Dividends: Squeezing income from your stock portfolio
The pandemic is forcing more companies to cut their dividends, said Robin Wigglesworth in the Financial Times. Dividends fell by over a fifth in the second quarter, the biggest decline since 2009, and corporate share repurchases have “slid precipitously” as well. The sudden drought has come as a shock to some investors— particularly pension funds, charities, and foundations—who have relied on this era of “shareholder friendliness” for income. Many analysts think the time of rich dividends may be over. Companies that gorged on debt to return more earnings to investors are now leaning on the government and the Federal Reserve to support them through the pandemic. And “such taxpayer largesse clashes with the tradition of corporate payouts.”
Now Disney is being pressured to halt its dividend indefinitely, said Jennifer Saba in BreakingViews.com. Dan Loeb, a prominent activist investor, sent a letter to Disney CEO Bob Chapek last week “saying he believes $3 billion in annual dividends would be better spent on its direct-to-consumer streaming service, Disney+.” Loeb’s right. Disney’s dividend is already lower than those of other media companies, but every dollar spent on dividends is one not being plowed back into the business—and this is the time to invest in growth. The $75 million that Disney+ spent on Hamilton, for instance, was well worth it. “Netflix doesn’t pay a dividend, but it eats Disney’s lunch in total shareholder return.”
Dividend stocks used to be a simple play, said Bailey McCann in The Wall Street Journal: “Stable stocks you could hold for building wealth or generating income.”
But “maintaining a dividend isn’t necessarily a sign of strength.” Some corporations have borrowed to keep from cutting their payouts, a strategy that historically has left companies “emerging from a correction in a weaker position.” Funds that track dividend-paying stocks have become popular, said Tim Gray in The New York Times. But the “stocks to which they’re linked won’t necessarily be steady.” Because dividend yield is calculated by dividing an annual dividend by the stock price, companies can deceptively appear more enticing as their share price falls. Dividend funds typically add “quality screens” for a more stable selection, but their holdings can still increase your exposure to “out-of-favor companies or industries,” like fossil fuels or defense contractors.
Dividends are far from obsolete, and over the long run you’ll find them in a surprising corner of the market, said Lawrence Strauss in Barron’s: technology. “The 72 tech companies in the S&P 500 yield about 1 percent, on average, compared with 1.7 percent for the full index.” But those same companies also more than doubled their second-quarter dividends—to $5.37 a share—compared with five years earlier. Their yields may not look that enticing now, but “plenty of dividend income is growing.”