One positive trend emerges from rough earnings season so far: Dividend investing is back

Published Fri, Jan 28 20226:56 AM EST

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 c