In a previous article, I showed the many periods where real, inflation-adjusted, dividend growth was negative. I think that article understated how inconsistent dividend growth has been. This article quantifies how often dividends have fallen, and it makes the case that examining only the last decade of dividend growth does not leave investors with an accurate picture of dividend history.
The U.S. equity market I refer to in this article is the subset of the market represented in Robert Shiller's data. It is not the entire market, but it is a close approximation.
Real dividends took a hit during the recession, but overall dividend growth over the last ten years has been exceptional. The chart below shows year-over-year real dividend growth from January to January for the last ten years. Dividends fell significantly between January 2009 and January 2010, but grew in all the other January through January periods.
Over the history of the market, there have been very few periods where real dividends have grown as consistently:
If we look at the real change in dividends from year to year since 1872:
- There has only been one 10-year period of uninterrupted dividend growth.
- Dividends fell year over year: 59 times.
- Dividend fell more than 10%: 14 times.
- Dividends fell more than 20%: 7 times
- Dividends fell more than 30%: 2 times
Below is the cumulative dividend growth since 1871. As you can see the trend is upward, but it's a roller coaster ride.
In the next chart, we see how the payout ratio has changed. If we compare it to the chart above, we can see that dividend growth smoothed out as the payout ratio fell. Before the early 50s, dividends dropped precipitously frequently; since the 1950s, the declines in dividends have generally been less steep. The payout has fallen since the first half of the last century. With a low payout ratio, a company has an easier time increasing or maintaining dividends when earnings are falling.
However, there is a problem with looking at only the payout ratio. Companies today have been more inclined to use buybacks than they were in the past. Buybacks also boost dividends, as the payout is now divided amongst fewer shares. In the past, if we saw a low payout ratio, we could assume that companies had a lot of room to boost dividends, even when earnings were falling. However, with companies using buybacks more frequently, we need to look at (buybacks + dividends)/earnings; this ratio tells us what percentage of earnings are being returned to shareholders. The higher this ratio is, the less room companies have to raise dividends going forward, and any earnings shortfall will put their dividend growth at risk.
What does this mean to your portfolio?
If you're sticking to the Dividend Aristocrats or stocks in David Fish's Dividend Champions' spreadsheet, you can probably expect your stocks to maintain/raise dividends more consistently than the S&P as a whole.
How much more consistently is not clear. I have not seen enough data to quantify the relationship between past dividend streaks and future dividend payments.
The type of questions I would like answers to are:
- Did stocks with dividend streaks before 1929 continue to raise their dividends during the Great Depression?
- How about stocks that had dividend streak entering the 1970s - did their dividend keep up with inflation in that decade?
- The same for all the other periods when the S&P real dividends were dropping. What percentage of stocks with dividend streaks continue to raise dividends? For those that cut dividends, what was the magnitude?
I've only seen these questions addressed for the great recession and that was a deep recession, but it had a relatively short duration. Many other periods put more stress on dividend paying stocks. When earnings fall, dividend-paying stocks can maintain or raise dividends for short periods of time by upping payout ratios and dipping into cash. Over longer periods of time, high payout ratios and dipping into cash cannot be maintained, forcing more companies to cut dividends.
In the absence of sufficient evidence, my best guess is that during most periods where the US markets dividends are falling, stocks that enter the periods with dividend streaks will do a better job maintaining their dividends. However, I don't believe they would be immune from dividend cuts. Even investors who held only the Dividend Aristocrats would likely see their dividends shrink when the US market went through a sustained period of falling dividends.
For those chasing yield, I believe the consequences would be much worse. High yields almost always indicate a dividend is at risk. If dividends are falling for the US market, you can expect high-yield stocks to be hit the hardest. To be clear, when I talk about high yields, I'm speaking about yields relative to peers. What constitutes high yield for a utility is different than what constitutes high yield for a company that sells consumer goods.
All investors should factor in the possibility of dividend cuts into their planning. This is especially important for those investing in high-yield stocks.
- Dividend growth over the last decade has been consistent, with real dividends dropping compared to the previous year only once.
- Since 1871, real dividends for the US market have dropped year over year 40% of the time.
- Lower payout ratios make it easier for companies to grow/maintain dividends even when earnings are dropping. However, investors should also factor in buybacks. Companies that are already returning most of their cash to investors in the form of dividends and buybacks will have little room to adjust to falling earnings.
- The last recession was not a good stress test of dividend paying stocks. There were many economic periods that impacted dividends more than the last recession.
- The Dividend Aristocrats and other dividend-streak stocks should provide more consistent dividend growth, but there is not enough evidence to quantify how much better they will do in periods when dividends are under stress.
- High-yield stocks will be especially hard hit during periods when dividends are under stress.
I am not a professional advisor or researcher. I am an individual investor who studies investing and shares my thoughts. I encourage all investors do their own due diligence and please share your findings. I strongly feel the best thing about Seeking Alpha is the sharing of ideas. Please comment; I value your input. Divergent opinions are welcome.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.