From this weekend’s Barron’s, a look at stocks that do — and don’t — have decent dividends:

“The benchmark Standard & Poor’s 500 index has a dividend yield of just 2%, one of the lowest of any major global market. European stocks yield an average of nearly 5%, and even the historically low-yielding Japanese stock market pays 2.5%.

American companies have the wherewithal to raise dividends because profits are at record levels and the payout ratio—the percentage of profits paid out in dividends—is near an all-time low at 28%. It has averaged 40% over the past 20 years.” (emphasis added)

That is an astonishing stat . . .

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Strong Dividends

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Weak Dividends

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Source:
In Search of Yield
ANDREW BARY
Barron’s JANUARY 21, 2012
http://online.barrons.com/article/SB50001424052748704900804577170672872489942.html

Category: Dividends, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “In Search of Yield & Dividends”

  1. constantnormal says:

    It would be interesting to see a historical chart with the rise in CEO compensation superimposed with the decline in dividends, both relative to earnings. I wonder how strong the correlation would be.

  2. Sechel says:

    Dividends are very important component when calculating total return picture of stocks, but as a replacement for fixed income I take issue for two big reasons, first by investing in stocks vs bonds the investor is taking on considerably more duration risk, secondly the income stream is less dependable based on the lower priority in the capital structure. Lastly I wonder about the wisdom of buying into companies the article mentions such as Verizon which has huge infrastructure spending requirements or some of the companies which huge cash overseas that can’t easily be repatriated and used as to pay cash dividends. Dividend paying stocks should be how one allocates the majority of their equity exposure(in my view) and not as a replacement for bonds. After all the risk profiles of the two asset classes are not exactly the same.

  3. David Merkel says:

    Amgen just did a huge tender and increased the dividend — should not be on the stingy list. I am long AMGN for clients.

    Aside from that, it might be better to focus on free cash flow. Dividends are good, but the full range of ways that a management team uses free cash flow is more indicative of shareholder value.

  4. theexpertisin says:

    The article’s revelation that dividend payout as a percentage of profits is at a historically low level for companies in total surprised me.

    Thanks, BR, for bringing this to the fore.

  5. Old Rob says:

    Companies don’t have a high payout because they DO NOT have to. Where you ‘gonna go’?

  6. maynardGkeynes says:

    I’d like David to expand on what he says about free cash flow. However, I’d say that the most obvious advantage of dividends is that they don’t allow the major fudging that retained earnings do, which I think is pretty obvious to everyone here. What is less obvious to me is why investors seem not to penalize companies that pay little or no dividends. Perhaps investors prefer a good story to real $$$?

  7. VennData says:

    If a CEO gets a 100% of the performance above a certain price threshold on his options, she will do buybacks until the cows come home to roost.

    Incent them to strive for dividend yield, and that is what you will get.

    But we all know that.

  8. carleric says:

    I am with “constantnormal”…investors seem willing to overlook obscene levels of compensation to CEOs which don’t demonstrate any ablilities whatsoever. Do you really want a Bob Nardelli running your company-just to cite one obvious example. Most CEOs can’t find their way to work without help. If board members weren’t sleeping with CEOs or their wives perhaps divdends might truly reflect the health of the company. I will readily admit my experience as a consultant to some of these bozos has somewhat colored my judgement but compensation packages are laughable judged against contributions.

  9. GuinnessFan says:

    Given the structure of the markets today, where HFT dominates the “investing” landscape, it’s probably not surprising that dividends are not valued more. The transient nature of a company’s shareholder base means there’s no pressure placed on management to increase dividends.

    Also aren’t many CEOs more concerned with manipulating the stock price via share buybacks in order to cash out their options?

  10. TR says:

    The mindless investing in index funds allows low dividend payout for companies. Every 401K should have a window so people can invest in what they deem as quality. A wee bit more education regarding dividends is necessary.

  11. sabre_jenn says:

    I would second (or third?) David Merkel’s comments that the true picture requires better analysis than just the dividend payout ratio. Do companies have good uses for the cash? And by “good”, I mean uses that will grow the company in real terms, after paying back debts.

    Any monkey CEO can “grow” a balance sheet by buying someone else’s work with debt. But if the acquisition makes sense, it should pay the debt back and then some. CEO pay has been shown to correlate with balance sheet size, which is why most acquisitions happen (and the M&A fees!). Most shareholders would be better off with higher dividends, but CEOs would not and they think they own the company.

    I want to also mention that the same issue of Barrons had what might be charitably labeled a puff piece suggesting CPI might somehow overstate true inflation… All to obviously a piece written by NY Fed / Goldman plant William Dudley, and re-printed no questions asked. Barrons should be embarrassed that they allowed themselves to be played like that

  12. Ramstone says:

    Presumably they also drop the other shoe in the story — that buybacks are back to recordish — 2007 levels. No prizes for guessing why Management prefer buybacks to payout.

  13. “Also aren’t many CEOs more concerned with manipulating the stock price via share buybacks in order to cash out their options?”

    now, where Is that Klaxon? yes, Klaxon.

    http://www.thefreedictionary.com/claxon

    http://www.macmillandictionary.com/dictionary/american/klaxon

    now, don’t lose it, it’ll come in handy..

