Dividends Are Down, but They Are Vastly Better Than Expected

It’s been a horrendous year for so many things: public health, employment, civil discourse, political norms, cultural and sports events, restaurants, small businesses of nearly every sort. Make your own list. There are plenty of choices.

In the stock market, dividend payouts had appeared to be among the prime casualties of the recession caused by the coronavirus pandemic. With the economy in a steep dive earlier this year, big corporations began hoarding cash. There were predictions by Goldman Sachs, among others, that dividends would fall by more than 20 percent, cutting payouts to investors by hundreds of millions of dollars.

Well, it hasn’t turned out that way. Dividends are down, yes, after years of steady and substantial gains.

But with little more than a month to go in 2020, the total decline for dividends in the benchmark S&P 500 stock index is likely to have amounted to less than 1 percent — 0.67 percent, more precisely. That’s the estimate of Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, who has been tracking these numbers closely for decades.

A drop in that range would be inconsequential, given the severity of the stock market downturn earlier in the year and the rate that the economy shrank, 31.4 percent, in the second quarter of the year.

“Considering where we were, this hasn’t been a bad year for dividends,” Mr. Silverblatt said in an interview. “It has been a great year.”

What accounts for the turnaround?

In a word, Mr. Silverblatt said: “Liquidity.”

Corporations have been inundated with a flood of cash. Enormous monetary and fiscal stimulus programs have helped keep big businesses afloat and allowed many of them to maintain their dividend payouts, which are prized by many income-seeking investors.

Interest rates are extraordinarily low and likely to remain so for years to come, central bankers say. That’s hurting people who count on bond income to pay for their retirement. But the low rates have helped keep dividend payments coming. American corporations are taking advantage of the low rates by selling bonds at a frenetic pace: more than $1.6 billion this year, according to the data provider Dealogic. Some of that cash has reached investors in the form of dividends.

Still, the business backdrop remains unsettled. Corporate earnings, which fell a calamitous 35.1 percent in the second quarter, are still depressed, with a further drop of 8.7 percent through Nov. 17, according to Yardeni Research.

When the coronavirus first surged in the United States, companies in many of the most heavily hit business sectors found themselves in a severe cash crunch. For the three months that ended on March 31, S&P 500 companies actually paid out more money in dividends than they earned: 130 percent of reported earnings, S&P data shows.

A deficit that big is not sustainable. It’s possible to spend more than you earn for a while, by drawing down savings and by borrowing money. But as anyone caught in that predicament knows, it will eventually catch up with you. No wonder corporate America began laying off workers, stopping stock buybacks — and freezing and trimming dividends.

A total of 42 companies in the S&P 500, heavily concentrated among hotels, airlines and retailers, suspended dividend payments from March through July, according to Mr. Silverblatt’s data. Among them are American Airlines, Ross Stores and Hilton Worldwide. The car companies, Ford and General Motors, confronting sharply declining sales and in urgent need of cash, also stopped paying dividends. And energy companies like Apache, Dominion Energy, Halliburton and Occidental Petroleum reduced their dividend payouts as the prices of oil and gas plummeted.

But the business outlook for many companies has since turned around, and their dividend actions reflect it. Darden Restaurants, Estée Lauder and Marathon Oil suspended their dividend payments earlier this year, only to reinstate them recently. These moves have helped to improve the overall picture for dividends.

Enormous increases in dividend payouts by a handful of companies have also bolstered the overall total. The two biggest increases on Mr. Silverblatt’s list come from two reliable giants. Microsoft increased its dividend by 9.8 percent in September, which amounts to a boost of $1.5 billion. Apple in April increased its dividend by $875 million. Both companies have been flush with cash and able to generate hefty profits and dividend payouts, even in a pandemic.

The next two big dividend increases came from members of the S&P Dividend Aristocrats index — a group of companies that have increased dividends annually for at least 25 consecutive years. AbbVie, the drug company, raised its dividends by $847 million in October. And Chevron, the oil company, did so by $756 million in January — before the economy and oil prices plunged. It has maintained quarterly dividends since then, despite declining oil prices, in deference to the presumed desires of the investors who have been counting on that income stream.

Whether Chevron — and a host of other companies — will manage to stave off dividend cuts early next year will depend on the state of the economy, which is likely to depend on the state of the pandemic. Big dividend-paying drug companies like Pfizer and Johnson & Johnson are working on coronavirus vaccines that could help turn the health crisis around.

Many of the biggest and fastest-growing companies don’t pay dividends, of course. These include the so-called FANG stocks — Facebook, Amazon, Netflix and Google (Alphabet) — as well as Tesla, which will soon be entering the S&P 500. These stocks have performed fabulously without them, demonstrating that total return — a combination of the change in share price, plus dividends — can be wonderful without any dividends at all.

Dividend yields have been declining for decades: For the S&P 500, they were as high as an average 9.2 percent in 1938, but only average 1.7 percent today. (That means that you would receive $1.70 in dividends for every $100 you held in stock.)

Still, dividends can be immensely helpful.

“They have historically been an important part of stock market returns,” said Jeffrey Yale Rubin, research director for the market analytic firm Birinyi Associates. He estimates that dividends accounted for 32 percent of the S&P 500’s total return in the bull market that ran from March 2009 through February of this year.

You don’t need dividends to prosper as an investor, but it’s nice to have them.

Where are dividends heading? It’s easy to project forward and assume that the economy is stabilizing and corporate payouts can be sustained. But projections like that sometimes go terribly awry.

As things stand now, Mr. Silverblatt says, it’s reasonable to project that corporate America will prosper and that dividend payments will continue to recover, perhaps even hitting a record next year, exceeding their 2019 peak.

But after decades tracking the ebb and flow of the corporate economy, he is cautious. “We don’t know whether we’ll be in another crisis next year, or what that might do to dividends,” he said. The coronavirus is surging and the economy is still vulnerable.

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