Wednesday, October 29, 2008

Dividend Yields are rising

The falling stock prices have pushed dividend yields on major US indices like S&P 500 and Dow Jones to levels not seen since the early 1990’s. The current trailing 12 month dividend rate for the Dow Diamonds ETF (DIA) that tracks Dow Industrials average is $ 3.02, which makes for a dividend yield of 3.64%.

The current trailing 12 month dividend rate for the SPDRs ETF (SPY) which tracks the S&P 500 is $2.78 which makes up for a current yield of 3.20%.

Given the uncertainty of corporate earnings amidst the current recession, the market is probably pricing in the fact that the dividend cuts which have largely been concentrated to the financial sector, would spread over to other industries as well.

S&P didn’t help either as it lowered its dividend growth forecast for the S&P 500 dividends to a little over 1% from the 2007 dividend rate of $27.73. Furthermore S&P maintained a cautious outlook for dividend growth in general in 2009, since some of the recent dividend cuts by financials won’t be felt until next year.

The current crisis will most probably result in a halt to the strong dividend growth experienced by S&P 500 companies over the past 30 years. It would be interesting to see whether the dividend growth would plateau like it did during the 2000-2002 bear market or it would reverse as many companies across all industries are affected by the slowdown.

As the current yields on stock market indexes are going up north, I would update my screening model to reflect the current marke conditions and to only select issues which have current yields of at least 3.00% up from 2%.
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  1. I think this can help make a strong case, in addition to sound fundamentals, of why a long-term investor with an investing horizon beyond 10 years would be interested in beginning to commit capital to this market in solid dividend paying stocks.

    Not only do you have the advantage of securing a higher level of cashflow from these investments, but many have global operations (>50% of revenues from non-US sources) trading and forward price to earnings ratios under double digits. Add the two factors together and you have what has historically been an excellent opportunity to invest.

  2. It definitely is a good opportunity to invest. But I wouldn't be adding more money than what I already add per month.

    Thanks for stopping by!

  3. 3.2%, I'd be pretty happy if it stayed there.

    I wonder, historically, how much the dividend rate (absolute dollar value, not %) has dropped in previous bear markets, as dividends are supposedly to be relatively stable.

  4. Jonathan,

    As a matter of fact the second chart shows the annual dividend dividends on the S&P 500 since 1977. Annual dividend payments were lower overall for the S&P 500 during the 2000-2002 bear market but not by much.


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