Investing in companies that have a proven history of raising their dividends has been a popular strategy among stock-market players over the years. But lately, finding firms that continue to boost their payouts has been getting harder.
Standard & Poor's said on Oct. 1 that only 191 out of 7,000 companies that report dividend information to S&P boosted their dividends during the third quarter, down nearly 45% from a year earlier. That makes the just-completed quarter the worst ever for rising dividends. It was also the worst third quarter for dividend cuts since 1982, with 113 companies reducing their cash payouts, S&P said.
The worst may be over in terms of dividend cuts or eliminations, according to S&P. But even if the economy responds to the Obama Administration's stimulus programs, companies may still not feel comfortable enough to raise or re-initiate payments until they have seen several quarters of improving financial results, S&P added.
Don Taylor, portfolio manager of Franklin Templeton's Rising Dividends Fund (FRDTX), agrees with S&P that dividend cuts "are largely behind us," and expects some companies that have trimmed their dividends in the past year, such as some banks, to start raising them again within the next six months. Nor would he be surprised, he says, if Pfizer (PFE), which slashed its dividend when it announced it was buying Wyeth earlier this year, starts to increase it by the end of this year or the early part of 2010.
Disappointing Funds
He notes that the vast majority of banks no longer qualify to be included in his fund because most have either cut their dividends or, if they have accepted money from the Treasury's Troubled Asset Relief Program, are prohibited from raising their dividends until they have paid it back.
The returns of most dividend-focused funds so far this year generally have been disappointing. These funds have underperformed because they don't invest in the lesser-quality, higher-risk stocks that don't pay dividends, which have been favored by the market since the rally began nearly seven months ago.
Taylor's fund was up 10.97% year-to-date as of Sept. 30, lagging the large-cap blend category by more than 10 percentage points and the S&P 500 index by 8.3 percentage points. The Franklin fund has been hurt by not including shares of big non-dividend-paying gainers such as Apple (AAPL).
Taylor prefers stocks he thinks are more likely to increase their dividends over the long term over ones currently paying high yields. Two that fit the bill are among the more defensive consumer staples names—Family Dollar Stores (FDO) and Wal-Mart (WMT). When it comes to retailers, the market lately has been focused on companies with greater potential for a big snap-back from several quarters of depressed sales, while companies that were able to consistently increase same-store sales during the downturn—such as Wal-Mart and Family Dollar—have been ignored in the rally.
"Longer-Term Phenomenon"
"We value that consistency and predictability and the appeal that they have to the consumer," says Taylor. "People have gotten more frugal, more careful. They're looking for discounts. It's not just cyclical, it's a longer-term phenomenon, and companies that appeal to that mindset will continue to benefit."
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