By John Wasik
CHICAGO May 24The golden days of summer might
also brighten the portfolios of dividend lovers.
With most large corporations swimming in cash as the economy
and earnings improve, adopting a dividend-centric strategy looks
even more promising for moderate-risk investors.
Dividends, the portion of earnings that corporations pass
along to shareholders in the form of quarterly payments, are
becoming more generous. Not only do they reward long-term
shareholders with higher total return, they are proven inflation
At the end of last year, the number of companies paying a
dividend hit a new, 13-year high, FactSet reports. And
while dividend payout ratios are close to their median level,
they are at their highest level since the recession hit in 2007.
The current yield of S&P 500 stocks is around 2 percent,
which beats most insured savings accounts. Unless a slowdown
triggers earnings declines, the dividend surge is expected to
That's because the most profitable corporations are hoarding
cash that could be channeled into dividends. Last year,
companies increased their reserves to $1.45 trillion, according
to Moody's Investor Services, up from $1.3 trillion in
While profits can also be used to buy back shares or be
invested in research and development - as many companies are
doing - they are increasingly redirected into dividend payments.
Here are three reasons why dividend-seekers will be
Companies hoarding piles of cash may not have the biggest
incentives to pay dividends, but they are facing intense
pressure to raise their payouts as shareholders get active.
Apple, sitting on nearly $138 billion in cash at the
end of last year, bowed to shareholder demands to share its pile
All told, Moody's estimates, technology companies have more
than a half-trillion dollars in cash on hand. "The sector with
the most cash and reasonably low yields and payouts is
technology," said Bob Doll, chief equity strategist for Nuveen
Investments. "I would expect the biggest increases there."
There's a broad selection of tech high-yielders, including
Intel at 3.7 percent.
PAYOUT RATIOS CLIMBING
Investors are seeing a cyclical increase in the amount of
earnings that flow back into dividends. That payout ratio is
important to watch because it shows the percentage of profits
turned into dividend payments.
Higher ratios are usually better for shareholders. The
average payout ratio for the S&P 500 companies ranged between 40
percent to 50 percent from 1981 through 2000, according to
research from Scottrade, the discount brokerage.
After the dot-com bust and again immediately following the
2008 crash, though, companies got more conservative with their
cash management. At the end of 2011, the payout ratio was at 28
percent. By the close of 2012, it rose to 30 percent.
Analysts like Doll expect ratios will "drift into the 40s
over the next couple of years as dividend increases exceed
earnings increases." Ultimately, the companies with the best
cash flow and earnings reports will lead the pack.
CASH CONSISTENCY COUNTS
The conventional wisdom has always been that companies
choosing to re-invest their cash in their businesses have
greater growth prospects - that's not always the case. The two
recessions and stock-market downturns during the past dozen
years have made companies much more efficient. Relying more on
technology, they have downsized their workforces. Although that
is a sour story for employment, it's freed up more cash.
Some top dividend yielders include Pitney Bowes,
which pays a 5 percent dividend; Altria Group, at 4.8
percent; and Entergy at 4.9 percent.
Companies building up their businesses while boosting cash
flow increasingly reward shareholders with higher dividends. The
telecommunications sector, for example, fed by the steady growth
in mobile devices, pays the highest dividends among S&P 500
companies, according to FactSet Dividend Quarterly.
Telecom companies pay an average 4.4 percent yield, compared
to 2 percent for the S&P 500. Along with tech companies, they
are in the best position to grow their dividends. Verizon
, yielding nearly 4 percent and AT&T, at almost 5
percent, are good examples.
BEST DIVIDEND STRATEGIES
You don't have to buy single stocks to grab decent yielders.
Exchange-traded and mutual funds offer diversified portfolios of
the best performers.
My best candidate is the Vanguard Dividend Growth fund
which owns 147 dividend "achievers" that are expected to
raise their dividends. It is up 26 percent for the year through
May 22 and 16 percent year to date.
Another worthy alternative is the SPDR S&P Dividend ETF
which is up 32 percent for the year and 20 percent year to date.