21 January 2019

Dividends Climb Amid Rising Competition From Bonds

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Dividends are on the rise when investors have fewer reasons to buy the stocks that pay them out.

More than a fifth of the companies in the S&P 500 have boosted their dividends to shareholders so far this year, while none have slashed their payouts, a first since 2011, according to S&P Dow Jones Indices. The increases are getting bigger too, with companies on average raising their payouts by 14%, the biggest jump since 2014.

The dividend boosts—from an array of companies including cable-giant Comcast Corp. , asset-management firm T. Rowe Price Group and consumer-products company Kimberly-Clark Corp.—come as firms report some of their best earnings and sales in years, offering further support for the nearly nine-year bull run in stocks.


Companies also have been spurred to put hundreds of billions of dollars to work since the tax overhaul law was enacted last year. February is typically the busiest month for dividends as companies roll out their annual results and reward shareholders ahead of their annual meetings. Historically, more than half of the companies in the S&P 500 increase their dividends each year, and in recent years, 60% or more of the index boosted their payouts, according to S&P Dow Jones Indices.

Eight of the 11 major S&P 500 sectors are generating a higher dividend yield than last year, including energy firms, consumer staples and health-care companies. Energy firms are seeing some of the biggest dividend increases, with three companies— Anadarko Petroleum Corp. , Pioneer Natural Resources Co. and Cimarex Energy—at least doubling their payouts this month.


In total, four companies in the S&P 500 have at least doubled their dividends to shareholders this year, matching the number for all of last year.

“It’s a function of the strong economic backdrop coupled with the changes to the tax code,” said Mike Allison, a portfolio manager with Eaton Vance . “A healthy earnings backdrop and lack of anything better to do with capital other than to return it to shareholders is something we like.”

But rising bond yields threaten to diminish the allure of those stocks. Yields flirted with multiyear highs this month, before pulling back slightly, amid signs that long-dormant inflation could be picking up enough to force the Federal Reserve to speed up its pace of interest-rate hikes. That coincides with concerns that larger budget deficits could increase the supply of government bonds in the market.

Those jitters sent stocks sputtering earlier this month, pushing the Dow Jones Industrial Average and the S&P 500 into correction territory for the first time in two years. Although stocks have regained some of their footing since then, higher volatility has kept investors on edge. Following the pullback, the S&P 500 and the Dow are both up 4% so far this year.

That makes bonds relatively more attractive than they have been in years and threatens to displace high-dividend stocks as the investment of choice for those seeking yield.


The yield on the two-year U.S. Treasury note surpassed the income investors could earn from dividends on the S&P 500 in December, a first since the throes of the financial crisis in September 2008. The spread between the two has continued to widen this year with two-year bonds touching a high of 2.27% in February, nearly half a percentage point greater than what the S&P 500 had been yielding.

But bond yields are still relatively low and would have to move higher, with the benchmark 10-year U.S. Treasury yield at least above 3%, to spark a bigger rotation out of equities and into bonds, money managers say.

“Now that rates are higher, bonds are more attractive enough to start some sort of shift,” said Jay Jacobs, director of research at exchange-traded-funds provider Global XManagement Co. “But the case for keeping equity payers in a portfolio is still very strong.”

Utilities and real-estate companies in the S&P 500 tend to pay bigger dividends relative to their share price than most other sectors and continue to offer better yields than short-term bonds, as well as the 10-year Treasury note, which settled Monday at 2.862%.

Still, utilities and real-estate stocks have been struggling since November as bond yields ticked higher. And the stock-market pullback has exacerbated their lackluster performance, putting utility and real-estate stocks among the S&P 500’s worst performers of the year. About $2.1 billion has flowed out of dividend-heavy exchange-traded funds over the five weeks ended Feb. 14, up from the $648.6 million in redemptions for the prior five-week period, according to data provider EPFR Global.

The pace of those redemptions appeared to be slowing, however. About $118 million flowed into those funds in the most recent week, according to EPFR’s data.

“Now that rates are going higher, it’s going to make bonds a lot more attractive,” said Mr. Jacobs. “What’s probably at the most risk right now is those lower yielding stocks.”

Click here for the original article from Wall Street Journal. 

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