It is that time of year again when S&P's broad statistics on the quarter just completed are released. Along with this information comes a spate of articles about how the S&P 500 did. This happens four times a year, every January, April, July, and October, right after the year’s fiscal quarters end. While the statistics are factual and the articles informative, they can often mislead. This is especially true for dividend investors.
First, let me make clear what I mean by “dividend investor.” It is someone whose objective is the collection of a rising stream of dividends, and who is working towards that objective by following a sound dividend strategy. Dividend investors may use their dividends for reinvestment and compounding, or just spend them as current income. The important point is that they have a significantly different objective from investing for capital appreciation. While dividend investors don’t enjoy seeing their capital stake decline, they are far less focused on that than on seeing their stream of dividends keep increasing. Dividend investing strategies take years to play out, and dividend investors become accustomed to and accept fluctuating values in their capital stake—so long as the dividends keep going up.
OK. Now it is easier to explain why the S&P statistics and the dividend articles can be misleading. It is because they can make it sound like dividend investors are taking a bath, or even getting slaughtered, when in fact they are doing just fine.
In February, S&P issued a press release headlined, S&P 500 Dividends Projected to Decline 13.3% in 2009; Worst Annual Decline Since World War II. In April, USA Today ran this headline following the first quarter: S&P: Record number of firms cut dividend in Q1. Last week, this was the headline on S&P’s dividend press release for the second quarter: A Record Low 233 Companies Increase Dividend Payments in Q2. Over the next couple of weeks, you can expect to see articles in the financial and popular press with similar dire-sounding headlines. Most of them will be based on the most recent press release and broad S&P statistics, but few will include value-added research or reporting beneath the surface. The analysis will usually be superficial.
The facts will be right. For the first six months of 2009, 65 companies in the S&P 500 either cut or suspended their dividend payment, compared to 20 for the same period in 2008 and 4 in 2007. Dividend increases fell from 158 for the first six months last year to 86 this year. In the second quarter, S&P 500 dividends posted their biggest decline in more than 40 years, dropping by $14.3 billion from a year earlier, according to S&P. More broadly, a record low 233 of the approximately 7,000 publicly owned companies that report dividend information to S&P’s Dividend Record increased their dividend payment during the second quarter of 2009, compared to 455 last year.
Some articles will quote Howard Silverblatt, Senior Index Analyst at S&P, who said, “It’s not a good time for dividend investors. The current trend to conserve cash and cut dividends has become defensive, with even relatively healthy companies choosing to reduce payouts. Until we see the economy better, …many companies will remain gun shy about parting with their cash.”
All of this is correct. But the reason that these headlines, articles, sound bites, and statistics can be misleading is that a well-conceived dividend methodology filters out most stocks with “dividends in peril” before they cut their dividends, while at the same time it identifies stocks that are most likely to raise them. The indicia are there in the companies' business models and financial results for anyone who cares to examine them. Attentive dividend investors routinely perform stock-by-stock analysis. They may not trade often, but they usually manage to drop stocks that are likely to cut their dividends before it actually happens.
So the attentive dividend investor does not hold the stocks that create the headlines. Most well-constructed dividend portfolios will go on producing as before. Most of their stocks will not cut their dividends, they will increase them. To the owners of such portfolios, the S&P numbers, while factual and interesting, are little more than background noise.
In distinction to Mr. Silverblatt’s quote, there are many dividend-paying companies that have given their dividends healthy increases already this year. Examples would be Abbott Labs (ABT) 11%, Procter & Gamble (PG) 10%, Colgate-Palmolive (CL) 10%, Coca-Cola (KO) 8%, Johnson & Johnson (JNJ) 7%, Alliant Energy (LNT) 7%, Waste Management (WMI) 7%, Chubb (CB) 6%, and Pepsico (PEP) 6%. These are not obscure, hard-to-find companies. They are well-known, well-run, solid companies that have been increasing their dividends for many years. They all yield more than 3% right now to new buyers, and they are foundational holdings in many dividend investors’ portfolios. While not as sensational, might not a better headline be Dividend Stalwarts Continue to Increase Payouts Despite Tough Economic Times?
S&P's quarterly release of across-the-board dividend statistics is certainly interesting for broad trends, but no one following a dividend investment strategy should be investing across-the-board in the S&P 500’s dividend-paying stocks. Your portfolio should consist of stocks selected one at a time for the most important dividend characteristics: sufficient initial yield (say 3% or more); consistency and safety of the dividend; and rising dividends.