After years where price growth was all that matters, 2022 may be the year of the dividend. Corporate America is again reporting strong cash flows as the recovery has proceeded. That means many companies can send more money back to shareholders in the form of buybacks and dividends. But there is reason to believe dividends may be gaining the upper hand over buybacks. With one-fourth of the S & P 500 reporting, 17 companies have announced dividend increases. Several have provided notable increases: Halliburton 167% Lennar 50% Wells Fargo 25% Marathon Oil 22% J.B. Hunt 33% Blackrock 18% Archer Daniels Midland 8% While these companies are reporting large dividend boosts, the overall trend is up. After dipping in 2020, total dividend payouts for the S & P 500 hit a new record in 2021 and are expected to rise 6% to 8% this year. S & P 500: yearly dividend payouts 2017 $420 billion 2018 $456 billion 2019 $485 billion 2020 $483 billion 2021 $511 billion (record) 2022 (est.) $541billion (record) Source: S & P Dow Jones Indices Why dividend hikes are more important than buybacks Companies have several ways they can distribute their cash flow. They can keep the money, buy back stock, pay down debt, make capital expenditures, or pay a dividend. In recent years, buybacks have been increasingly popular, because if a company can buy back enough stock to reduce share count, the earnings per share will increase. Where the cash flow goes (Q3 2021, based on GAAP net income) Buybacks: 39.0% Capital expenditures: 29.3% Dividends: 21.6% Retained earnings, paying down debt 10.1% Source: S & P Dow Jones Indices But now there are signs that dividends may become more important. While the S & P 500 still yields an historically low 1.44% yield, that is above the roughly 1.2% range it was in for much of last year and will certainly rise further this year. The historic average yield for the S & P is 3.5%. "With all the volatility, cash in hand has become what matters to a lot of investors," Howard Silverblatt, senior index analyst at S & P Dow Jones Indices. "Dividends don't matter as much if you're making 20% price returns," he said. "But if you are only expecting a price return in the low single digits for stocks this year, or even a down year, a 2 or 3% dividend will matter a lot." Dividends increases are a sign of corporate confidence "When companies increase their dividends, that is a very forward-looking indicator," Simeon Hyman, global investment strategist at ProShares, told me. "When they increase dividends, it is a sign of confidence in future cash flows," he said. "A buyback is not as sticky as a dividend increase. You can always stop buying back stock without a lot of complaints from investors. That's not true with dividends." Dividends as a hedge against inflation Companies with significant dividends, and those that are growing them, are likely to get increased attention for another reason: Dividends are a good hedge against inflation. "The growth of dividends is one of the most important contributions equities can deliver to defend against inflation," Hyman told me. What type of dividend stocks should you own? Another reason dividend paying stocks may be a better bet this year: Many of the stocks with the most attractive yields are in more defensive, value sectors like utilities and consumer staples and energy. They underperformed in recent years as growth stocks, which pay low dividends, got all the attention. That may now be changing as the Fed is raising rates, making value stocks more attractive in general. Not all stocks that pay dividends are alike. Some just pay a high dividend. Others — known as "aristocrats" — have a history of raising their dividend consistently over many years. Todd Rosenbluth, director of ETF and mutual fund research at CFRA, believes the "aristocrats" are likely to get increased attention this year. "In prior years, some investors bought high dividend stocks as an alternative to low bond yields," he told me. "That could be a riskier strategy this year, because if investors can get similar yields from a bond than a high yield stock, it would be less risk to own the bond over the stock." Simeon Hyman at ProShares, who manages the ProShares S & P 500 Dividend Aristocrats ETF , which holds S & P 500 stocks that have increased dividend payments annually for at least 25 years (including Hormel Foods, McCormick, Procter & Gamble, and W.W. Grainger), agreed. "You need dividend growth as a bulwark against inflation," Hyman said. "If you just go to companies that pay high yields and are not growing the dividend, you could be particularly exposed to inflation and rising interest rates." Note: Simeon Hyman and Todd Rosenbluth will discuss dividend strategies for 2022 on ETF Edge this Monday at 1 p.m. ETFedge.cnbc.com
Traders on the floor of the NYSE, Jan. 26, 2022.
After years where price growth was all that matters, 2022 may be the year of the dividend.