How to play U. S. dividend growth

Dividends from U. S. companies are at an all- time high, but the growth of these payouts is slowing, and may fall further in the year ahead. Dividends per share are set to grow at a rate of nine per cent to a total of US$380 billion for S&P 500 companies in 2015, based on estimates from Barclays. That dollar figure would establish a new record for the U.S. equity benchmark.

Even the energy sector saw an all-time high for dividends in the third quarter, despite oil prices falling 60 per cent 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 would be the slowest rate of growth since 2010.

“Dividends have not yet responded to the decline in earnings,” Glionna told clients. “Although EPS for the S&P 500 has declined in 2015, dividends continue to go up.”

He noted that dividend growth, measured on a trailing fourquarter basis, has declined to 10 per cent, from 16 per cent two years ago. “When earnings fall outside of a recession, similar to what has occurred in 2015, dividend growth usually slows the following year,” the strategist added. “That is what we expect to happen 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 good chunk of the tech-sector’s growth rate.

Financials, meanwhile, are anticipated to generate the strongest dividend growth 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 one that targets dividend yield, citing the former’s long- term track record of success and the tailwind it should get from the strong U.S. dollar.

Either approach ( buying the highest dividend yielders or buying dividend growers) has outperformed the S&P 500 over the past 20 years, but they’ve demonstrated substantially different returns over shorter periods of time.