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Dividend payouts are at record highs, but yields are down


Traders in New York City work at the New York Stock Exchange (NYSE), on October 15, 2020.

Spencer Platt | Getty Images

Following a devastating 2020 in which many corporations had to decrease dividends, the payouts to shareholders has been increasing for several quarters. The dollar value of dividends paid on the S&P 500 will likely hit historic record levels in the third quarter and for the full year, as well. 

“Dividends are back,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told me.

S&P 500: Yearly dividend payouts

  • 2017   $420 billion
  • 2018   $456 billion
  • 2019   $485 billion
  • 2020   $483 billion
  • 2021 to date:  $522 billion, up 8.1%
    Source: S&P Dow Jones Indices 

Nearly 300 companies in the S&P 500 have raised their dividend this year. 

BMO Capital Markets reported that dividends for the second quarter increased by 4% compared to a year earlier and 6.5% above the pandemic low of the third quarter in 2020.

Brian Belski (BMO’s chief investment strategist) stated in a note that higher cash levels, lower payout ratios…and an unprecedented recovery of corporate earnings were setting the stage to a prolonged rebound in shareholder distribution. This should eventually be a positive factor for U.S. stocks market performance in 2022.

Particularly, the energy companies were either providing assurances to investors the dividend is safe(ExxonMobil), or increasing the dividend following many reductions in these payments over the years. Viper Energy and Devon Energy as well as Chesapeake Energy, DTE Energy (Marathon Oil, Oasis Petrol, Diamondback Energy) have increased their dividends in the last month. 

Estee Lauder is not the only company that has recently increased its dividend. Simon Property Group and U.S. Steel are also among them.

These are the reasons why dividend payments have reached a new record

The reason corporate America is making record dividend payments is simple: Cash flows have been getting stronger as the recovery has proceeded, so corporations are able to divert more money to buybacks and dividends.

Both buybacks and dividends are based on cash flow. This is how Corporate America used its cash flow during the second quarter.

Cash flow, second quarter

  • Dividends: 21%
  • Buybacks:   33.8%   
  • Capital expenditures:   27.8% 
  • Retained earnings, paying down debt:   18%
    Source: S&P Dow Jones Indices

Although the dividends’ dollar value has increased this year, their percentage of cashflow has been decreasing in recent years.

Silverblatt claimed that “dividends have actually gone up because of cash flows having increased.”

However, the money being spent elsewhere means that you don’t get a greater share of it. Over the past several years corporations have spent more money on buybacks and dividends than on capital spendings.

What is the difference between buybacks and dividends? Silverblatt stated that buybacks are more manageable. A buyback can be stopped or increased. Dividends or capital expenditures can be difficult to reverse.

Let’s not forget the good news.

The bad news: Because of the relentless rise in the S&P this year (up about 24% year-to-date), dividend yields, at 1.3%, are near historic lows. 

In September 2000, yields fell to 1.14%.

Since 1936, the average long-term is 3.544% 

That is a bit strange: Corporate America is paying out more money than ever in dividends, but dividend yields are near a record low.

This could explain why some investors have not invested in dividend-yielding stock this year.

There have been small inflows over the past few months to exchange-traded fund that pays higher dividends such as the Vanguard High Dividend Yield IndexThe ProShares S&P 500 Dividend Aristocrats ETFThe, WisdomTree Quality Dividend Growth Fund. However, this pales in comparison to the huge inflows into plain-vanilla index funds like those that are tied to the S&P 500 (say, the SPDR S&P 500ETF, or the iShares Core S&P 500ETF), or to the Russell 2000iShares Russell 2000ETF) or the Nasdaq 100 Invesco QQQETF

Todd Rosenbluth (director of ETF research and mutual funds at CFRA Research), said that investors are now choosing ETFs with more value or choosing ETFs that are more widely diversified than companies that have increased dividends in the past. 

There were two issues, he explained. The stocks that offer attractive yields tend to be in defensive industries like Utilities, Consumer Staples and Utilities. Investors favor growth over these defensive sectors. The second reason is that dividend investing doesn’t appeal to many people: yields are very low.

Silverblatt concurred. He said that if earnings are rising, dividends should also rise. 

He said, “But it’s difficult to live off dividends since those yields can be so low.”

Belski is optimistic that yields can rise as cash flow improves into 2022. “Even with dividend payments for the S&P 500 already on pace for a record-setting year, we believe there is further room for growth in the coming periods,” he said.