It’s only April, but already 2018 is on track to be a record year for cash payouts to shareholders.
Dividends increased by a whopping $18.8 billion in the first three months of the year for U.S. domestic common stocks, according to data tracked by S&P Dow Jones Indices. That’s up from increases of just $4.5 billion in the prior quarter, and $10.9 billion in the first quarter of 2017.
Among the 505 stocks in the Standard & Poor’s 500 index, 415 companies pay a dividend, and they increased their payments by an average of 13.9 percent in the first quarter. Meanwhile, not a single company in the S&P 500 cut its dividend in the first quarter. The result is a record cash payment to shareholders, with the rest of the year on track to easily beat that, says Howard Silverblatt, senior index analyst with S&P Dow Jones Indices.
“It’s going to be a good year for dividends, just as it’s going to be a good year for earnings,” he says. “Not too many people ever get a 13.9 percent pay raise.”
So why is this happening?
[See: 9 Financial Stocks to Buy for the Dividends.]
Companies are sitting on a record pile of cash, their earnings have been boosted by lower corporate tax rates and as a result, some firms see this as the prime opportunity to repatriate cash from operations abroad. It’s only natural their shareholders would expect a dividend hike, and that the companies would deliver.
“We shouldn’t be too surprised companies are hiking dividends,” says Simon Moore, chief investment officer of Moola. “The tax deal is increasing the available cash to companies, and so boards are deciding what they want to do with that cash. If they’re already paying a dividend, increasing it in line with that expected bump that they’re getting makes sense, and that’s what a lot of companies are doing.”
Rising interest rates also play a role. As the Federal Reserve raises interest rates, the same type of conservative income investor that’s often attracted to boring blue chip, dividend-paying stocks, may instead be tempted to flee to the perceived safety of higher-yielding bonds or certificates of deposit. As a result, dividend-issuing companies are facing more competition from alternate investments, Silverblatt says.
“Most dividend investors want stability,” he says. “Dividends, which for a while had no competition, are starting to get some.”
So far, the largest dividend hikes of 2018 have come from energy companies, as they start to rebound from low energy prices that pressured earnings. The hikes are so huge, they’re certainly an outlier. In February, Anadarko Petroleum Corp. ( APC) increased its dividend 400 percent and Pioneer Natural Resources Co. ( PXD) hiked its payout 300 percent. With the energy industry aside, some of the other large hikes have come from technology firm Juniper Networks ( JNPR, up 80 percent), insurance company Progressive Corp. ( PGR, up 64.7 percent) and discount retailer Ross Stores ( ROST, up 40.6 percent).
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
One of the most highly anticipated dividend hikes is likely to happen within the next month, which marks quarterly earnings season for many large companies. When Apple ( AAPL) reports its second quarter earnings on May 1, shareholders will be keenly watching for news on the company’s dividend, given the tech giant has said it plans to repatriate its multibillion-dollar stockpile of cash from abroad due to tax reform. At the company’s annual meeting in February, CEO Tim Cook indicated the board remains committed to annual dividend increases, but also commented that he’s “not a fan of” one-time, special dividends, either.
“We have said in the past that our intention was to have annual dividend increases,” Cook said. “Special dividends — I’m really not a fan of. I don’t think it helps the company and probably doesn’t help long shareholders either. Annual increases in the dividend [are] something that this board and this management team is committed to doing.”
Apple declared its first dividend since 1995 in March 2012 and has raised it every year since, including a 10.5 percent hike last May.
Other upcoming dividend hikes are expected from Exxon Mobil Corp. ( XOM), Procter & Gamble Co. ( PG), Johnson & Johnson ( JNJ) and W.W. Grainger ( GWW), which have each raised their payouts every April for the last 10 years, according to S&P Dow Jones Indices’s data.
“That cash dividend is a reward to shareholders, and we think good companies always allocate that in a good way,” says Terry Kelly, principal for Bartlett Wealth Management in Cincinnati.
He predicts P&G will raises its payout only 1 to 3 percent when it releases its third-quarter earnings on April 20. The company faced an expensive proxy battle last year and continues to grapple with a price war on consumer staples.
Overall, when thinking about dividend-paying companies as part of an investing strategy, Moore recommends investors don’t seek out the highest yielding stocks.
“If you look at the top 20 percent of dividend yielders, you can often be disappointed there,” he says. “Those high dividends are not sustainable.”
He also recommends investors certainly don’t focus on dividends alone. Stock buybacks are an increasingly important part of how companies are returning cash to shareholders, and are not to be overlooked as part of the equation.
“The dividend is just one signal of value, and I think it’s helpful,” he says. “But you want to be careful not to be overly reliant on just this on metric.” He recommends investors seek to broadly diversify their portfolio, and evaluate other metrics like price-earnings, price-book ratios and a company’s full income statement.
As for those record dividend hikes this year, don’t get too excited, he says.
[See: 8 Overseas Dividend Stocks to Watch.]
“I definitely don’t think this is a point to be rushing into the market and viewing these dividend increases as some exceptional good news,” he added. “In my view, it’s just par for the course.”
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2018 Is on Track for Record Dividend Hikes originally appeared on usnews.com
