Dividend Payouts Are Climbing After Plunging to a Record Low

Hunting for Yield

Hunting for Yield

There are a variety of strategies to play dividends. Wells Fargo analysts note that one way is through the S&P 500 "artistocrats," or dividend payers with long-term track records of increasing payouts. These stocks returned 6.4 percent beyond the index return over the past three years.

Adams said another way is to look at industries that have been slow to declare payouts but may be ready to change. She notes compared to other sectors—technology, health care and consumer discretionary—have been the stingiest when it comes to dividends.

"Technology and health care are paying more on average than they have in the last 10 years," she said. "They are recognizing the trend that they do have too much cash and aren't deploying it."

Standard and Poor's index analyst Howard Silverblatt said that Cisco'sdecision to pay a dividend last year for the first time was a major turn for technology companies. It made for the largest dividend initiation ever, with a $1.5 billion annual payout, which it has since raised. There is now speculation that Applemay share some of its giant cash horde with investors.

"In technology and health care, they are holding a lot of the cash overseas becuse of taxation. There is also a poltical concern to this," Adams said.

Another strategy Adams recommends is to look at the highest yielders in the S&P index. There are 13 companies in the S&P 500 with better yields than the average corporate credit yield of companies with similar ratings. (see list below) There are also 227 companies in the S&P 500 that have a higher yield than the 10-year Treasury.

Some companies also choose to do stock buybacks instead. "It's a very short-term impact. Media comes to mind as an industry that focused on share buybacks rather than dividend payments," she said.

She likened corporate buybacks to 'casual dating,' versus the 'long-term commitment' companies make when they pay their investors quarterly dividends.

Dividend Catch Up

The dividend rate, or the payout rate by S&P 500 companies, hit an all-time high, in terms of cash paid out, in June 2008, but it fell sharply by August 2009 as the recession caused companies to clamp down on capital outlays.

It is now up 31.8 percent since then, but still lags the 2008 level by about 2.5 percent, according to Standard and Poor’s data.

For all of last year, S&P 500 companies paid out a total $241 billion, versus the $247.9 billion they gave shareholders in 2008.

Standard and Poor's Silverblatt, senior index analyst for Standard and Poor’s indexes, expects the total rate paid out by S&P 500 companies to come in at a record this year. “I’m looking for $263 billion by the time this year is over,” he said.

Uncertainty about tax law changes, and the pending expiration of the Bush tax cuts, have probably also impacted corporate decisions on payouts. Adams said if the taxation of dividends is raised above the capital gains tax rate, "the dividend theme could die on the vine."

On Monday, President Obama proposed raising the tax on dividends for households making more than $250,000 to a maximum of nearly 40 percent next year, the highest tax rate set to take effect in 2013.

Obama also proposed raising the current 15 percent long-term capital gains tax rate to 20 percent for the wealthy. He had earlier also sought to set a 20 percent tax on dividends.

Who Pays What

Financials were responsible for more than 31 percent of the S&P 500 payouts in 2007, and they provided just 11.8 percent of the payout in 2011.

Consumer staples in 2011 were the biggest contributor, providing 15.5 percent of the total S&P 500 payout, while technology, seen as an underachiever when it comes to dividends, provided a surprising 10.4 percent of the total last year, according to Silverblatt.

The S&P 500 is currently yielding 2.09 percent but if stocks are removed that don’t pay dividends, the average yield of the remaining 396 issues averages 2.46 percent, says Silverblatt. He said the historic yield, going back to the 1930s, is 3.76 percent and the average for the last decade was 1.9 percent.

“From 1962 to currently, the S&P dividend yield dividend by the 10-year yield was 43 percent, less than half,” Silverblatt said. Now with the 10-year yielding less than 2 percent, the yield is 7 percent higher, he notes.

So far this year, 68 companies in the S&P 500 have announced dividend actions, with 66 increasing their payout rate and two companies initiating dividends, according to Standard and Poor’s.

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