Forget earnings — stock market returns have been all about dividends lately.
In a note to clients on Monday, Sean Darby and the equity strategy team at Jefferies argued that it’s dividends per share, not earnings, that have driven returns in the last year as earnings and stock prices have been flat.
“US indices whose constituents show increasing dividend payments over time have sharply outperformed since the beginning of the year,” Jefferies writes.
“A scarcity of ‘dividend growth’ globally, combined with flattening G7 yield curves, has put a bid on ‘US dividend growth stocks,’ in our view. US real bond yields have also fallen since November 2015 underwriting income generating stocks.”
And looking at Jefferies “dividend aristocrats” index, which tracks stocks that offer higher consecutive dividend payments, this search for yield has proven a winner in the last year or so.
This trend, however, might be set to cool off in 2016.
Dividend payment increases were hot in 2015, with announced dividend payouts rising 10.6% year over year. And the companies that jumped on this train were rewarded.
Dividend payments increases, however, are expected to drop to just a 4.2% year over year growth rate in 2016.
As Jefferies writes, “The good news is that forward expectations for dividends have stabilised based on the futures markets… The bottom line is that US [dividend per share] growth is just as an important driver for equities as [earnings per share] given the global reach for yield. However, the expected [dividend per share] figure for 2016 is underwhelming single digit, although the pace of decline appears to have bottomed out.”
Something you often hear in markets is that big dividend paying stocks are a replacement of sorts for bonds.
If we assume that the point of owning bonds is receiving the regular coupon payment from the company you’ve lent money to, then receiving a regular dividend payment would seem to be an apt replacement.
And with with record-low or near-record-low interest rates prevailing in much of the developed world, these bond coupon payments have shriveled up to a negligible level, leaving investors searching for alternative ways to earn returns on their capital.
Like, for example, getting a regular dividend payment for owning a company’s stock.
Of course, the dividend isn’t the only thing at risk here, as your capital investment — which in the case of a bond is returned when the bond matures (or is called, which is a possibility depending on the type of bond issued) — can go up or down depending on the stock price.
This can have all sorts of knock-on effects within a portfolio, but it suffices to say buying the stock of a big dividend payer and then sitting back to collect that cash is not as simple as I just made it sound.
But recall that interest rates are at record lows and people are trying to find whatever return they can on their invested capital. And so here we are.