Informed Dividend Investors – Q2 2023

ADDRESSING DIVIDEND VOLATILITY

Given all of the uncertainties over a potential recession, earnings, and increases in both government and corporate debt costs, it’s no surprise that dividend increases were down and dividend decreases were up in Q2 2023. According to S&P Dow Jones Indices, the net change in U.S. dividend payments slowed in 2Q. In fact, the net change for U.S. domestic common stocks was up only $4.3B during 2Q 2023, compared with net increases of $9.7B in 1Q 2023 and $17.6B in 2Q 2022. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, said, “For 2023, the dollar aggregate of dividends is still expected to increase, but at less than half the pace of the double-digit growth reported in 2022. Given the current environment, we expect this to be in the 4% area, with the potential for additional growth.”

As dividend volatility picks up, we feel now is an excellent time to remind investors of several key factors to keep in mind when considering dividend investment opportunities, both to help mitigate volatility and potentially to increase the cash flow sustainability of their portfolios…

Dividend Investors publication, we address and explore ways to mitigate the volatility of dividend payments…

BUSINESS CYCLE AND INDUSTRY

Different industries and businesses experience varying levels of volatility in their dividend payments.

DIVERSIFICATION

To mitigate the impact of dividend volatility from any single investment, investors can diversify their portfolio across different industries and types of companies.

DIVIDEND HISTORY

A company’s record of dividend payments can provide insights into its commitment to returning value to shareholders.

MARKET CONDITIONS

External factors such as economic downturns, changes in interest rates, and geopolitical events can impact a company’s ability to maintain or grow its dividend.

EARNINGS STABILITY

Companies with stable and predictable earnings are more likely to offer consistent dividends. If a company’s earnings are erratic, its ability to sustain or increase dividends may be compromised during lean periods.

• 460 dividend increases were reported during Q2 2023 compared to 555 during Q2 2022, a 17.1% year-over-year decline.
• 65 dividend decreases were reported during Q2 2023 compared to 51 during Q2 2022, a 27.5% year-over-year increase.

CASH FLOW

A company with healthy cash flow is better positioned to maintain stable and growing dividend payments, even if earnings fluctuate.

DIVIDEND POLICIES
Some companies have formal policies that clearly define their commitment to paying dividends, including their frequency, stability, and growth rate.

DIVIDEND PAYOUT RATIO
The dividend payout ratio, which is the proportion of earnings paid out as dividends, is an important indicator of dividend sustainability. High payout ratios suggest that the company is distributing a significant portion of its earnings as dividends, leaving less room to buffer against downturns. This can lead to greater dividend volatility.

DEBT LEVELS
High debt levels can strain a company’s ability to pay dividends consistently, especially during challenging economic times. As we have seen in the past, debt obligations, especially for more highly leveraged companies, can often take priority over dividend payments.

• The S&P 500 indicated dividend yield was 1.54% as of 6/30/23, down about 8.9% Y/Y.
• Real Estate, Energy, and Utilities continue to be the highest-yielding sectors.
• The lowest-yielding sectors were Consumer Discretionary, Information Technology, and Communications Services; all below 1%.

COMPANY GROWTH

Companies in the growth phase of their business lifecycle might choose to reinvest their earnings into expanding sales or operations rather than paying dividends. As a result, the dividend payments of growth companies might experience greater variability or rise more slowly during higher growth periods.

At DAC, we believe understanding the key factors that could impact the stability and future growth of a company’s dividend payments is crucial for investors looking to build a stable and reliable income stream from their dividend investments.

DID YOU KNOW?
• According to Bloomberg data, as of 06/30/2023, 14,320 stocks were listed on U.S. Stock Exchanges and domiciled in the U.S.
• Among those stocks, only 1,416 or less than 10% are expected to pay dividends in the next 12 months.
• Among those expected to pay dividends, only 393 companies are projected to deliver dividend growth rates over the next three years at or higher than 10% annually, or less than 3% of the listed securities.
• Those 393 companies have an average market cap of $34B and an estimated dividend yield for the next 12 months of 3.14%, 118 bps higher than the S&P500 Index indicated yield of 1.96%, due to higher anticipated dividend growth.
• Within DAC’s investment universe, 57% of companies grew their dividend over the last 10 years by 10% to 15%, 22% grew it 15% to 20%, and 21% of the companies grew their dividend by more than 20%.

INVESTMENT PHILOSOPHY… WE BELIEVE DIVIDENDS ARE ONE OF THE BEST INDICATORS OF THE FUTURE PRICE PERFORMANCE OF A STOCK:

• According to the most recent update from Ned Davis Research (6/30/2023), “Dividend Growers and Initiators” have outperformed all other dividend policies as well as the S&P 500® Equal-Weighted Index, continuing to demonstrate the power of compounding dividend growth.