Pandemicimmune dividends

Q: It seems that many companies have cut or suspended their dividends in 2020 because of the pandemic and recession. Does that mean income investors are out of luck?

A: Many prominent companies will not let 2020 change their ways, even when their business is clearly impaired. Starbucks, which has seen a drop in sales during the pandemic, boosted its payout 9.8%, effective November, for a yield of 2.1%. “They have really big free cash flow and the balance sheet to lean on,” says Aaron Clark, who manages dividend portfolios for GW&K Investment Management.

Clark also expects AT&T, despite its fallen share price and other questions, to grant another increase in the upcoming weeks. Why? Ample cash flow and an urgency to keep shareholders’ loyalty despite a share price that has fallen to a 10-year low.

Other companies that have boosted their payouts 10% or more during the pandemic include Accenture (a global IT and consulting firm); homebuilder Lennar; Microsoft; chicken producer Sanderson Farms; Texas Instruments; and several retailers, including Camping World, Tractor Supply and Williams-Sonoma.

In September, the Schwab US Dividend Equity ETF (SCHD) distributed 54.3 cents a share, its highest quarterly cash payout ever, dating to 2011, and up from 44 cents in each of the two preceding quarters. SCHD has a five-year annualized total return of 12.2% and is likely the best of the high-dividend exchange-traded funds. Another all star is Vanguard Dividend Growth ETF (VIG), whose total annualized return for five years is 13.6%. Both SCHD and VIG have been red hot since July.

And although the Legg Mason Low Volatility High Dividend ETF (LVHD) has lagged in 2020 because it is full of out-of-favor value stocks, the fund holds many reliable, high-yielding names we’ve frequently favored, including real estate investment trusts and utilities.

If it seems counterintuitive that dividends can fight off COVID-19, the reality is that pandemic-era American business is cleaving into winners and losers. Procter & Gamble (PG) had been in a deep business slump. But helped by booming sales of cleaning supplies, it is doing so well this year that it kicked up dividends 6% in April, compared with 4% the two previous years and 3% the year before that.

We now expect the likes of McCormick (MKC), which is rolling in profits and keeps raising its forecasts because of the boom in home cooking, to be generous with its next dividend raise. The same goes for shipping and delivery firms.

We have said much of this before, but it always bears repeating: Dividends are nothing but durable.