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Dividend appetite reopens on Wall Street: Funds want money

Date: May 28, 2023 Time: 21:44:17

Dividends are back on the lips of stock market investors. For now, S&P 500 companies allocated some $561 billion to shareholder compensation in 2022. In addition, some companies resumed payments for the first time since the pandemic. S&P 500 cash dividends this year totaled 9.7% more than the $511.2 billion in 2021, according to data from S&P Global Indices.

But another payout record appears to be in store for 2023, “even if the economy goes into a full-blown recession,” according to Howard Silverblatt, a senior analyst at S&P Dow Jones Indices. “Rising interest rates and bond yields will continue to put upward pressure on dividend payments,” according to Silverblatt.

“There will be more competition for revenue streams…the levels were very low before this year,” he adds. Resilient corporate earnings and large cash balances have allowed companies to compete. S&P 500 earnings are projected to fall 3.5% in 2022 from the previous record, and Silverblatt envisions companies could ride a 5% decline in 2023 and keep increasing dividends.

Stocks have a ways to go if they are to match lower-risk alternatives for income. The aggregate dividend yield for the S&P 500 increased from 1.31% at the end of last year to 1.78% in December. The 399 stocks in the S&P 500 that currently pay dividends have an aggregate yield of 2.2%. Meanwhile, the US 10-year Treasury yield rose from 1.51% to 3.88% in 2022 amid the Fed’s rate hike cycle.

Several of the highest-yielding sectors have escaped the bear market this year. S&P 500 stocks in the energy sector, up 58%, have a 3.6% dividend yield on Wall Street. S&P 500 utilities and consumer staples are yielding 3% and 2.6%, respectively, and are down just 0.5% and 2.7% year-to-date. On the other hand, S&P 500 real estate stocks have a dividend yield of 3.5% and are down 28% year-to-date on the stock market.

In the fourth quarter of 2022, equity markets posted their first positive quarter of the year across all regions. In October and November, markets benefited from the positive inflation numbers and hopes rose for a Fed turnaround or at least a pause in rate hikes, resulting in a strong rally. MSCI World gained 7.2% and 7% in those two months, respectively.

Federal made it clear at the December meeting of the Federal Open Market Committee (FOMC) that it wanted to see more “substantial” advances in inflation before stopping the increases. This led the MSCI World to lose -4.3% in December.

Along these lines, this year’s dividend payments are likely to get a boost from some of the companies that renewed compensation to their investors suspended due to Covid. Southwest Airlines announced that it will resume paying its dividend. A full year of dividends at Southwest’s quarterly rate of 18 cents per share would boost next year’s total S&P 500 dividend payout by $428 million.

Focus on the dividend

In the last ten years, investors have not paid much attention to dividends. US consumer and tech companies returned over 10% and dominated the majority of total market returns, making dividends really boring.

Today we like boring, according to equity manager Caroline Randall. “With slowing growth, the cost of capital is rising and valuations of the least profitable tech companies are falling. In my opinion, dividends could make a more significant and stable contribution to total return,” says Randall.

Although dividends represented only 16% of the total return of the S&P 500 Index during the 2010s, historically they have contributed an average of 38% to that return. In the 1970s, especially characterized by the high level of inflation, this percentage exceeded 70%. “When certain growth is expected to be less than 10%, dividends can give you an advantage,” adds Randall. “They can also offer protection in periods of increased volatility, but it is essential to understand the sustainability of such dividends,” she says.

For this reason, the manager finds companies with stable dividends that are higher than those of the market in various sectors, such as finance, energy, materials and healthcare, among others. “Examples include ZurichInsurance, the multinational in the mining and metallurgical sector Rio Tinto, the biopharmaceutical giant AbbVie, the personal care company Kimberly-Clark and the tobacco manufacturers Imperial Brands and British American Tobacco”, he concludes.

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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