A recent chart and market commentary about the S&P 500 quarterly dividend payout approaching an all-time high caught my attention. The chart seen below, which is originally from the S&P Dow Jones Indices, shows that dividend payouts have increased nearly 152% since Q3 2009. This was the depths of Great Recession and many companies cut the dividend. In Q3 2009, the dividend payout was $47.21 billion and and it almost tripled by Q2 2019 when the dividend payout was $118.68 billion. This dollar amount was an increase of 6.3% on year-over-year basis from $111.6 billion in Q2 2018, and the 11th straight quarter of dividend payouts over $100 billion. The average payout over those eleven quarters was $110.54 billion. The all-time high for the S&P 500 dividend payout was $119.81 billion in Q4 2018. But the S&P Dow Jones Indices estimates that the dividend payout may set an all-time high of roughly $122 billion in Q3 2019.
Technology Sector Contributes Most Dividends in S&P 500
Four sectors reportedly contributed the majority at about 53.8% of the S&P 500 Index’s payout through Q2 2019. Surprisingly, 16.2% of the payout was from the Information Technology sector, 14.1% from the Financial sector, 12.8% from the Health Care sector, and 10.7% from the Consumer Staples sector. Much of this is likely due to growth of the dividend payout from Apple (AAPL) and Microsoft Corporation (MSFT). Combined these two companies alone are now paying about $28 billion in dividend annually. But even companies like International Business Machine (IBM), AT&T (T), and Oracle (ORCL) pay billion of dollars in dividends. All these technology companies are growing their dividends at a good clip each year.
S&P 500 Dividend Yield and Payout Ratio Are Trending Down
Despite the growth in the dollar value of the dividend the S&P 500’s yield and payout ratio continues to trend down. In fact, in many years before 1960 the yield was over 5%. Even after 1960 the dividend yield was over 3% for most years. But after 1991, the S&P 500’s dividend yield fell below 3%. It has not gone above that value except for one year. In 2008, the Great Recession caused the S&P 500’s dividend yield to go over 3%. But it rapidly dropped below 3% in 2009 due to dividend cuts and an appreciating market. Currently, the dividend yield is about 2% .
Similarly the payout ratio was typically over 40% from 1960 until about 1994. In fact, in many years it was over 50%. But since 1994, the payout ratio has been generally below 40%. A few years when the market was down the payout ratio has popped over 40%. It even went over 50% to roughly 57.5% in 2008. But in general the long-term trend is downward.
The main reason for both the long-term decline in dividend yield and payout ratio is share buybacks. Companies are generally focused on returning cash to shareholders. But the emphasis is arguably not regular cash dividend or even a periodic special dividends. Yes, there are some companies like Costco Wholesale Corporation (COST) that do both while doing a moderate level of share repurchases. But many companies in the S&P 500 spend the same and sometimes much more on stock buybacks. For instance, Apple spent $14,119 million on dividends and $69,714 million on share repurchases in 2019. Microsoft is more balanced but stock buybacks still exceed the dividend. The company spent $13,811 million on dividends and $19,543 million on share repurchases in 2019.
Future of S&P 500 Dividends
What does the future hold? At the time of writing this article initially it was likely that the S&P 500 dividend payout would continue to rise barring an unforeseen event. In 2019, the S&P 500 companies increased the total dividend payout by 6.4% to a record $485.4 billion. The broadly surging market brought the dividend yield down to approximately 1.8%. In January 2020, an S&P senior index analyst stated in eerily prescient note:
The current 2020 outlook, absent any major event or negative Washington policy, has the 2020 payment potentially returning to double digits, last seen in 2015,” Silverblatt said, implying that such an expansion would translate to a number above $500 billion.
In general companies are committed to their dividend and view it as component of total return. Some have even taken on low interest rate debt to pay the dividend (or conducts stock buybacks). I am not a big fan of this. But the point is that companies in the S&P 500 index are committed to shareholder returns and paying dividends.
As of this update, there have been roughly 134 companies that have cut or suspended the dividend. Please take a look at the Coronavirus Dividend Cuts and Suspensions tracker. In fact, there have been several prominent dividend cuts in the S&P 500. This includes Boeing (BA), Carnival Cruise Lines (CCL), Darden Restaurants (DRI), Delta Air Lines (DAL), Ford Motor Company (F), Freeport-McMoRan (FCX), Macy’s (M), Marriott International (MAR), Nordstrom (JNW), Occidental Petroleum Corporation (OXY), and Apache Corporation (APA). The list of companies cutting or suspending their dividends grows weekly.
Large capitalization companies that dominate the S&P 500 index list generally do not cut the dividend unless in dire straights. For example, Marriott was faced with hotel closures and capacity in the the single digit percentages. At that level, the company essentially would have had no revenue and earnings. There is some optimism that dividends will continue to grow leading to another record year due to the financial strength of technology companies and banks at the current moment. But I view that as unlikely. The pace of dividend cuts and suspensions is at a record since the Great Recession in 2009. It is not logical to expect that the economy will return to where it was two months ago after lifting of restrictions. I view it as much more likely that the economy has a pop as an initial group of people are brought back from furlough. After that, I think the economy will start a slow climb back to ‘normal’. That would not be optimistic for the S&P 500 quarterly dividend payout.
This article was first published on October 10, 2019. It was updated on April 25, 2020.
Disclosure: I am long MSFT and IBM.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.