These are the best of times for America’s biggest companies. Growing sales, low costs, and rising profit margins are delivering huge amounts of cash to corporate America.
In 2013, the S&P 500 companies are on track to post their biggest profits ever. As a result, corporate cash is near an all-time high at 13.3% of total assets – well above the 9.7% average since 1977. Some of the largest U.S. companies are on their best financial footing since well before the recession.
With so much extra cash, more U.S. companies than ever before are offering dividends. And those that already have dividends are increasing them at the fastest clip since the turn of the century.
Over the past four quarters, S&P 500 companies have grown their dividends by an average of 17.7%. No other quarter since at least 1990 has had dividend growth of more than 16.7%.
Dividend payers are being more generous with their shareholders these days. Plus, an increasing number of companies are trying to attract investors by initiating a dividend.
Many companies previously thought issuing a dividend was a sign of weakness – an indication that growth prospects are limited. But with investors seeking both capital gains and income, even growing companies like Apple (AAPL) are starting to share the wealth with shareholders.
According to the investment group BlackRock, 81% of S&P 500 companies now offer a dividend. Combined, those companies are expected to pay $300 billion in dividends this year – an improvement from last year’s $282 billion record.
At roughly 2%, the yields aren’t bad either. That’s less than the 3.25% yield in early 2009, when stocks hit rock bottom during the recession. But it’s slightly above the average 1.8% yield of the last decade.
When you consider that most stocks are trading at or near all-time highs, the above-average yields look much more appealing.
With so many income investors shunning the Treasuries and money markets in favor of dividend stocks, the stock market as a whole is benefitting. Since 2009, stocks with a yield of 6% or more have outperformed the S&P 500 by an average of 3% per year, according to Ned Davis Research.
Above-average yields also appear to be good for the stock market. Perhaps that’s because higher yields mean that companies are earning more profit and increasing their dividends. Meanwhile, when dividends get cut that’s a bad sign for the economy and individual companies.
Since 2009, the average yield has been 2.2% – higher than any five-year stretch since the mid-‘90s. During these last five years, the S&P 500 has soared more than 80%, and that’s before factoring in the dividend payments.
Between 2000 and 2009, the average yield among S&P 500 stocks was 1.6%. During that period, stocks fell 38%.
In the last 13 years, higher dividends have been good for the stock market. When yields are growing, it’s a sign of prosperous times at America’s biggest companies.
Now that 81% of the S&P 500 is comprised of dividend stocks, the influence of dividend payers on the broad market has never been stronger.
Don’t expect dividend growth to slow until at least 2015. That’s the earliest the Federal Reserve would raise interest rates above their current level of near zero. Until that happens, Treasuries, CDs and the money market will remain unappealing. As a result, a steady stream of income investors should continue to flock to dividend stocks.
For income investors, there’s plenty of yield out there … just not in the places we’re accustomed to looking.
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