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Hefty cash balances, rising corporate profits and growing investor demand for income are driving dividend yields. Photographer: Scott Eells/Bloomberg (Scott Eells/Bloomberg)
Hefty cash balances, rising corporate profits and growing investor demand for income are driving dividend yields. Photographer: Scott Eells/Bloomberg (Scott Eells/Bloomberg)

Yield Hog

The year of the dividend Add to ...

Gloomy economic headlines and choppy stock markets spoiling your summer? Here’s some cheerful news for investors: 2012 is shaping up as a record year for U.S. dividend-paying companies.

Spurred by hefty cash balances, rising corporate profits and growing investor demand for income, U.S. companies boosted dividends by a net $12-billion (U.S.) in the second quarter, according to data released Monday by S&P Dow Jones Indices. Of the approximately 10,000 publicly traded U.S. companies, 505 increased dividends during the three months to June 30, compared with just 37 that reduced or eliminated them.

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And there’s no sign that the trend is slowing down.

“Dividends are back in style with investors looking for yields during a time when companies can afford to give more and want to satisfy shareholders – all of which makes for a very positive outlook for dividends,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Based on dividend rates at the end of the second quarter, U.S. companies are projected to shell out an annualized $391-billion in 2012 – the highest on record. Payments are expected to rise 16 per cent in 2012 over 2011, Mr. Silverblatt said, even as Europe’s economic woes continue and fears of a global slowdown mount.

“While there is concern over the economy, I don’t expect it to be enough to cause companies to significantly delay or reduce their dividend plans,” he said.

S&P Dow Jones Indices looked only at U.S. stocks, but Canadian companies have also been shovelling more cash to shareholders, with most of the major banks, telecommunications providers, pipelines and utilities increasing dividends in the past year.

Another reason for the growing popularity of dividends are microscopic bond yields. Government of Canada 10-year bonds are yielding about 1.73 per cent and 10-year U.S. Treasuries just 1.63 per cent, causing investors to turn to high-yielding dividend stocks to supplement their incomes.

Even as dividends rise sharply, however, payout ratios – the percentage of profits paid out as dividends – are stuck at historically low levels, indicating that companies could afford to distribute even more of their cash. The payout ratio during the second quarter was 31 per cent, well below the long-term average of 52 per cent.

One wild card are rising taxes on U.S. dividends. Starting in 2013, the 15-per-cent tax rate on U.S. dividends is set to nearly triple to 43.4 per cent, which could cause companies to slow dividend increases and put more emphasis on share buybacks. It’s also possible, however, that after the fall election Congress and the U.S. president will reach a deal to scale back the tax increase.

In the meantime, Mr. Silverblatt said some U.S. companies might decide to accelerate dividend payments from the first quarter of 2013 to the fourth quarter of 2012 to avoid the potential tax increase, which would mean fatter dividend cheques for investors at the end of the year. It’s also possible that companies could declare a special dividend, he said.

Even as dividends rise, not everyone is convinced that now is the time to jump in.

In the latest edition of his Connolly Report newsletter, dividend growth investor Tom Connolly devotes most of his front page to warnings from investing pundits about a potential market collapse. Among the factors they cite are a possible hard landing in China, a “calamitous” amount of debt in the industrialized world and the fact that central banks are keeping interest rates at emergency levels.

“The question now is, how much lower will prices go? I believe the coming fall in equity prices will be significant,” Mr. Connolly said.

If that sort of talk frightens you, consider another piece of data provided by Mr. Silverblatt.

From January, 1926, through June, 2012 – a period that included assorted bear markets, crashes and long periods when the market went nowhere – the S&P 500 delivered an annualized total return of 9.9 per cent. Dividends – which many companies pay through good times and bad – accounted for about 41.7 per cent of the gains.

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