One of the most compelling reasons to invest in the stock market may be going by the wayside.
At least that’s the thinking of investors who speculate on the size of dividend payments. Often used by companies to sweeten the pot for investors looking for periodic cash distributions, dividends are seen coming in lower than previously forecast.
The aggregate expected S&P 500 payout of $US54.70 a share has slipped 6.2% since peaking in early March, and now sits at the lowest since mid-January, according to Bloomberg data on futures contracts expiring at the end of 2020.
The expected reduction in stock dividends comes at a time when the S&P 500 is hitting new records seemingly every week. It’s the latest crack in the facade the stock market, which is already dealing with a slowing pace of share buybacks.
In a way, dividends and share repurchases are kindred spirits in the sense that both have been known to bail out the stock market during difficult times.
While defensive investors tend to seek out the additional yield provided by dividend-heavy utility stocks and REITs, buybacks can be a source of strength in an environment devoid of other catalysts. That they’re both seeming to fade simultaneously is something that should worry equity investors.
Still, the negative effect of these two market drivers pales in comparison to perhaps the most important pillar of share appreciation: good, old-fashioned earnings growth. And profits are looking strong.
The S&P 500 is expected to see earnings expand by more than 12% in 2017, which would be the index’s best year since 2011, according to estimates compiled by Bloomberg.
Faced with these warring factors, Wall Street strategists are largely agnostic, at least for the moment. On average, they see the benchmark finishing the year at 2,414, according to a 19-person survey conducted by Bloomberg. That’s just 0.8% below Wednesday’s closing price.