Global dividends fell at the fastest pace since mid-2015 in Q3 as American dividend growth slowed to a post-crisis low.
According to the Henderson global dividend index, U.S. payouts fell to $100.4B, down 7% on a headline basis.
Payments were constrained by subdued profit growth, which can partly be explained by a strong dollar, alongside higher levels of debt, causing management to take a cautious approach when deploying cash.
Dividend strategies in general have done well this year, and dividend growth has outperformed since interest rates began their sharp rise in late summer.
Evercore's Ahbra Banerji suggests even better returns by adding a screen for low payout ratios. Banerji and team tested large-caps, mid-caps, and small-caps, and found combining dividend yield, payout ratio, and growth outperformed simpler dividend strategies.
His top picks using that troika: VF Corp (NYSE:VFC), with a 2.6% yield and 53.4% payout ratio; Tiffany (NYSE:TIF) 2.3% yield and 48.2% payout ratio; Marathon Petroleum (NYSE:MPC) 3.3% yield and 36.3% payout ratio; Phillips 66 (NYSE:PSX) 3% yield and 41.1% payout ratio; BB&T 3% and 42.7% payout ratio.
Though still beating the S&P 500 for the year, popular dividend ETFs underperformed in Q3 as the number of dividend increases fell 14%, and dividend cuts rose. On a net basis, there were $6B in dividend increases last quarter, down from $10B in Q3 one year ago, and $7.3B in Q2.
In a world of still-invisible interest rates though, there's no flagging in the funds' popularity though. Vanguard's Dividend Appreciation ETF (NYSEARCA:VIG) took in $573M in Q3, while the iShares Select Dividend ETF (NYSEARCA:DVY) brought in $533M. The iShares Core High Dividend ETF (NYSEARCA:HDV) had net inflows of $591.4M, and nearly $1B in fresh money poured into the Vanguard High Dividend Yield ETF (NYSEARCA:VYM). State Street's SPDR S&P Dividend ETF had net inflows of $429M.
Payouts at S&P 500 companies over the last year footed to nearly 38% of net income during the period, according to FactSet - the highest level since February 2009. A full 44 S&P 500 companies paid annual dividends in excess of the previous 12 months of income - that's the highest number in a decade.
At least part of the rise is thanks to earnings that have now fallen for five quarters in a row combined with corporations that bend over backwards not to cut dividends. Caterpillar makes a nice example: It hiked its dividend 10% in June 2015, now paying out at a $3.08 per share annual rate. EPS, however, slumped to $2.18 in the 12 months ended June 30 from $3.84 a year earlier, and the CEO isn't expecting a rebound this year.
CAT, however, is maintaining the dividend, not wanting to upset a 22-year record of making higher payouts.
Because they historically haven't been yield names, tech stocks tend to be underweighted in dividend ETFs. The Vanguard Dividend Appreciation Index (NYSEARCA:VIG), the SPDR S&P Dividend (NYSEARCA:SDY), and the iShares Select Dividend (NYSEARCA:DVY) have 10%, 4%, and 2% of their assets, respectively, in tech.
For those looking for more tech exposure in their dividend ETF, the First Trust Nasdaq Technology Dividend Index (NASDAQ:TDIV) has mostly big-cap tech and telecom services companies which have paid and not cut a dividend in the past year. Apple, Cisco, Qualcomm, Microsoft, and IBM are among the top-10 holdings.
The WisdomTree U.S. Quality Dividend ETF (NASDAQ:DGRW) has 19% of its holdings in tech.
The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) and FlexShares Quality Dividend Defensive ETF (NYSEARCA:QDEF) each have double-digit percentage of AUM in tech.
"John Bull can stand many things but he cannot stand two per cent,” said Walter Bagehot about 150 years ago.
Today, Carlyle Group's Jason Thomas says low interest rates are perversely working against raising the level of business investment. The reason, says Thomas, channeling Bagehot, is retirees' need for current income - public companies distributing more of their income today (instead of investing it for the future) are being rewarded with premium valuations.
Since the Fed took rates to about zero in 2009, U.S. companies have lifted buybacks by 194%, dividends by 66.5%, but investment by only 44%, says Thomas. Big energy companies boosting payouts while slashing capex are an easy example, but even companies not having to deal with lower commodity prices are doing so. Witness McDonald's, Eli Lilly, and Verizon holding the line on capex while lifting dividends.
The WSJ's Grep Ip notes when real five-year yields slid 50 basis points between February and May this year, the S&P Dividend Aristocrats Index outperformed the S&P 500 by 4.8% - as rates go lower, a new investment needs even a higher hurdle to boost the stock price more than a bigger dividend.
Less than years ago, the rate crossed $300B for the first time, and a year later reached $350B. S&P Dow Jones Indices' Howard Silverblatt sees the number passing $400B by the time he opens his pool for the summer.
Though the absolute number continues to grow, the amount of dividend increases is slowing and the rate of payout cuts is surging, says Silverblatt.
