Dividends Rise in Sign of Recovery

Christine Hauser|The New York Times

Every year since 1976, McDonald’s has increased its annual payout to shareholders. This year it will keep the streak alive, raising its annual dividend to $2.80. In doing so, it will join a broad range of companies that weathered a challenging economy and are now delivering their best payments to shareholders since the financial crisis.

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If analysts’ forecasts come true, that trend will continue later into the year, as companies release more of their cash and try to win over investors still hesitant about putting their money back into stocks.

“The idea is beginning to percolate a little bit in management suites that paying a bit higher percentage of your earnings in dividends might be a way to a higher stock price and better benefits for shareholders over all,” said Edward F. Keon, portfolio manager for Quantitative Management Associates.

Companies listed in the Standard & Poor’s 500-stock index paid $240.6 billion in dividends in 2011, up from $205 billion in 2010. The 2011 payout was the largest since 2008, when firms had not yet been hit by the full brunt of the financial crisis and paid a record $247.8 billion in dividends.

Dividends are on track to set a record of more than $252 billion in 2012, according to data released by S.& P. that is based on the current dividend rates of 394 companies. While there could be some changes as the reporting season begins this week, analysts said companies were expected to continue to pay shareholders, possibly at the same rates or higher, as some of the economic and fiscal headwinds from 2011 tapered off.

“Dividends have been rising strongly,” said Binky Chadha, the chief strategist at Deutsche Bank. “And the rise that we have seen has plenty of upside.”

Companies that pay high dividends were some of the best performers in the markets last year.

Telecommunications, utilities and health care shares had the highest yield rates at the end of 2011, at 5.86, 4.13 and 3 percent, respectively.

McDonald’s had double-digit percentage stock returns, at more than 30 percent, and dividend yields that exceeded the S.& P. index. Other companies with similar performance included Bristol-Meyers, Consolidated Edison and Home Depot. The dividend yield is the amount paid per share as a percentage of the stock price. In McDonald’s case, that equals 2.8 percent, or $2.80 for each share, which are now trading at $99.70.

Even dividends from financial companies were higher in 2011 than in previous years. Because of the federal bailouts in 2008, banks need federal approval before they can increase dividends, but investors can still expect improving payouts. Dividends in the financial sector of the S.& P. index rose to $28.5 billion last year, up from $18.6 billion in 2010. The 2011 payout was still far lower than the $50.7 billion in 2008.

JPMorgan Chase’s dividend for 2011 was $1 a share, up from its previous annual dividend rate of 20 cents, but in contrast to $1.52 before the crisis. Citigroup went to 4 cents a share last year after not paying a dividend in 2010.

“Down the road, the financials clearly would like to bring back those long-term investors,” said Quincy Krosby, a market strategist for Prudential Financial. “Clearly their goal is to become an investment vehicle as they were in the precrisis period.”

American companies and investors rode out a volatile year in 2011, a year fraught with concerns about a spreading euro zone debt crisis, the possibility of an economic recession in the United States, the first downgrade of the country’s credit ratingand the fiscal impasse in Washington. Oil prices jumped higher from the turmoil in the Middle East, supply chains were disrupted by the earthquake in Japan and severe weather hamstrung American companies, said Hank Smith, the chief investment officer for Haverford Trust Company.

With memories still fresh from the credit freeze that followed the financial crisis, companies accumulated cash, with those listed on the S.& P. piling up about $2 trillion. But they also cut costs, increased productivity and reaped the benefits of overseas revenue, all of which helped increase profits to record levels and made corporate earnings one of the few bright spots on Wall Street. Mergers and acquisitions also picked up, said Mr. Smith.

In announcing their dividends, many companies reflected the economic conditions. AT&T said it would increase its quarterly rate by a cent, to 44 cents a share, after being “very disciplined financially” through the “economic downturn.” Ford Motor said last month it would resume paying quarterly dividends to its shareholders for the first time since 2006. The automaker has just closed out its third consecutive profitable year and will pay out 5 cents a share on March 1.

McDonald’s raised its quarterly dividend to 70 cents from 61 cents, or about 15 percent. The company is trying to squeeze more sales out of existing restaurants rather than building new locations, which would provide more cash for dividends and share buybacks, said John Staszak, senior analyst at Argus Research.

While many companies increased their payouts, 101 American companies decreased or suspended dividends in 2011, the fewest since 2006.

Vulcan Materials , which produces construction materials like stone and gravel, decreased its quarterly dividend to a cent, from 25 cents, partly because it needed the available cash.

While the company said it recognized the importance of dividends to shareholders, it said it believed the decision was “prudent given the effects of the recession over the past three years on construction and our end markets.” Analysts say some of the turmoil in 2011 is unwinding, with the shocks from the euro zone debt crisis likely to become less of a headline because they are priced in. In the slow-growing American economy, companies with cash piles are expected to loosen up with share buybacks, capital expenditures or by increasing or beginning dividends, analysts said.

Getting a Boost From the Banks

One of the surprises for the year, Mr. Keon said, “might be that some of the technology companies might get more aggressive in their dividends. And some of the technology companies that don’t pay any dividends and have a huge pile of cash might start to do so.”

Stuart Freeman, the chief equity strategist for Wells Fargo Advisors, said there would probably be more interest in companies that benefit from recovery, like industrials and materials.

But many analysts noted that timid investors were keeping cash or opting for safer havens, like 10-year notes, even though they paid less than the 2.1 percent yield on the S.& P.

During a client appreciation event in Mattoon, Ill., in December, Scott L. Wren, a senior equity strategist for Wells Fargo Advisors, stood in front of about 300 clients to explain why one of the best ways for them to build wealth was in stocks.

“They are resistant to that, largely,” Mr. Wren said. “Many of these retail clients seem more than willing to sit on many low-yielding types of investments and ride out the current uncertainty until they feel better, and they don’t seem to be too upset about maybe missing some upside.”