Dividends
February 17, 2012

Out with 2011 and in with 2012. What a month to start the year. The Dow rallied 3.4% while the S&P 500 climbed 4.4%, the best January for both averages since 1997. The Nasdaq was the real winner jumping 8%, the best January since 2001 following the tech bubble. The first couple of weeks of February sent the averages even higher. It feels good following the volatility of last year. The best performing sectors so far this year have been the materials up 11% and financials up 8%. The techs continue to perform well as the old guard like Intel, Microsoft, and Dell come back to life. Apple keeps doing its' thing pushing over $500 a share. The underperforming sectors for the first seven weeks of the year were the best performing sectors in 2011 like the utilities, healthcare, and consumer staples.

A great start to the year, but we know it may not last. Greece and Europe for that matter are unfortunately not done roiling the markets. With the huge bond rally last year dropping yields to historic lows, dividend yields for many blue chips now rival or exceed the 10 year bond. In fact, the yield on the S&P 500 is higher than the 10 year Treasury, the first time since 1956. This could be the year for dividends not that the dividend story is new. Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and outperformed non-dividend payers by nearly 8% every year, all while paying out cash to their shareholders, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts. In fact from 1926 to 2011, 44% of the annual total return came from payment and reinvestment of dividends. Capital appreciation accounted for the rest of the return.

Companies are now hiking their dividends more and more to attract investors. Last year, 342 companies increased their payouts, and in 2010 it was 256 companies. In just the first six weeks of this year, there have been 58 dividend increases or initiations, according to S&P, confirming an annual trend whereby increases are announced during the start of the year. In 2010 and 2011, about one-fourth of the total dividend raises came before March.

More than two dozen companies have raised their dividend so far in February, including such names as Coke, Cisco Systems, Occidental Petroleum, UPS, 3M, MasterCard, Freeport , and Apache. Coincidently only Freeport and Apache are the only two in the same sector which is a good sign.

The dividend yield for the S&P 500 is near its highest point since June 2008, and is on track to surpass that level. The yield for the index has risen to 2.1% year-to-date, up from 1.9% in 2010, notable given the 7.5% increase in the index since the start of 2012. Excluding the non-dividend paying stocks, the S&P yield is 2.46%. By comparison, 10-year U.S. Treasury note yields 1.99%, while the two-year yields around 0.26%. The payout ratio for the S&P is at 31.8% for a total of $241 billion. The payout level fell to a trough of $196 billion in 2009.

In the short term the averages seem to be over bought, but any way you look at it, investors need income and with CD rates at zero more and more clients are turning to the stock market for income.