Corporate America, flush with cash, is finally sharing a bit more with shareholders. It’s about time. U.S. corporations are on track yet again to report amazing returns for the first quarter. And they have tons of cash — about $3.6 trillion.
Depending on how you slice the data, you could say companies are finally getting generous. Or you could say, okay, they could be doing a great deal more for investors.
Here’s the good news for shareholders: 401 companies in the S&P 500 are now paying dividends, the most since 1999. S&P Senior Index analyst Howard Silverblatt estimates that total dividend payouts could reach $279 billion this year, handily beating the 2008 record of $248 billion. About two-fifths of the companies in the S&P 500 are offering yields higher than the 10-year U.S. Treasury, about 2% for sometime now. Some blue chip company dividend yields are substantially higher, like Johnson and Johnson (3.5%), AT&T (5.5%), and Merck (4.3%).
The mix of companies paying dividends is changing. Traditionally they include utilities, consumer staple companies (still No. 1 among dividend payers) and telecommunications companies. But now, the No. 2 group paying dividends is information technology — which includes companies like Microsoft, Cisco, Dell, IBM, and of course the newest dividend payer, Apple. Tom Roseen, research analyst at Lipper, laughs out loud when I tell him that info tech now accounts for nearly 14% of the dividend payments in the S&P 500. That’s just how new and surprising the change is. Silverblatt writes in a recent email: “Lots of things have changed over my 35 years (if I make it to May) at S&P, but the statement that Technology could be the biggest payer definitely needs to be added to my ‘who woulda thunk it’ list. ”
That’s because the info tech sector has had the reputation for plowing cash back into research and development; it’s the kind of industry that needs constantly to innovate to stay competitive. In general, the rule of thumb is that growing companies don’t pay dividends. Alan Muschott, portfolio manager, Franklin Equity Income Fund, says it’s time to shut down that myth. “Plenty of innovative companies are paying dividends,” he says. And companies that pay dividends tend to be both shareholder friendly and to boast better earnings growth, he says.
Despite these shifts, however, companies are paying just 30% of earnings in the form of dividends — about half the historical rate, says Muschott. That’s because dividends haven’t risen nearly as quickly as corporate profits in the past few years. A slew of companies have recently boosted their dividends. Many are buying back shares, too. But (isn’t there always a ‘but’?) the corporate chieftains haven’t been in a hurry to raise dividends even more. Uncertainty reins. The recovery is now three years old, and still everyone worries about its vigor. Europe is still a thorn. The housing market is still weak. Companies are pushing productivity over new hires. And retail investors are still pretty queasy when it comes to stocks. So far this year, they’ve put $12.8 billion in equity income funds, says Lipper. That’s about one-tenth of the $119 billion they poured into taxable bond funds.
Another downer for investors: The income tax on dividends may jump from 15% to 43.4% next year, which would dent returns for investments that aren’t in tax deferred accounts — about half of retail accounts, according to Ned Davis Research.
Nonetheless, Franklin’s Muschott says the big corporate cash balances and low payout ratios mean that good things are in the offing once everyone gains full confidence in the economic recovery. Investors need to think about that. According to Lipper, so far this year fixed income funds have returned just 3.3%; equity funds have gained 11% and equity income funds are up 8.5%. If dividend payouts take off, so will those returns.
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