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Shrinking Dividend Yields

Shrinking Dividend Yields

Shrinking Dividend Yields. Long-time dividend growth and high yield investors are aware of the incredible shrinking dividend yield. Investors examining the dividend yield history of the S&P 500 Index can observe that the current dividend yield is approximately 1.29%. This percentage is nearly the lowest value on record. Furthermore, the S&P 500’s dividend yield has only been lower for a time during the dot-com boom. The minimum was 1.11% in August 2000. For perspective, the long-term average is around 4.3%.

Shrinking Dividend Yields
Shrinking Dividend Yields

The long-term chart shows a downward trend, especially since 1980. There have been periodic upticks during recessions as stock prices declined. Dividend yields reached a local peak right before the sub-prime mortgage crisis. However, the trend is unmistakable. One may be asking the question, are dividend yields dead?

Shrinking Dividend Yields
Source: multpl.com

Reasons for Shrinking Dividend Yields

There are two reasons why dividend yields are shrinking: rising stock prices and valuations and increasing share buybacks. 

The price-to-earnings (P/E) ratio has been on an upward trend since 1980. Peaks and troughs have occurred, but the upward trend is unmistakable, as seen in the chart below in the Market Valuation section. This trend means that stock prices are increased faster than earnings. The equation for dividend yield is dividend rate per share/stock price expressed in percentage. Since dividend yields are inversely related to stock prices, dividend yields must come down.

The other reason for shrinking dividend yields is that companies increasingly use free cash flow (FCF) for share buybacks. Companies can use free cash flow (operating cash flow – capital expenditures) for investing in organic growth, M&A, paying down debt, share buybacks, and dividends. As a result, many companies do not pay a dividend. Even ones that do are using free cash flow for share buybacks or other purposes. The result is that a lower percentage of free cash flow is used for dividends.

recent article highlighted this trend. For example, in Q2 2021, (operating) cash flow was separated into the following uses, 33.8% share buybacks, 27.8% capital expenditures, 21% dividends, and 18% for retained earnings and paying down debt.

Shrinking Dividend Yields but Rising Payouts

The same article also highlights that cash for dividend payouts for the S&P 500 is higher than ever, despite a slight decline in 2020. This fact occurred because the number of dividend cuts was increased due to the COVID-19 pandemic. The table below illustrates the cash for dividends by year. This value continues to rise as companies recover from the pandemic and have high cash levels. In general, cash used for dividends continues to rise each year.

YearCash ($ billions)
2021 (as of November 23, 2021)$525
Source: S&P Dow Jones Indices

The dollar value for dividends hit a record in Q3 2021 after increasing approximately $20.9 billion, according to Howard Silverblatt of the S&P Dow Jones Indices. Q4 will likely set another record based on the pace of dividend increases and reinstatements. However, share buybacks will probably be at a record in 2021. In 2021, share buybacks will exceed $800 billion, a dollar value much more significant than cash used for dividends.

Looking at the S&P 500’s dividend rates, they continue to rise after a flat 2020.

Final Thoughts on Shrinking Dividend Yields

Dividend yields continue to trend down even though cash and dividend rates are setting records. The reason for this trend is that more cash is used for share buybacks. Turning back the clock to pre-1980, companies did not usually buy back shares. Today, share buybacks are the most common use of cash flow. As a result, share buybacks may contribute to rising earnings per share, contributing to lower dividend yields.


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Chart or Table of the Week

Today I highlight Activision Blizzard (ATVI). Most investors that play video games know the company. They own several popular game franchises, including Call of Duty, Tony Hawk, Diablo, Warcraft, Candy Crush, etc. The stock is in the news for many damaging allegations. The stock price is down about (-35%) year-to-date and is trading near its 52-week low. The stock is one of the worst-performing Dividend Contenders. The forward dividend yield is up to 0.78%. It does not sound like much, but it is the highest since mid-2019. The 5-year average dividend yield is 0.57%. The dividend is growing at a double-digit rate, and the payout ratio is only 12%. The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at the end of November 2021. The number of companies on the list has risen to 541. Thus, we are well over 10% of companies that pay dividends, having cut or suspended them since the start of the COVID-19 pandemic.

There were three new companies added to the list this past month. The three companies were Hoegh LNG Partners LP (HMLP), Sturm, Ruger & Company (RGR), and Compass Minerals (CMP).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,899 (-2.0%)

NASDAQ: 15,994 (-0.4%)

S&P 500: 4,705 (+0.1%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 28.9X, and the Schiller P/E Ratio is about 38.8X. These two metrics were down the past three weeks. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as the index companies reported solid earnings for the second consecutive quarter.

S&P 500 PE Ratio History

Source: multpl.com

Shiller PE Ratio History

Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was up ~11 points this past week to 28.62. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The Index is now in Fear at a value of 31. The Index is down 38 points this past week. This Index is a tool to track market sentiment. There are seven indicators in the Index that are measured on a scale of 0 to 100. The Index is calculated by taking the equally-weighted average of each indicator.

These seven indicators in the Index are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Junk Bond Demand indicates Greed.

Stock Price Breadth indicates Neutral.

Market Momentum indicates Fear.

Put and Call Options are signaling Fear.

Stock Price Strength is signaling Fear.

Market Volatility is set at Extreme Fear.

Safe Haven Demand is in Extreme Fear.

Source: CNN Business

Economic News

None for Thanksgiving Week.

Thanks for reading Shrinking Dividend Yields – Week in Review!

Here are my recommendations:

If you are unsure how to invest in dividend stocks or are just getting started with dividend investing. Please take a look at my Review of the Simply Investing Report. I also provide a review of the Simply Investing Course. Note that I am an affiliate of Simply Investing.

If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend NewsletterNote that I am an affiliate of Sure Dividend.

If you want a leading investment research and portfolio management platform with all the fundamental metrics, screens, and analysis tools you need. Read my Review of Stock RoverNote that I am an affiliate of Stock Rover.

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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.

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