Dividends paid by companies in the S&P 500 currently
amount to less than 2% of their share prices, compared with the long-term
average of 4.4%, according to data from Yale University economist Robert
Shiller. Dividends also are falling steadily as a share of earnings, with about
a third of profits getting returned to shareholders in recent years, compared
with nearly half in the 1980s and 1990s.
If S&P 500 companies paid out the same percentage of
profits as dividends during the decade ended Dec. 31, 2013, as they did from
1950 to 2000, shareholders would have received nearly $1 trillion more in
dividends than they actually did.
Profits that were paid out as dividends in the past now
largely go toward share buybacks. The problem is that companies have a history
of buying back their shares at inopportune times. Share buybacks tend to be
sporadic, which can lead to bad timing from corporate managers who, on average,
tend to buy their own shares when they are expensive.
S&P 500 companies bought $614 billion of their own
shares in 2007, just as the market was peaking, up from $309 billion in 2005,
according to Norwalk, Conn.-based research firm FactSet.
That dropped to $138 billion in 2009, as markets hit decade
lows. Buybacks surged to $540 billion in year ended July 2014, with markets at
all-time highs. Poorly timed or not, buybacks lead to higher future earnings
growth, as the number of shares outstanding decline, leaving remaining
shareholders a larger share of the corporate pie. Inflation-adjusted annual
earnings-per-share growth has been 1.5 percentage points higher in the
post-World War II period than it was in the half-century before it, when
dividend payouts were higher.
The shift toward buybacks should change the way you think
about dividends. Rather than searching for the highest current yields, investors
should look for sectors where buybacks are fueling per-share dividend growth.
(Dividend yield is found by dividing a company’s dividend by its stock price.) Investors
seeking yield in a world where bond interest rates are near all-time lows has
driven up valuations on traditional dividend kings like utility and
telecommunication stocks. Growth sectors like technology and consumer
discretionary, by comparison, look attractive to some investors.
The WidsomTree U.S. Dividend Growth Fund, an
exchange-traded fund, owns shares of both companies and currently yields 2.3%.
The ETF charges annual expenses of 0.28%, or $28 per $10,000 invested.
The Vanguard Dividend Appreciation ETF tracks a similar
strategy of owning companies with a history of consistently raising their
dividend payouts. The fund yields 2% and has an annual expense ratio of 0.10%. For
investors looking for more income, a high dividend yield still can be found.
You just might have to look abroad.
As the U.S. market has gotten more expensive, many of the
best opportunities for yield are in international stocks, which tend to trade
at lower valuations and have higher payout ratios.
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