NEW YORK - The dividend gravy train is slowing down, threatening an important source of income for investors at a time when stocks are going nowhere.
About 500 companies cut or halted their dividends last year, the highest tally since the economy was crawling out of the Great Recession in 2009. Not only that, other companies got more reluctant to raise their payouts to shareholders, according to numbers released Tuesday by S&P Dow Jones Indices. The number of dividend increases was the lowest in four years.
Dividends, the share of profits that some companies distribute to investors, have been increasingly important because bonds still offer relatively low interest payments and stock prices have been flat. For example, all of the 0.3 per cent return that the largest mutual fund produced last year came from dividends. Without the payouts, Vanguard's Total Stock Market Index fund would have lost 1.6 per cent.
That's not to say dividends are dead. Companies paid out $38.7 billion more last year than in 2014. It's just that the momentum has turned. Last year's growth was the weakest in five years.
In the earlier years of this economic recovery, corporate profits were jumping, and companies were racing to dole out ever-bigger chunks of their cash hoards to shareholders. Dividends got back in vogue after demonstrating their importance during the “lost decade” of 2000-09, when the Standard & Poor's 500 index dropped in price by 24 per cent. Dividends cushioned the blow and left the index with a more modest loss of 9 per cent.
Dividend payouts grew so large in recent years - while bond yields shrank - that many investors searching for income who would have traditionally bought bonds moved instead to stocks.
But corporate profits hit a wall last year, and companies felt the pressure to preserve their cash. Commodity producers were the hardest hit, pummeled by the plummeting price of oil and metals. Profits for exporters across other industries eroded because of a strong dollar and still-tepid global economy.
Mining company Freeport-McMoRan (
NYSE:FCX,
Forum) has paid a dividend in 12 of the last 13 years and sent out checks to shareholders totalling $2.3 billion in 2013, for example, but it's hurting because of the slide in copper's price. In March, it slashed its quarterly dividend to 5 cents from 31.25 cents. As losses continued to mount, it suspended its dividend last month as part of a plan to cut spending.
The dividend doldrums are expected to continue. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, expects the growth in dividends to fall to the mid-single digits in 2016, down from 10 per cent last year and a high of 18 per cent in 2012.
Despite this trend, the First Trust Morningstar Dividend Leaders ETF (
NYSE:FDL,
Forum) is up 23% since late August.