Dividend Payouts Are Climbing After Plunging to a Record Low

Corporate America may be getting ready to share a bigger chunk of its record profits with investors, who lately have been getting a record-low piece of the pie.

Photo by: Tracy O.

Dividend payouts already are rising and the total dollar amount by S&P 500 companies could reach a record high this year. Standard and Poor's analysts expect the dividend payout for the S&P 500 to surpass the record $247.9 billion paid out in 2008.

Yet, payout ratios—or the percentage of earnings paid out as dividends—are currently at a record low 27 percent. Wells Fargo analysts argue in a note that there could be a long-term opportunity in dividend paying stocks. Historically, payout ratios have averaged 53 percent.

"I think there's a change in investor appetite for risk, and that in the last couple of years that has resulted in better performance for dividend paying stocks...to the extent dividends are being paid. There are also plenty of companies choosing to do share buybacks," said Gina Martin Adams, Wells Fargo institutional equities strategist.

Dividends have provided the bulk of return to long-term shareholders for quite a while, and companies are just beginning to catch on to the fact that investors are seeking dividend-paying stocks and will reward them, according to Adams.

While the price return on the S&P 500 since 2001 has been a stagnant 2.3 percent, the total return, including dividends, is 26.4 percent, the Wells Fargo analysts note. S&P 500 dividend payers averaged a price return of 0.6 percent and total return of 3 percent, relative to a negative return for non payers of 5.7 percent.

Whether companies will pay out a whole lot more has yet to be seen.

"I still think it's kind of mixed," said Adams. "To the extent that dividend paying stocks perform better and corporates are beginning to recognize that long-term growth prospects are stable...It's almost the best of all worlds because investors are going to reward them for paying out cash."

She added: "I do think they are getting ready to step up and share more. What's happening now is they are dipping a toe in the water."

Adams said the investor mentality has shifted as sources of yield have dried up in the current record low interest rate environment. Two of the top 10 ETFs with the biggest inflows in 2011 were dividend stock ETFs—SPDR S&P Dividend ETF and Vanguard Dividend Appreciation ETF.

The hunt for yield—and dividends—is also a very different tactic from that favored by investors in the not-too-distant past.

"In the 1990s, they were cast in a negative tone," Adams said. "Investors sometimes thought dividends were evidence the company didn't have tremendous long-term growth prospects, but it seems now that dividends are highly valued, and it's taking time for companies to recognize that."

Bespoke Investment Group co-founder Paul Hickey said already this year, there seems to be an increase in dividend raises already, as companies become more confident.

“Compared to the last three years, I think we’re going to see much more in the way of dividend raises," Hickey said. "There’s more clarity out there. There’s a general view that the worst is behind us. Most people would think that companies have a little bit more visibility now. With increased visibility, they’ll be more likely to part with some of their cash.”