the first group of 125 and avoid all of the 91 in the latter group, if they can. The middle group can be acceptable to dividend growth investors as many in this group still had strong dividend growth over the full 10 years.

A year by year analysis of dividends of the current S&P 500 stocks

As a first look, the chart below shows the total dividend dollars paid each year by the 500 stocks. It is calculated simply as a summation for each year of the dividend dollars in that year. It is the dividend dollars an investor would have received if he had 1 share of each of the current S&P 500 stocks. The following chart shows the change in the growth of the dividend income.

Note: the percent changes shown may differ from the actual S&P 500 reported stocks due to differences in weighting and changes in the portfolio that are not considered here.

The charts show that dividend dollars decreased in only 1 year: 2009. The median dividend growth rate over these years was 10.9% with a large standard deviation of 9.8%. The Great Recession year of 2009 caused a net decrease of dividend dollars awarded of 18.5%. The year before and after 2009 showed positive dividend growth, though it was below the average growth rate. The other 6 years all grew at over 10% per year.

Digging deeper into the dividend growth history of these stocks, the following charts show the percentage each of stocks, each year, that grew their dividend and those that decreased it, respectively.

On average, 68% of the 423 stocks analyzed raised their dividends in a year. The low of 45.4% occurred in 2009 and last year, 2014, it hit a high of 84.6%.

On average, 6% of the 423 stocks analyzed decreased their dividends in a year. In 2009, 80 stocks or 18.9% of the 423 stocks decreased the dividend.

In reading the charts, for any given year, the sum of the % increasing stocks and the % decreasing stocks is less than 100% and is typically about 65% to 85%. The difference is those stocks that kept the dividend the same. Included in this difference are stocks that had dividends both years and kept them the same and stocks that did not have a dividend in either of those years (but did have a dividend in at least one of the 10 years).

Dividend Reliability

My purpose in putting all the dividends paid by the current S&P 500 stocks over the past 10 years into an excel file was to help assess my confidence level in dividend paying ability of stocks. What have I concluded? Having done the analysis, I am more confident than before that my dividend income has a high probability of continuing and growing, but I am also aware that bad years can bring either a slowdown in income growth or worse, an income drop. As a drop is possible, I think it is prudent to plan to withdraw and rely on less than 100% of my dividend income.

Consider the following conclusions, which may apply to an investor in S&P500 stocks:

  • Even if I randomly selected my dividend growth stocks from the 423 dividend paying stocks of the S&P500, I would expect that about 68% of my stocks would increase dividends each year.
  • Similarly, I would expect on average that 6% of my randomly selected stocks would decrease their dividend in a given year.
  • All years are not the same. In bad years for the market, up to 18.9% of my stocks may decrease their dividends. Even though 45.4% of my stocks may still raise their dividend in that same "bad" year, the 18.9% of stocks that lowered dividends lowered them sufficiently to overcome the impact of the dividend increasing stocks to result in an overall lower dividend income. In the "bad" year of 2009, it was down 18.5%.

Of course, dividend growth investors do not randomly select stocks from the S&P500 dividend payers, but, hopefully, do their homework and are very selective in buying companies that are the most reliable dividend payers. With this assumption, looking at the S&P500 stocks must be considered a worst case scenario. But when planning for retirement, it makes sense to consider the worst case scenarios and prepare for them.

Based on that cautious thinking, I believe it is prudent for dividend growth investors planning for retirement to plan on withdrawing no more than 80% of their available dividend income in the years of increasing dividends. This 80% rule is most important for retirees needing each and every dividend dollar to pay expenses. These are the people who cannot afford a "bad" year with a dividend income decrease. In the event that a bad year happens, the retiree can take the full 100% and that should still exceed the dollar amount of the good year 80% dollars.

The remaining 20% would still be plowed back into your favorite dividend payers to enhance growth rates and provide the additional security needed when depending upon dividend income.

Overall this analysis adds to my faith that investing in a dividend growth portfolio is the right strategy for me and one that I can count on. But I will also plan on employing the recommended 80% rule. I will continue to have faith that the dividend income will grow in normal years and be prepared in the rare event that the economy is so bad that my dividend income drops 20%.

Disclosure: The author is long BRK.B, VOO.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.