Dividends from U.S. companies are at an all-time high, however the development of these payouts is slowing, and could fall further around ahead.
Dividends per share are going to grow for a price of nine percent to some total of US$380 billion for S&P 500 companies in 2015, based on estimates from Barclays. That amount would establish a new record for the U.S. equity benchmark.
Even the power sector saw an all-time high for dividends in the third quarter, despite oil prices falling 60 percent and profits collapsing accordingly.
Jonathan Glionna, U.S. equity strategist at Barclays, is predicting dividend growth will decline to just five per cent in 2016. That might be the slowest rate of growth since 2010.
“Dividends haven’t yet taken care of immediately the decline in earnings,” Glionna told clients. “Although EPS for that S&P 500 has declined in 2015, dividends continue to increase.”
He noted that dividend growth, measured on the trailing four-quarter basis, has declined to 10 %, from 16 per cent 2 yrs ago.
“When earnings fall beyond an economic downturn, much like what’s occurred in 2015, dividend growth usually slows the following year,” the strategist added. “That is what we expect to take place in 2016.”
Glionna pointed out that financials and technology stocks should post the best dividend growth in 2016.
Expected dividend hikes from Apple Inc. and Microsoft Corp. should contribute a great chuck from the tech-sector’s growth rate.
Financials, meanwhile, are expected to generate the strongest dividend development in 2016, as large banks continue to target higher payouts in the annual stress test.
Glionna also thinks dividend growth will be a better strategy to pursue than a single that targets dividend yield, citing the former’s long-term track record of success and the tailwind it ought to get from the strong U.S. dollar.
Either approach (buying the highest dividend yielders or buying dividend growers) has outperformed the S&P 500 in the last Two decades, but they’ve demonstrated substantially different returns over shorter periods of time.
The strategist discovered that dividend growth usually does better when the U.S. dollar is strong, as was the situation within the late 1990s. Dividend yield outperformed when the greenback weakened from 2001 through 2008.
“The current duration of U.S. dollar strength is interesting because dividend growth hasn’t outperformed,” Glionna said. “We feel that may change.”
He highlighted several names that provide promising dividend growth, including AbbVie Inc., American International Group Inc., Boeing Co., Bank of the usa Corp., Citigroup Inc., Ford Motor Co., Kansas City Southern, Lowe’s Cos. Inc., 3M Co. and Wyndham Worldwide Corp.