One of the most confounding facts in the often-confounding rally in stock markets over the past nine months is that it has come even as companies have paid investors less and less for holding their stocks. But that's about to change, says Standard & Poor's.
The stock-index provider said in a report yesterday that it expects total dividend payments from the S&P 500 companies to rise 6.1 per cent in 2010 - reversing part of the estimated 21.4-per-cent decline in dividends in 2009. If S&P is right, it would mark the first time since 2007 that S&P 500 dividend payments have risen.
Over the past two years in the dividend darkness, the S&P 500 has shed a mind-blowing $60-billion (U.S.) in dividend payments alone. Yet, amazingly, the U.S. stock benchmark has actually seen more companies raise their payouts than cut them: To date, there have been 388 dividend increases in 2008 and 2009 combined, compared with 140 decreases or suspensions.
The problem, of course, is that the cuts and suspensions have far outpaced the increases in terms of scale. So far this year, for example, we have seen 147 dividend increases, totalling $9.5-billion. But the 78 dividend cuts and suspensions have combined for $48-billion in lost payments.
However, the tide should slowly turn in 2010, S&P senior index analyst Howard Silverblatt said.
"While we do expect additional dividend decreases, Standard & Poor's believes that improving economic conditions will inspire companies to slowly increase their payouts," he said in a news release. "We expect dividend rate increases to average in the mid- to high-single digits, with the second half of the year much better than the first half, as companies will need time to reassure themselves of their product and financial position."
A rising dividend environment could provide a new key driver for stocks, as they enter a year in which the big rebound in valuations and earnings expectations seen in 2009 will be hard to duplicate.
As Oppenheimer Asset Management chief strategist Brian Belski argued in a report last summer, dividend-paying stocks are particularly attractive to investors as long as central banks are keeping interest rates depressed at historical lows. In addition, he pointed out, companies that are able to increase their dividends have a strong track record for outperformance - suggesting that in times when more companies are raising dividends than lowering them, the overall market stands to get a lift.
Before we get too excited, though, it's worth noting that this is a preliminary forecast. As such, it does contain significant risk should the economy turn out better or worse than S&P has assumed in the base-case scenario it used to come up with its projection. And, unfortunately, more of the risk is to the downside than the upside.
In S&P's more optimistic economic scenario, it projects that dividend growth could reach 8.9 per cent - well above the long-term historical average of 5.6 per cent. However, should S&P's pessimistic scenario occur - in which unemployment rises and U.S. government spending continues to climb - dividends could drop as much as another 20 per cent next year.
"However, under this scenario, dividends might be the least of our problems," Mr. Silverblatt said.
By the numbers
Key stats for the S&P 500
2.2 Current dividend yield
22.2 Current price-to-earnings ratio based in last 12 months
17.6 Estimated P/E ratio 12 months from now
891.25 Current sales per share (U.S. dollars)
405 Number of stocks that have gained in 2009
22.1Year-to-date percentage return for the index