Savers and investors have few causes for complaint. But one frustration is the sluggish pace and shrunken heft of dividend increases.
Although U.S. companies have more than $2 trillion in cash, scads of firms that not long ago raised dividends by 10 percent a year have morphed into relative misers: The median annualized increase within the S&P 500 dwindled to 6 percent in the fourth quarter of 2023.
Look at ProShares S&P 500 Dividend Aristocrats, an exchange-traded fund of 68 stocks with 25 consecutive years or more of raises. From 2015 to 2020, the fund hiked its payout by 11.5 percent a year. Since the start of 2021, that fell to 5.4 percent, limited by near-freezes from one-time cash spigots like Kimberly-Clark. Apple is not an Aristocrat but clings to a habit of raising quarterly dividends each year by just a penny a share. UPS, soon to join the Aristocrats, also just hiked its payout by one cent a quarter.
Why so stingy? One explanation is that cash is so valuable, with interest rates up, that companies are hoarding it. Another is that a large cohort of CEOs expected a recession and refused to commit to high dividends that would be impossible to freeze or cut without an uproar. And there is the ever-present fixation with buybacks despite a new 1 percent federal tax and the sky-high valuations of so many shares. Hence, the payout ratio—the percentage of earnings paid as cash dividends—has held at around 30 percent since the pandemic. It was 43 percent as recently as 2015 and 2016 and above 50 percent for much of the past 50 years.
But there are signs of a comeback. As rates fall and cash yields eventually drop, tax-qualified dividend income will become relatively more valuable. Investors will press companies to pay up. Meta Platforms (formerly Facebook) chipped some ice with a first-time 50-cent quarterly dividend this year—hardly a gusher, as Meta is handing out just $5 billion a year from its $45 billion of free cash flow. Salesforce followed with a similar initial cash payout.
More encouraging: unexpectedly large early-2024 raises by old-timers such as Archer-Daniels-Midland (11.1 percent) and Sherwin-Williams (18.2 percent), as well as 25 percent from Exelon’s power-generation spin-off Constellation Energy. John Deere has been raising dividends twice a year, its latest pair of hikes totaling 17.6 percent. Walmart stepped up with a 9.5 percent raise. S&P Dow Jones Indices reports more increases and fewer cuts so far in 2024 than in the same months of 2023, though overall payouts are still creeping rather than leaping.
Dan Peris, who manages the Federated Hermes Strategic Value Dividend Fund, predicts that higher payout ratios are inevitable—his target is 50 percent—and insists “the bloom is off the buyback rose.”
Competition from higher fixed-income yields will encourage fatter dividends. But Peris also says that company bosses are revisiting the idea that shareholders should be partners in the business rather than adversarial share-sellers—and plying them with hard cash is central to this plan.
