Saturday, May 16, 2020

Dividend Increases Outpace Dividend Cuts in 2020

It has been a turbulent five months since the beginning of the year. The Corona-virus has swept the world, leading to millions of infections, and tens of thousands of people dying from the virus. A large part of the developed world is on a  government imposed lock-down, which has devastated economic output, and led to high unemployment in the US.

Last month, I shared my thoughts on the current health crisis in " My Take on Covid-19 Dividend Cuts". I wanted to provide you with an update, based on the updated data that I discussed in the article.

The number of dividend cuts has definitely increased this year, there is not doubt about it. The first companies to get impacted by the lock-downs were cyclical companies that usually get impacted during a recession. As a result, it was no surprise that companies like airlines, automakers and cruise ship companies cut or eliminated dividends. They did the same thing during the 2007 - 2009 financial crisis as well. There were a lot of dividend cuts in the REITs sector during the Global Financial Crisis, so this crisis is or won't be an exception either. So far, the financial companies like the major banks have largely held up. But their dividends could be in danger as homeowners cannot pay mortgages, or consumer increasingly start defaulting on consumer loans whose collateral value may be impacted in a recession.

Now, there are a few companies, whose cuts surprised me, but that's what makes investing such a challenging endeavor. These include Disney (DIS) and  TJX Companies (TJX). I am surprised that most major oil and gas companies have managed to maintain their dividends for so long after the energy market collapsed in 2014 - 2016, and the only major cut was with Royal Dutch Shell last month.

The other problem is that when things are bad, the media tends to focus on the negative, and ignores the positive. I do not want to put my head in the sand, but I also think that by focusing on the negative, it is easier to confuse people that things are worse than they are. I am strictly speaking about dividends, I am not an expert epidemiologist.

So to summarize, it looks like dividend cuts are getting more coverage, and more dividend cuts are happening, because cyclical companies that usually cut dividends in a recession are facing their first recession in many years.

As dividend growth investors however, we are looking at quality companies, with long streaks of annual dividend increases. Only a certain type of company can afford to grow dividends annually for ten years in a row. We are looking for quality.

I dug a little, and found out the dividend declaration data for companies in the S&P 500. There are 500 companies included in this index. These are the largest and most successful US companies that are listed on a stock market. The index includes 11 industries, and is owned by millions of Americans in their retirement plans.

Based on the data so far, it looks like there had been 205 dividend actions on the S&P 500 so far this year through mid-May.

There were 151 companies on the S&P 500 that increased dividends so far this year.

There were 35 companies on the S&P 500 that suspended dividends, while 17 companies decreased dividends.

It looks like there were two companies that initiated a dividend this year.

If you look at the data, and crunch some numbers, you will see that the rate of dividend increases so far outpaced dividend cuts by a factor of 3:1.

You can view the data, organized by Sector and Type of action ( Decrease, Increase, Initial, Suspension). Source: Standard & Poor's

You can also view the detailed data per individual company in the spreadsheet you can download from here: File Data

As you may see, I am still optimistic about things. It is easy to be optimistic, when the data agree with your strategy. After all, for my dividend portfolio that I share with my premium newsletter, I have had 16 dividend increases so far in 2020 and two dividend cuts or suspension. Since the launch in July 2018 we've had just these two suspensions and 67 dividend increases.

That doesn't mean that things cannot and will not get worse, before they get better. It is possible that it takes the economy longer to recover than any of us anticipate. Stocks may go lower from here in price, as earnings are decimated, and unemployment soars. It is possible that dividends can get cut further from here.

As you can see, the pace of dividend increases on the S&P 500 has been slowing down since March, while the pace of dividend cuts and suspensions has been increasing.

Either way, I will keep sticking to my regular monthly investing plan. I will buy stock in companies I find to be attractively valued whenever I have money to invest. I will reinvest dividends received. If I have a dividend cut, I will most likely sell the stock, and replace it with another stock. This plan worked during the last recession. This plan also worked during the Great Depression.

The hard part is sticking to the plan, when the world around you seems to be collapsing. That's where many investors fail. But hopefully, we will stick to our plans, and ultimately prevail.

Relevant Articles:

My Take On Covid-19 Dividend Cuts
Dividend Aristocrats Keep Performing Well in 2020
Dividend Investing and Covid-19 Disruptions
- Everybody ought to be rich
Dividend Investors: Stay The Course

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