In 2013, Silverblatt demonstrated the power of dividends (and hindsight) by highlighting a "magnificent seven" - those DJIA companies which had boosted payout for at least 30 years: 3M, Coca-Cola, Exxon, J&J, McDonald's, P&G, and Wal-Mart. One thousand dollars invested in each at the end of 1982 would have grown to $425K at the end of 2012 - a 14.7% annualized return.
Kinder Morgan is making plenty of headlines with its dividend cut, but Barclays says it's energy companies which have been the most reluctant to slash payouts, and energy sector dividends are at an all-time high even with the oil price crash.
In fact, says the team, dividends from the energy sector were up 3% Y/Y in Q3.
For the S&P 500 as a whole, Barclays expects a 5% increase next year, which would be the slowest pace of dividend growth since 2010. The energy sector should see a 10% decline in payouts.
The best strategy: Buy those companies with high dividend-growth rates (currently financials and tech).
Blame it (mostly) on energy/commodities as Markit expects another 62% cut in dividends in the basic resources sector. Payouts in the media sector will decline 21%, but this is due to Disney switching from paying annually to semi-annually, and reallocating $1.1B in returns to next year.
In total, Markit sees dividend growth of just 3.4% in Q4, down from 11.5%, 11.4%, and 24.1% growth in the previous three quarters. Special dividends in Q4 this year will total just $1.5B, down from $5.6B a year ago.
The top five dividend increases coming in Q4: MasterCard (NYSE:MA) is expected to boost its payout by 31%; Visa (NYSE:V) by 25%, CVS (NYSE:CVS) Health by 23%, Lincoln Financial (NYSE:LNC) by 20%, and Starbucks (NASDAQ:SBUX) by 19%.
Goldman's sees the S&P 500 hitting a mid-year high of 2,150 by mid-year, but fading to 2,100 by year-end after the Fed hikes rates. Its 12-month forecast of 2,125 stands against the current level of 2,130.
With appreciation returns expected to be nil, Goldman suggests having a look at its dividend growth portfolio - a sector-neutral basket of 50 stocks. They have a median yield of 2.5% and are expected to boost payouts by 16% this year and 12% in 2016. The group's P-E ratio is 15 vs. 17.3 for the S&P 500.
The ten highest-yielding additions: Harley-Davidson (NYSE:HOG) - with a 2.3% yield, Home Depot (NYSE:HD) - 2.1%, Dr. Pepper Snapple (NYSE:DPS) - 2.5%, National Oilwell Varco (NYSE:NOV) - 3.6%, Regions Financial (NYSE:RF) - 2.3%, Baxter International (NYSE:BAX) - 3.1%, Cummins (NYSE:CMI) - 2.4%, Seagate Technology (NASDAQ:STX) - 3.9%, International Paper (NYSE:IP) - 3.1%, AES Corp (NYSE:AES) - 3%.
Looking over a ten-year horizon, Goldman expects dividends to account for 46% of the S&P 500's 5% annualized return, up from 20% during the current bull market which started in 2009.
Net dividend increases of $12B in Q4 compared to $12.7B a year prior. For all 2014, dividend increases of $54.8B were roughly the same as the previous year. 3,308 companies boosted dividends last year vs. 2,895 in 2013.
Non-S&P 500 companies got more into the act, with the percentage of those paying dividends rising to 48.5% in Q4 from 47.7% a year earlier.
The next area to watch for potential increases is the S&P Small Cap 600, says S&P Dow Jones' Howard Silverblatt, noting a net gain of 15 payers over the past six months.
A word of caution: Though the dollar amount of total dividend cuts in Q4 was flat from a year earlier, over half the cuts came from energy issues. It's not yet the financial dividend meltdown of 2008/2009, says Silverblatt, but energy does account for 11% of dividends in the general market.
Companies in the S&P 500 could pay dividends totaling a record $41.2B in November, says S&P Dow Jones' Howard Silverblatt, who notes payouts are on pace for their third straight year of double-digit growth - through the end of October, cash payments of $38.59 per share for the trailing 12-month period are up 10.94% compared to the year previous.
For 2015, the pace is set to be at least $40.49 per share, and that assumes no changes to dividend policy (which isn't going to happen, says Silverblatt). At the moment, 364 of the S&P 500 have a higher indicated dividend rate than their actual 2013 payout, and almost half have already declared a higher rate than their 2014 payment.
Dividends in Q2 rose from the first quarter by $12.6B, but the growth lagged that of a year ago when they increased $17.6B, according to S&P Dow Jones Indices. The number of firms boosting payouts in Q2 was 696 vs. just 591 a year ago.
“The good news is that the number of dividend increases was strong again in Q2, as the 696 increases were the most since 1979,” says the group's Howard Silverblatt. “The bad news is that the growth rate of actual aggregate cash payments has slowed, even as dividends continue to set record payments.”
Among the S&P 500, 84.4% of firms currently pay a dividend, the most since September 1998, while all 30 of the DJIA pay a dividend.