Next year looks hopeful for income-starved investors.
More companies are expected to raise their dividends in 2011, and the increases should be bigger, says Howard Silverblatt, Senior Index Analyst at S&P Indices.
That is a welcome turnaround from just one year ago, when S&P 500 companies were furiously cutting dividends, costing investors more than $52 billion in income, and making it the worst year ever for dividend payouts.
A dividend recovery started this year, as companies saw improved earnings and strong cash flow. Of the S&P 500 companies, 247 increased dividends in 2010, paying investors $207 billion, an increase of 5.6 percent over 2009. Silverblatt expects this number to grow another eight percent in 2011.
“We estimate that over half the S&P 500 issues will pay out more in regular cash payments in 2011 than they paid in 2010,” says Silverblatt. “Given the current uncertainty of the economy and the market, that statement, in and of itself, is a powerful endorsement of the upward trend for dividends.”
Another boost to investors would come from the tax package being voted on by Congress this week. The plan would retain the maximum 15 percent tax rate on dividends and capital gains, and that should help the price of dividend paying stocks as they become more attractive to those seeking yield.
Dominating the list of firms Silverblatt is watching are consumer discretionary companies that were hit hard during the Great Recession. Among them: Family Dollar Stores and McGraw-Hill Companies, S&P’s parent company, as well as Sherwin-Williams that are expected to raise dividends early next year.
Silverblatt also anticipates that companies in the consumer staples sector like Archer-Daniels-Midland, Coca-Cola , and Kimberly-Clark will serve investors well. The sector demonstrated a relatively stable performance during the crisis and these companies are expected to hold on to their track record in 2011.
Here is the full list:
Investors are likely to see more dividend increases from financial companies, which had the biggest cuts in payouts to investors during the financial crisis, as the government bailed many of them out. Silverblatt warns however that it will take a while for returns to reach pre-crisis levels as many of these companies now have more outstanding shares.
Citigroup , which cut its dividend during the downturn, currently has 29 billion shares outstanding compared to 5 billion in 2007. "If it were to pay out dividends at an old rate, it would have to shell out $62 billion this year," says Silverblatt. “Clearly it’s not going to happen. Not this decade, anyway.”
Another good omen for investors is that companies that initiate dividends often increase them within a year.
Just Monday, information management company Iron Mountain announced a 200 percent increase to the quarterly dividend it initiated earlier in 2010. Starting in January, the company will pay $0.75 per share on an annualized basis.
Silverblatt cautions that the recovery in dividend payouts will continue to be slow and is highly contingent on continuing improvement in economic growth. He anticipates it will take until 2013 for the dividend market to return to the 2008 levels.
“Investors looking for higher returns will have to accept higher risk,” says Silverblatt.