Dividends Rise, But Devil’s In The Details

By Cinthia Murphy,

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More than 81 percent of S&P 500 companies paid dividends in the first quarter of the year, the highest number since 1999, an increase that is putting U.S. stock dividend payments on track to reach a record $300 billion this year.

But the rising total dollar value of dividend payments for U.S. stocks is more a function of a growing number of companies starting to make quarterly payouts rather than a simple case of generosity, S&P Dow Jones senior index analyst Howard Silverblatt told IndexUniverse. Think of Apple in 2012 coming in with a $10 billion payout-or other companies, such as banks, resuming dividend payments, he said.

In any case, dividend-focused ETFs are right in the middle of that traffic, and investors are gravitating to them as an alternative to what are plainly paltry bond yields on risk-free government debt. Inflows into payout-rich ETFs have easily topped $60 billion in the past year, according to data compiled by IndexUniverse.

The payouts are alluring and exceed the 2 percent that a 10-year Treasury note yields. The $11.16 billion SPDR S&P Dividend ETF (NYSEArca:SDY) is currently paying a 30-day SEC yield of 2.55 percent-the 30-day SEC yield is a standardized yield that reflects dividends and interest earned minus expenses. That yield is just shy of the 2.61 percent weighted average for all dividend payments in the quarter.

SDY's first-quarter inflows totaled $357 million, and its share price rose 15 percent.

The $5.4 billion Vanguard High Dividend Yield ETF (NYSEArca:VYM) attracted a net of $588 million in the first three months of the year while rallying some 13 percent. The $2.8 billion iShares High Dividend Equity Index Fund (NYSEArca:HDV) pulled in $454 million in the same period, according to data compiled by IndexUniverse.

A Slowly Rising Tide

Outside of the S&P 500 universe, 46.1 percent of companies paid dividends on common stocks in the first quarter, up nearly 3 percentage points from the previous quarter and significantly higher than the 41 percent serving up payouts a year earlier. What's more, all 30 members of the Dow Jones industrial average paid dividends in the first quarter of this year.

"These companies are not being generous yet," Silverblatt said. "But at the end of the day, more companies are paying dividends, and some in higher dollar amounts."

Actual cash payments ticked 12 percent higher in the first quarter relative to the same period a year earlier, according to S&P Dow Jones data. A total of 944 firms increased their payouts-nearly 40 percent more companies than the 677 that did in the same year-earlier period, according to S&P Dow Jones data.

In all, net dividend payment increases reached $14.5 billion in the first three months of 2013-well below the year-earlier comparison, though that comes with an important caveat.

Indeed, that increase rate was only about half the net increase seen in the comparison between the 2012 and 2011 first-quarter comparison, when net increases exceeded $29 billion for the first quarter of last year.

"But this figure represents a much more relevant improvement, because in the first quarter of 2012, payouts were still coming off sharp lows seen in the previous year," Silverblatt noted.

"We went so far down in 2011, that in 2012 we were still coming back-there was an enormous amount of ground to cover," Silverblatt said of dividend payments. "But now we are clearly past that recovery period, we are building stability and we are seeing more continued growth."

The weighted dividend yield for the quarter was, as noted, 2.61 percent, according to Silverblatt's estimates, down from 2.8 percent in the previous quarter and only marginally higher than year-earlier comparisons.

"The lower yield is the result of the strong 10 percent equity increase in the first quarter," Silverblatt said. "Dividend yields remain relatively attractive compared to other instruments such as corporate bonds, Treasurys and bank CDs, especially considering the new 'permanent' tax rate, which, while higher than last year, maintains preferential treatment for dividends."

What's more, despite a surge in dividend payments late in 2012 as companies looked to avoid potential higher taxes this year-an event that inflated total 2012 dividend payments to $281.5 billion-payouts are expected to exceed $300 billion in 2013, which, as noted would be a record.

"Even if not a single company increases dividend payments anymore this year, we will hit $300 billion," said Silverblatt.

"The dividend cycle is solidly back on the upward track, with investors and companies viewing them positively," he added.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: HDV , SDY , VYM

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