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Portfolio > Economy & Markets > Stocks

Where are Dividends Headed?

By Tom Nawrocki

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Apple’s announcement of its first dividend in over a decade on Monday sent its already-lofty stock even further upward this week. Apple last issued a dividend from 1987 to 1995, not so coincidentally, during the period in which founder Steve Jobs was absent from the company. Now, stockholders can expect to get $2.65 a share each quarter for the foreseeable future. Paying out the dividend doesn’t figure to slow Apple down very much. The first year’s payout will cost the company roughly $10 billion. Meanwhile, over its last fiscal year, Apple’s cash hoard grew by $31 billion.

See also: The Apple Blowout

It’s not unusual for high-tech companies to refrain from offering dividends. Fast-growing companies generally don’t pay out dividends until they become settled, profitable businesses, so there’s some sense among tech companies that only those that are past their primes pay out dividends. Google, for example, doesn’t pay a dividend, even though it has roughly $45 billion in cash on hand. Amazon.com, Dell and eBay also don’t pay dividends.

The positive reaction to Apple’s dividend may help prod those companies into thinking about rewarding shareholders with some of their profits. But even more significant, the equity landscape looks very promising for dividends to grow right now. Even though by some measures, dividends are at record levels, there appears to be more room for expansion.

Apple is famous as a high-tech trend-setter, both as an electronics manufacturer and as an iconic stock, but in the realm of dividend-payers, it’s just getting on the bandwagon. According to projections compiled by S&P Capital IQ, the amount paid out by dividend stocks may break $263 billion this year. The previous record was $253 billion in dividends, back in 2008.

Standard & Poor’s estimates that announced dividends for companies in the S&P 500 suggest an average payout rate of $29.02 per index share. That’s a record for that figure. The highest number previously recorded was $28.96 in June 2008, just before the market crash. Dividend payouts bottomed out little more than a year later, in August 2009, when the dividend level reached $21.44. The biggest reason for that drop was the financial sector, which accounted for 30 percent of all of the S&P 500′s dividends as recently as 2007. They now contribute just 13 percent of them. 

But while the raw number is at a peak, the percentage is far from it. The average company in the S&P 500 is now paying out just 30 percent of its profits as dividends, while the historical average is 52 percent.  

So even at record levels, there is still room for dividends to continue to grow. American corporations are sitting on around $1 trillion in cash or cash equivalents, so the assets are there to pump up the dividend level even further. The current S&P 500 dividend yield is just 1.96 percent, compared to an average of about 3.24 percent between 1970 and 1994. In the 1990s, dividend levels dropped as the valuation of stocks went skyrocketing in the Internet bubble. Dividend yields eventually bottomed out at 1.05 percent in 2000, which means we’re still closer to that bottom than we are to the average for the 25 years before the dot-com bubble.

Apple’s dividend yield of 1.8 percent puts it far behind the market leader, AT&T, which is the top dividend payer among the 30 stocks in the Dow Jones industrial average. AT&T is currently paying out a dividend of 5.56 percent. Other notable names paying more than Apple are Pfizer at 4.02 percent, Philip Morris at 3.57 percent, GE at 3.36 percent, and Coca-Cola at 2.90 percent. But Apple is still ahead of other large high-tech corporations, such as IBM at 1.46 percent, Cisco at 1.29 percent and Oracle at 0.81 percent.

In fact, the sectors with the two lowest dividend yields in the S&P 500 are financials and technology. Coincidentally, they are also the sectors that have seen the most price appreciation in 2012.

That’s been a trend throughout the year: Companies with the best track records of paying dividends are lagging the rest of the stock market. The S&P 500 Dividend Aristocrats Index, which tracks companies that raised payouts for at least 25 straight years, had returned 7.1 percent in 2012 as of last week, while the entire S&P 500 had gained 11 percent. That is a strictly recent trend, though. In 2011, the returns were 8.3 percent and 2.1 percent, respectively.

S&P’s chief analyst, Howard Rosenblatt, has said he expects to see more banks to begin paying out dividends. And Apple may set a similar trend in motion for technology companies. It could be that the optimal strategy for investing in dividend stocks is not chasing those currently offering the highest payout, but finding out which highflyers will be the next to join Apple on the dividend bandwagon.

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