Yahoo Finance 3 Things to Know About Slowing Dividend Growth
A slowdown in the profit growth rate for the Standard & Poor's 500 index means dividend-payment growth is sluggish, too, and that could be an issue for income-oriented investors looking at equities for extra yield.
It shouldn't be a complete surprise that overall dividend-payment growth is stagnating. The weakness in the materials sector, particularly acute in energy and commodities where several firms cut dividends, reverberated across the stock market.
And with an S&P 500 return that is essentially flat on the year, it goes hand-in-hand with moderating dividend-payment growth.
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Slowing dividend growth is not the same as falling dividend growth, of course, but in light of lackluster payment growth, investors should think about their ultimate investment objective and perhaps look at some select sectors where dividend growth remains firm.
Coming off a strong cycle. The current sluggishness comes after very strong growth following the global financial crisis, says Pat O'Hare chief market analyst at Briefing.com in Chicago.
In 2008, the dividend-growth payment was at 2 percent and in 2009 it fell to less than 1 percent, versus the 12 to 13 percent dividend growth for the S&P payers during 2004 to 2007, O'Hare says.
Payment growth in 2010 crept up to 1 percent, but by 2011 it rebounded to 16 percent and by 2012 it was 18 percent because of the strong corporate earnings recovery after the financial crisis, he says. But in 2013, dividend-growth payment started to moderate as earnings growth began to decelerate, with 2013's growth rate at 12 percent. By 2015 it slid to 10 percent, and based on some data from S&P Dow Jones Indices, 2016's growth rate may only be around 4 percent, O'Hare says.
"Until you start to see a pickup in earnings growth again, it's fair to say you're going to see a deceleration in the dividend growth rate," he says.
Tom Huber, who runs the T. Rowe Price Dividend Growth Fund (PRDGX) in Baltimore, says dividend investors have done well since the financial crisis. Considering the soft earnings growth, "I think it should be expectations for that level of dividend growth, the double digits, should be tempered," he says.
Mike Baele, managing director at U.S. Bank Private Client Reserve in Portland, Oregon, says a grinding U.S. economy in general may play a hand in the overall picture, too.
"In the aggregate, economic data flow today is better than it was a year ago, but it's also consistently below expectations.... Back in the '90s in the expansion cycle it was hitting 4 percent GDP (gross domestic product). In 2002-07, GDP was 3 percent. Now in this cycle, only 2 percent. It's harder for some of the defensive companies to get that product growth," Baele says.
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Don't give up on dividends. While dividend growth may be slowing, Baele points out that 55 percent of companies in the S&P have dividends better than the 10-year U.S. Treasury note, so income-oriented investors still should look at equities for income.
And Baele and Huber say that payout ratios are back to pre-recession levels of about 37 percent, which may also be part of the reason for the slowdown in dividend growth. That makes the stagnation less of a concern.
Baele says investors who want a better dividend growth rate should look beyond traditional dividend-paying sectors of staples and utilities. They saw year-over-year negative dividend growth. He and Huber say the health care sector still offers good dividend growth.
Think about the technology sector, too. "Generally what tends to happen when a company enters a mature phase and growth slows, it's no longer that dynamic growth company that it used to be. It can still be generating plenty of earnings, but not delivering the growth that they once did," O'Hare says.
Baele says some of the previous tech high-flyers now have really attractive dividends. "Back in the 1990s, high-speed internet was a luxury. Today it's like buying a refrigerator. These companies are now a cash-cow business. Like value companies do, they pay out nice dividends," he says.
Apple (APPL) is probably the best example of a technology company that pays dividends, O'Hare says. And he adds, as technology companies become more mature, the growth-oriented investors are less interested, so offering dividend payments is a way to attract investors.
"The ability to pick up your dividend payment does keep people wedded to the stock who otherwise might have abandoned it," he says.
Intel Corp. (INTC) and Cisco Systems (CSCO) are other good examples of technology companies that have become bluebloods. Intel is looking to transition to business data centers amid the slowdown in the personal computing and both Intel and Cisco are both trying to capitalize on the growth of the Internet of Things market. Intel's dividend is 3.44 percent and Cisco is about 3.7 percent.
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"So you're still getting industry leaders with great cash-flow generation capacity, still profitable and throws off a pretty nice dividend for investors," he says.
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