Battered S&P 500 stocks may get fresh interest from investors turning to dividends in a world of shrinking bond yields.
The dividend yield on the S&P 500 now exceeds the yield on the benchmark 10-year U.S. Treasury by its highest margin in nearly five decades after a flight to safe-haven assets compressed government bond yields to record lows.
Wall Street’s coronavirus sell-off has left the S&P 500 down 26% from its February record high, lifting its dividend yield to 2.46%, the highest since 2009, according to Refinitiv’s Datastream.
By comparison, investors’ rush to government bonds has pushed the yield on U.S. 10-year Treasuries to record lows, most recently on Thursday at 0.59%. Bond yields fall as prices rise.
With Treasury yields so low, “income-seeking investors should consider stocks with both high dividend yields and the capacity to maintain the distributions,” Goldman Sachs recommended in a note to clients this week.
The bank’s report highlighted a list of 40 companies with comparatively high dividend yields, a long history of dividend payouts and stable balance sheets, among them Home Depot, Johnson & Johnson, Cisco Systems Inc and Wells Fargo & Co.
Historically, 10-year Treasury yields have almost always been higher than S&P 500 dividend yields, with a handful of exceptions since the 2008 financial crisis. At over 1.8 percentage points, the current spread between the S&P 500 dividend yield and 10-year Treasuries is the largest since at least the early 1970s, according to Datastream data, which does not go back any further.
Attractive dividend yields on Wall Street may not last, however. Goldman Sachs warned in its report that S&P 500 dividends are likely to shrink by 25% in 2020 as companies vulnerable to the economic shock of the coronavirus outbreak cut or scrap payments to shareholders.
Companies borrowing government money under a $2 trillion economic stimulus package approved last week are not allowed to repurchase shares or pay dividends until they repay their loans. Corporations including Boeing, Macy’s and Ford Motor have already suspended their dividends.
S&P 500 dividends in the March quarter reached a record $127 billion, up 8% from the previous year, according to S&P Dow Jones analyst Howard Silverblatt. However, in the same quarter, a total of 13 S&P 500 companies reduced future dividends by $13.7 billion, including 10 companies that suspended their dividends, he said.
In another report, BofA Global Research estimated that in an extreme scenario in which troubled industries slash dividends to zero, the S&P 500’s overall dividend yield would fall by only about 9 basis points.
“We recommend high quality and safe - not high - dividend yield companies until credit conditions stabilize,” BofA Global Research wrote.