September 17, 2013
Ron DeLegge, Editor
Public companies – both large and small – are opting to pay shareholder dividends.
The percentage of S&P 500 companies (SNP:^GSPC) paying dividends is now at the highest level recorded in the past 15 years (83%) and even payout ratios for mid-cap (NYSEARCA:MDY) and small cap (NYSEARCA:IJR) companies are at multi-year highs, reports FactSet.
Microsoft (NASDAQGS:MSFT) just announced a 22% increase in the company’s quarterly dividend to 28 cents, payable to shareholders of record as of Nov. 21.
S&P 500 aggregate dividend payments topped $82.6 billion for Q2 2013 (July 2013) and over the trailing twelve months were 37.6% greater than the ten year average.
A stock’s dividend payout ratio is the fraction of net income a corporation pays to its stockholders in dividends.
A stock’s dividend payout ratio is different from its dividend yield. The latter is calculated by dividing a company’s share price by the dividends it paid. For example, a $20 stock with a $1 annual dividend carries a dividend yield of 5%.
In 1999, the S&P 500’s dividend yield bottomed at 1.14% because stock prices rose faster than both dividend payments and earnings. This unsustainable trend was corrected during the 2000-02 bear market when the stock prices fell 47%.
Although the S&P 500’s aggregate payout ratio (31.8%) has rebounded from 2010 levels, the historical dividend payout ratio for the S&P 500 has actually declined from 56% of operating earnings in the 1960s.
The Income Mix ETF Portfolio generated a 10.7% yield from August 2012 to August 2013 using a combination of dividends and selling monthly covered call options.
Small company stocks (NYSEARCA:IWM) tend to have very low or even zero payout ratios because they use earnings to reinvest and grow their businesses. Once they mature, however, they tend to return capital to shareholders via dividends.
At the end of Q2, telecommunications (NYSEARCA:IYZ) and utilities (NYSEARCA:XLU) had the highest payout ratios among all industry sectors for the tenth straight quarter.
ETFs focused on dividend paying stocks include the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), ALPS Sector Dividend Dogs ETF (NYSEARCA:SDOG), and the iShares Select Dividend ETF (NYSEARCA:DVY).
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