The combination of the recent stock market downturn and the flight to high-quality government bonds has created an unusual situation: For entire markets, one can now get higher rates of return just from company dividends than from long-term government bonds.
In the United States, for example, the collective dividend yield for all the stocks on the S&P 500 is 2.15 per cent. The yield on a 10-year U.S. government bond is 2.13 per cent. In Canada, the S&P/TSX composite index is yielding 2.66 per cent; the Canadian government 10-year bond is at 2.39 per cent.
Britain? The FTSE 100 is yielding 3.69 per cent, the 10-year Gilts 2.54 per cent. Germany? A dividend yield of 4.20 per cent, a 10-year Bund yield of 2.15 per cent.
For the global investor, these numbers imply that even if stocks don't appreciate in value (and they usually do, over time), the dividends alone will pay us more than a risk-free bond in many major markets.
"High dividend yields are indeed looking attractive at the moment, especially when considering the current low interest rate environment," said Brockhouse Cooper global macro strategist Pierre Lapointe and financial economist Alex Bellefleur in a report this week. "But how sustainable are they?" they asked. "High dividend yields are not meaningful if they are not going to be sustained."
European payouts still lagging
Mr. Lapointe and Mr. Bellefleur noted that in absolute terms – total value of dividends paid – dividends worldwide have edged above their pre-2008-crisis levels. In the Americas and Asia the total payouts are already roughly 10 per cent above where they were before the crisis, recession and bear market hit.
By contrast, total dividends in Europe are still about 14 per cent below their pre-2008 levels. This is largely due to deep cuts in dividends in the financial sector, but they noted that non-financial European equities also haven't returned their dividends to pre-recession levels.
A question of free cash flow yield
Those numbers suggest that Europe has much more room to sustain and grow dividends than North America and Asia. But there's a hitch: The European companies simply don't have the cash.
Mr. Lapointe and Mr. Bellefleur noted that the "free cash flow yield" (i.e. annual free cash flow per share as a percentage of share price) on the MSCI Europe stock index is 4.8 per cent, only slightly above the dividend yield of 4.2 per cent.
U.S. companies, on the other hand, have a free cash flow yield of 8 per cent – far above the 2.15-per-cent dividend yield on the S&P 500. "This means U.S. companies have much more room to pay and grow current dividends, while carrying out capital expenditures, than their European counterparts," they wrote.
David Parkinson