Dividends Are Booming, With Plenty of Room For More Hikes: We Name Names

Earnings growth rates are slowing, but Corporate America isn’t turning off the dividend spigot. S&P Dow Jones Indices says net dividend payouts increased $8.8 billion in the third quarter, a figure S&P dividend major domo Howard Silverblatt believes to be a quarterly record. For the year, cash payouts are 19% higher according to Silverblatt.

There’s no fundamental reason why the payouts can’t continue. The current 34% average payout ratio for dividend-issuers in the S&P 500 is well below the historic average of 52%.

Companies including McDonald’s (MCD), Microsoft (MSFT) and Yum (YUM) recently announced dividend hikes, but their payout ratios remain below the long-term average.

MCD Payout Ratio TTM Chart

MCD Payout Ratio TTM data by YCharts

Among large caps rated “attractive” by YCharts with above-average dividend yields companies such as Royal Dutch Shell (RDSA), Corning (GLW) and Walgreens (WAG) all have super-low payout ratios.

RDSA Payout Ratio TTM Chart

RDSA Payout Ratio TTM data by YCharts

GLW Payout Ratio TTM Chart

GLW Payout Ratio TTM data by YCharts

WAG Payout Ratio TTM Chart

WAG Payout Ratio TTM data by YCharts

The one potential rain cloud hovering over the dividend parade is what happens to the tax rate on qualified dividends. Since 2003 dividends have been taxed at a maximum of 15%, rather than as ordinary income (top current rate 35%.) S&P’s Silverblatt estimates that investors have pocketed an extra $358 billion since the rate was lowered in 2003. But all Bush tax cuts are scheduled to expire at the end of this year; we won’t have a clue what is going to happen until Congress focuses in the post-election lame-duck session.

But as explained in this YCharts post, Fidelity Investments says it doesn’t expect a change in dividend taxation to cause the dividend spigot to run dry. Moreover, plenty of companies have consistently paid-and increased-their dividend to shareholders, across decades of changing tax policy. General Mills (GIC) has paid a dividend for more than 100 consecutive years—longer than the federal tax code has been in existence.

GIS Dividend Chart

GIS Dividend data by YCharts

For other long-term dividend hikers, you can trawl through the portfolio of the SPDR S&P Dividend ETF (SDY). This ETF cherry picks the highest yielders among companies in the S&P 1500 that have managed to increase their dividends annually for at least the past 20 years. Current top holdings include Pitney Bowes (PBI), Leggett & Platt (LEG) and AT&T (T).

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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