From Bonddad: I'm back from traveling on business last week.
Weekly Sector Performance from Stockcharts
Despite hitting a record high, sector performance was largely negative: two of the three leading sectors were defensive.
US Sectors Relative Rotation Graph from Stockcharts
Health care (XLV) is now the only sector leading the SPYs over the last 10 weeks.
This downward march of interest rates has occurred prior to and after QE programs and is therefore not the result of central bank tinkering. Rather, it is the result of far bigger global market forces. One interpretation of this movement (based on the expectation theory of interest rates) is that the market expects future short-term interest rates to be increasingly lower. As Tim Duy notes, the Fed is fighting against this force and is unlikely to win. Put differently, interest rates are being suppressed by market forces despite the Fed's best efforts. The Fed will not be able to raise interest rates this year and maybe even next year.
This combination of rising dividends and falling profits has created a situation that at one time I didn't believe I'd ever see outside a recession: a historically normal payout ratio for the U.S. stock market. For the entire run of DividendInvestor, I've been complaining about low yields and payout ratios. The median payout ratio for the post-World War II period is 50%, but since the tech bubble, this metric has scraped new low: just 29% at the 2011 nadir. But with the numerator (dividends) of the payout ratio continuing to rise since third-quarter 2014 and the denominator (earnings) falling, a big shift took place in a hurry. In the four quarters through the first quarter of 2016, the payout ratio of the S&P 500 has reached the 50% mark: normal at last!
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Commentary
Is the Golden Era of Dividend Growth Over?
Several factors are conspiring to thwart dividend growth, explains Morningstar DividendInvestor editor Josh Peters.
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By Josh Peters, CFA | 07-25-16 | 06:00 AM | Email Article
This article was published in the June 2016 issue of Morningstar DividendInvestor. Download a complimentary copy of DividendInvestor here.
About the Author Josh Peters, CFA, is a portfolio manager for Morningstar’s Investment Management group and edits the monthly newsletter Morningstar® DividendInvestorSM.Contact Author | Meet other investing specialists
It's provocative and possibly dangerous to call an end to an era, but I'm going to give it a try: The golden age of dividend growth is over.
Maybe you didn't even know that there had been a golden age of dividend growth, but I trace its start to 2003, when tech bellwether Microsoft (MSFT) declared its first-ever cash dividend and the federal government brought the tax rate on dividend income in line with long-term capital gains, ending the latter's long advantage. In 32 of the 49 quarters between the first quarter of 2003 and the first quarter of 2015, the year-over-year growth rate for dividends per share for the S&P 500 has been at least 10%: frequent enough for investors to treat double-digit dividend growth as normal, something that can be taken for granted.
History illustrates just how golden this golden age has been. There was that nasty stretch from the fourth quarter of 2008 to the first quarter of 2010 in which dividend payments shriveled at the fastest pace since the Great Depression. The nadir came in the third quarter of 2009, with dividends down 24.1% year over year. Some of that decline reflected dividends that had been raised too much in the preceding boom, particularly in the banking industry. The plunge also made it easier for double-digit growth to return as corporate profits and dividends recovered; only in the third quarter of 2012 did the S&P's quarterly dividend payment reach a new high.
But even with the horrors of 2008–09 in our data, the 12-year growth rate in dividends (adjusted for inflation) has averaged an extraordinary 5.9% a year, edging out even the growth experienced in the post-World War II boom.
Why is the golden age over? It's not just that dividend growth has already slumped, though it clearly has. In the first quarter of 2016, S&P 500 dividends per share rose only 4.6%, the weakest advance in nearly six years. The energy sector can be blamed for much of the weakness, including cuts by Kinder Morgan (KMI) (which, robbing investors of $3.4 billion annually, is nearly a full percentage point of drag on dividend growth for the S&P 500 by itself) and ConocoPhillips (COP) ($2.4 billion). But many other dividends that are reasonably secure aren't rising as fast as they used to.
Dividend Select stalwart Procter & Gamble (PG) is as good an example of this phenomenon as any. Its dividend increase for 2016, despite marking 60 years of uninterrupted growth, was merely 1%. As recently as 2014, P&G's dividend was growing at a 7% annual clip. But years of dividend growth that outpaced gains in earnings per share lifted the company's payout ratio above 70%, at which point it would have been reckless to keep jacking up the dividend in the absence of EPS growth. Since P&G's EPS growth has been clobbered by negative currency effects, a heretofore gratifying rate of dividend growth had to tumble.
Similar forces are at work in the market at large. The price level of the S&P 500 may be within 3% of its all-time high, but trailing-12-months earnings per share, computed under generally accepted accounting principles, have dropped 18% since peaking in the third quarter of 2014. In the same span, dividends per S&P share have risen 14%.
This combination of rising dividends and falling profits has created a situation that at one time I didn't believe I'd ever see outside a recession: a historically normal payout ratio for the U.S. stock market. For the entire run of DividendInvestor, I've been complaining about low yields and payout ratios. The median payout ratio for the post-World War II period is 50%, but since the tech bubble, this metric has scraped new low: just 29% at the 2011 nadir. But with the numerator (dividends) of the payout ratio continuing to rise since third-quarter 2014 and the denominator (earnings) falling, a big shift took place in a hurry. In the four quarters through the first quarter of 2016, the payout ratio of the S&P 500 has reached the 50% mark: normal at last!
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Also, and perhaps more important, most of the top payers of dividends today already look about as generous as they ought to be. Of the $411 billion of annualized dividends I estimate for the S&P 500, half is paid by just 37 firms. Some could legitimately afford to pay more without starving their businesses for growth capital or paying too much to be sustained through the next economic downturn, but I can call out only a few ( Oracle (ORCL), Comcast, and Medtronic (MDT)) for being too stingy for their risk profiles. By contrast, an Apple or Gilead Sciences (GILD) could pay more, but with less certain futures for profits, perhaps they shouldn't.
Finally, there is the matter of corporate earnings growth, the ultimate wellspring of dividend increases. Forget about the next couple of quarters: Consensus earnings estimates for the back half of 2016 are as preposterously high as ever. What can we expect for actual corporate earnings growth over the long run?
Daily Chart for Verizon and Yahoo
