The Predictability of Dividends
December 10, 2014
In the 2013 calendar year, 163 S&P 500 companies suffered a decrease in price, while only 12 companies decreased their dividends – and it’s the same scenario this year. Given the recent upward movement in the market, this may be hard to believe, but as of September 30, 2014, 165 companies in the S&P 500 have experienced negative price growth, yet only seven have announced dividend decreases. Thus, it’s our belief that these trends highlight the lower volatility associated with dividend growth as compared to price growth. Even though companies lose stock price value, they generally won’t see the same effect with their dividend payouts, and dividends have steadily grown over time. How can this be?
Typically speaking, companies choose not to decrease their dividends, due to this being a negative indicator for investors, who would likely feel less certain about their investments. Even when corporations fall short of earnings expectations, they generally maintain or may even increase their dividend payouts, as we saw recently with Starbucks. The company missed on earnings, yet it announced a 23% dividend increase to reward stockholders and to signal its expectations of future growth.
The following chart shows the number of negative price vs. dividend actions for the companies in the S&P 500 during 2013 and through Q3 of 2014.
January 2, 2013, through September 30, 2014. Past performance does not guarantee future results. Source: S&P Capital IQ, Reality Shares Research
Stock prices are affected by a slew of factors. These include the usual earnings and revenue growth, but prices are also affected by external factors, such as world events and social media hype, which companies and their shareholders have no control over. Be that as it may, corporations do have primary discretion over their dividend payments.
By maintaining or increasing their dividend payouts over time, companies are able to instill confidence in their shareholders, as dividends represent a more conservative proxy to corporate fundamental health. Given the often uncorrelated nature of price vs. dividend growth, the record amounts of cash sitting on corporate balance sheets, and historically low dividend payout ratios, it’s our conviction that corporate action toward higher dividend payouts are here for the long haul.
Reality Shares does not make any representations, endorsements or promotions to any company, security, or trading strategy as may be held or represented in Reality Shares Funds. For a complete list of all portfolio holdings held by Funds advised by Reality Shares, please click here.
S&P 500: A broad stock market index based on the market capitalization of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 was developed and continues to be maintained by Standard & Poor’s Financial Services LLC, and is considered to be a bellwether for the US economy.
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