Please, Sir, May I Have More Dividends?

More generous dividends could be a great way to fund the retirements of the Baby Boomer generation at a time of low interest rates. Illustration by Dennis Pacheco Close

More generous dividends could be a great way to fund the retirements of the Baby Boomer... Read More

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More generous dividends could be a great way to fund the retirements of the Baby Boomer generation at a time of low interest rates. Illustration by Dennis Pacheco

For years now, yield-starved investors have been clamoring for more income. Wouldn’t it be great if their demands were met by more supply?

There's no lack of income-oriented products -- 88 stock funds with "dividend" or "income" in their name were created in the U.S. over the last two years, and more are on the way. It's an increase in the raw material, the actual cash dividends, that investors are eager to see.

There are signs that CEOs and boards are paying more attention to shareholder demands for income. Last month, 44 companies in the S&P 500 index increased their dividend, up from 30 a year before, according to S&P Dow Jones Indices. IBM raised its dividend 12 percent, while Apple boosted its dividend 15 percent. If present trends continue, Bloomberg projects S&P 500 dividends will rise 9.2 percent in the next three years.

The 'Share' in Shareholder

Still, a far bigger share of corporate profits could be sent to investors. "Companies need to remember the 'share' in shareholder," says James Morrow, who manages dividend stock funds for Fidelity Investments. After all, the companies in the S&P 500 index have twice the cash they did nine years ago, Bloomberg data show.

More generous dividends would be warmly welcomed by Baby Boomer retirees at a time of low interest rates. For retirees with a buy-and-hold approach, the rise and fall of the stock price doesn’t matter as much as a consistent and hopefully rising dividend payout, says Gregory Thomas of ThomasPartners Investment Management. (Thomas will sell a dividend stock if his firm determines that it's overvalued.) He views dividend-paying stocks as a way to buy a long-term stream of income. Thomas's firm, which specializes in such a dividend strategy aimed at those 55 and over, was bought by Charles Schwab for $85 million in October.

It won’t be easy to get executives to fully meet the demands of yield-hungry shareholders. Doing so would reverse a 40-year trend of companies keeping more of their profits for purposes such as buying back stock, making acquisitions and funding growth plans.

S&P 500 companies announced $208 billion in buybacks last quarter, up 64 percent from the year before, at a time when the index was at a record high.

In the 1950s and 1960s, many investors -- and thus many execs -- were obsessed with dividends. “In a lot ways, it’s back to the future,” Morrow says. Currently, the S&P 500 has a dividend yield of 2 percent. Morrow calculates that if the stock market returned to paying out a “normal” amount of its earnings in dividends, that would rise to 3.5 percent. “The capacity is certainly there,” he says.

Self-defeating cycle

Why did dividends shrink, at least as a percentage of profits? Morrow thinks rewarding executives with stock options gives them incentives to grow the company and its share price, rather than increase its dividend. Also, managements have been cautious about making dividend promises that they couldn’t keep, especially after the scary economy of 2008 and 2009. They've preferred share buybacks, and have often bought in when their stocks looked pricey. Indeed, as dividends have risen, so have share buybacks. S&P 500 companies announced $208 billion in buybacks last quarter, up 64 percent from the year before, at a time when the index was at a record high.

The more popular dividend stocks are, the more their prices are bid up and their dividend yields shrink.

More companies paying more dividends could help ease a frenzy for dividend income that can be self-defeating. The more popular dividend stocks are, the more their prices are bid up and their dividend yields shrink. When industrial company Parker Hannifin's share price doubled in four years, its dividend yield fell 36 percent, despite frequent increases in its per-share payouts. About a month ago, Thomas sold the stock in favor of regional bank BB&T, which has a dividend yield 55 percent higher than that of Parker-Hannifin.

It could take five to 10 years for executives and boards to embrace a more generous dividend policy, Morrow predicts. “We’re early on in this trend,” he says. “Companies are slow to change.”

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