With the markets up significantly, yet companies hesitant to raise dividends, yields continue to fall, leaving value investors seeking where to put their money next.
A review of the S&P 500 reveals that 72% of its components are currently paying a dividend, with an average yield of 2.37%, and a median value of 2%. The current average yield represents a 35-basis point drop from the figure in late July, and 91-basis points since late April.
While last quarter was the worst third quarter ever for dividend increases, with a record low 191 of the ~7,000 publicly owned corporations that report dividend information to Standard & Poor's increasing dividend payments, some analysts believe that this trend may be about to turn.
“The third quarter number suggests, when analyzed with additional information, that dividends may have finally hit bottom,” said Howard Silverblatt, Senior Index Analyst at Standard & Poor’s Index Services, regarding last quarter's figures.
“However, even if the economy responds to the various economic stimulus programs, it may still take several quarters of proven results for companies to be comfortable with increasing, or initiating, their dividend payments." Mr. Silverblatt added.
During the first nine months this year, a total of 730 companies announced dividend decreases, marking levels not seen since 1955 when S&P began tracking this information. Indeed, the drop in dividend payments, which represents a significant portion of investors' income, was reduced by approximately $77 billion during the first quarter of 2009 alone.
According to Mr. Silverblatt, when dividends finally start to increase, it will most likely be at a more subdued level than the average 17% in 2007. Historically, dividend increases outnumbered decreases at a ratio of 15 to 1, while this relationship is now close to 1 to 1.
Additionally, from December 1936 to March 2009, the average yield of the S&P 500 was 3.84%, while the benchmark index's annualized return per year stood at 9.51%, from January 1926 to March 2009.
Dividend investors seeking insight into where some of the highest yielding stocks reside could find guidance by looking at the major S&P sectors.
A breakdown of the S&P 500 by sector shows that telecommunications, utilities, and consumer staples companies, as depicted on the table to the left, have on average the highest dividend yields. Currently, about 94% of the companies in the the utilities sector pay a dividend with an average yield of 4.43%, while telecom companies have the highest average yield at 8.04%.
Impact of the Rally
The markets rebound from their March lows has pushed yields down further (Yield = Dividends / Price. As prices rise, yields fall). Since mid March, for example, the percent of stocks with dividends yielding less than 2% has jumped 72%. As displayed on the chart below, approximately 89% of companies in the S&P 500 now have yields less than 4%, with fewer companies driving up the overall average. Also note that approximately a quarter of all the companies within the S&P 500 do not pay a dividend.
The following chart portrays the distribution of all the companies in the S&P 500, according to their corresponding dividend yields.
The tables on the next few pages depict some of the companies in the S&P 500 with dividend yields north of 3%. The yields on these companies are based on the most recent data from Thomson Reuters. Note that dividends are not guaranteed, as has been the case with many companies in the past six months, either raising or halting dividend payouts.
As always, keep in mind that the information should help you generate ideas, but there is more homework to be done, especially with stocks paying dividend yields above 7%.