    “The mindless investing in index funds allows low dividend payout for companies. Every 401K should have a window so people can invest in what they deem as quality. A wee bit more education regarding dividends is necessary.”
    ~~

    Then, guess what?

    Options. specifically, Covered Call Writing.

    embedded in, most, every, is an, easily, exercisable ‘Dividend’..

    the ‘Call’ can be sold..IOW sell the ‘Right to Buy’…

    Why?

    for the Premium. Paid, in Cash, to You.
    ~~

    Who Should Consider Writing Covered Equity Calls?

    An investor who is neutral to moderately bullish on certain portfolio holdings.
    An investor willing to limit upside profit potential on a specific stock holding in exchange for limited downside protection.
    An investor who wishes to generate income in addition to any dividends from shares of underlying stock owned.

    This strategy is one of the most basic and widely used that combines the flexibility of listed equity options with the benefits of stock ownership. It works well for cash, margin, and Keogh accounts or IRAs. Although this strategy may not be suitable for everyone, it can provide a stock-owning investor limited downside stock price protection in return for limited participation on the upside. In addition, the covered call generates income from the premium received from the call contract’s sale that can supplement any dividend income paid to eligible underlying stockholders…”
    http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/Part1.aspx

    Catch a _______ Clue, Free of Charge.

    if you still Labor under the (mis-)impression that you Need to Pay your ‘local’ Hedgie, 2&20, for middling mid-teen ‘Returns’ (if you be so ‘Lucky’)…W(ake)TFUp.. learn yourself, some, for a “Change”–you, just, might ‘Earn yourself (more than, just,) Some’.

    to keep it ‘Elementary’..

    after you ‘graduate’ R.I.F.
    the next Lesson tracks..” Learnin’ is Earnin’ ‘”

    or, differently, it’s, Only, a Meritocracy, if you ain’t playin’ “Checkers”, while those about you are playin’ “Chess”.

  14. louis says:

    The list is a good drip portfolio for one to consistently feed.

  15. Bob A says:

    FII also saw it’s stock price go from around 25 to below 15 during 2011…
    So I’m not sure the dividend is what you want to base your investment decision on.
    Does it make sense to lose 40% of your principal to earn a 4% dividend? Really?

  16. GuinnessFan says:

    Mark E. H., perhaps you should consider joining me in therapy!

    They’re coming to take me away haha, hoho, heehee,…

  17. Winston Munn says:

    I don’t understand how anyone gets the personal information of what these “people” decide to donate to various other private individuals – my God, you would think people were regulated or something.

  18. Lyle says:

    The preference for capital gains over dividends is left over from the tax situation pre 2003. At that time you paid regular taxes on dividends but 20% on cap gains. So the powers that be preferred cap gains. It takes time for the pendulum to swing. Further it should be noted that young companies do not pay dividends, but as they become middle aged they tend to see Microsoft. Google for example is still young, and so it believes it has a better idea of how to invest its money than its stockholders.

  19. GuinnessFan,

    yes, on one hand, I, just, might~!

    though, as you might guess, on the other hand..

    Are you in agreement with the Idea of, simply put, ‘Covered Call Writes’(?), or, are you telling me that I need to be fitted(tailored) for a Straight-Jacket? :)

    (you know, sometimes, the ‘Hand you’re Offered’, is different from the ‘Hand you’re Dealt’ !)

  20. Drizzt says:

    evidence that it may be better to go for capital gains when investing in the US stock market. international investors have a 30% withholding tax on dividends and that drastically reduce the yield for US.

    still its amazing payout ratio is so low. around the world we do see 50% to 100% payout ratio and 5% yields but people are likely to say these are unsafe figures.

  21. Drizzt says:

    btw is this just a statistic or can we infer that payout ratio will mean revert?

  22. constantnormal says:

    Drizzt, mean reversion doesn’t happen on a schedule — something is happening to cause a diversion from the mean, and that’s gotta be changed before mean reversion can begin …

    The question here is why are US equities so dividend-averse? It’s sure not due to tax policy …

    I don’t expect this situation to change anytime soon.

  23. [...] Why aren’t companies paying out more in dividends?  (Barron’s via Big Picture) [...]

  24. Bruce Bartlett says:

    But a key justification for lowering the dividend tax rate was to encourage companies to pay out more dividends. Are you telling me George W. Bush was wrong?

    -Bruce Bartlett

    ~~

    BR: I’m still hunting for an example of where he was right. Let me know if you find one . . .

  25. [...] Barron's did the big In Search of Yield cover story this week.  The learned Rabbi Ritholtz pulled the appropriate paragraph and charts from here: In Search of Yield & Dividends [...]

  26. Michael M Thomas says:

    People ask me why aren’t companies distributing their cash mountain. Based on the past 15-20 years, the answer seems pretty straightforward: given the present stringent political and regulatory climate, corporate managements and their legal and accounting dogsbodies are going to have to devise new ways of stealing it. This can take time.

  27. ciwood says:

    If most stock investors are the 1%, then tax rates matter. When dividends are again taxed at the highest rate, will dividend stocks fall precipitously? I would like to buy dividend paying stocks for many of the reasons mentioned above, the most important of which is truth in accounting as opposed to managed p/e ratios. However, I will abstain until I get a better read of the tax situation coming in 2013.

  28. GuinnessFan says:

    Mark E. H.,
    I won’t disagree with your covered call approach.