About Those Falling Dividend Yields

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I've been worried about a trend for the last three years.

With interest rates at all-time lows, investors have gone crazy for stocks with high dividends, since it's one of the last holdouts of good yields.

That, I've proposed a few times, might be setting up something akin to a dividend bubble (although I hate using that word).


But the more I look at the data, the more skeptical I am of that view.

Yes, a few companies have seen their yields plunge as valuations are bid up. But that narrative isn't as systemic as I thought.

Take the top 10 non-financial companies in the Vanguard High-Yield Index -- a proxy for the most popular dividend stocks.

While the 10 stocks have performed well over the last three years, beating the S&P 500 by more than 10 percentage points, the average dividend yield of the group has barely moved at all:

Company

Return Since 2010

Current Dividend Yield

Dividend Yield, 2010

ExxonMobil 

30%

2.9%

2.6%

General Electric

18%

3.4%

2.1%

Chevron 

49%

3.3%

3.5%

Johnson & Johnson 

33%

3.1%

3.4%

Microsoft

8%

2.8%

1.7%

Procter & Gamble

23%

3.1%

3.1%

Pfizer 

76%

3.2%

4.3%

AT&T 

44%

4.8%

6.5%

Coca-Cola

58%

2.7%

3.3%

Philip Morris International

94%

3.6%

4.7%

 

   

Source: S&P Capital IQ.

There's a simple explanation for this.

When I first used the "dividend bubble" phrase a year ago, I gave a few reasons for why I could be wrong. One was that "the dividend payout ratio on S&P stocks is near an all-time low." I wrote: "S&P 500 companies could more than double their dividends without breaking any historical precedent."

That seems to be the prevailing trend.

In 2010, the average company on this list paid out 42% of its earnings as a dividend. In 2012, that payout ratio grew to 55%.

Take Microsoft. Since 2010, net income per share has grown 15.4%, while dividends per share increased 71%. Its payout ratio grew from 24.4% to 44%.

Coca-Cola is similar. Its payout ratio has jumped from 35% in 2010 to 53% in the last year.

What happens next? The overall dividend payout on the S&P 500 is still abysmally low by historic standards, but with so much executive compensation now coming in the form of options that don't benefit from dividends, it's hard to know whether we should expect a reversion to the mean -- higher dividends might not be in the best interest of many CEOs and CFOs who decide the payout ratio.

But for now, the bottom line is that the rush toward dividend-paying stocks may be more justified than some (including me) once thought. 

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's free, so simply click here now and get your copy today.

The article About Those Falling Dividend Yields originally appeared on Fool.com.

Fool contributor Morgan Housel owns shares of AT&T, ExxonMobil, Chevron, Procter & Gamble, and Philip Morris International. The Motley Fool recommends Chevron, Coca-Cola, Johnson & Johnson, and Procter & Gamble. The Motley Fool owns shares of General Electric, Johnson & Johnson, Microsoft, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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