Marking the largest aggregate of dividends per share in at least a decade, DPS for the S&P 500 amounted to $43.90 for the trailing 12 months (TTM) ending in Q1. This represented a 7.5% year-over-year growth rate and a slight uptick from the dividend amount in Q4.
But while DPS for the index has continued to rise, it has been doing so at a decreasing rate. Q1 was the second consecutive quarter that DPS has increased at a single-digit growth rate. This marked a divergence from the post-recession trend, in which dividends per share for the S&P 500 grew at double-digit growth rates. In the TTM ending in Q1, only the Health Care, Financials, and Telecom sectors grew DPS at double-digit rates. The Health Care and Financials sectors led all groups in terms of DPS growth logging 13.5% and 12.9% year-over-year growth rates, respectively. Nine of the 10 sectors posted positive DPS growth with the Energy group being the only outlier.
Analysts Expect DPS Growth to Slow to 4.9% over Next 12 Months
Over the next 12 months, dividend per share growth for the S&P 500 is expected to slow to 4.9%. This growth deceleration has been a consistent trend over the past year for the index. Analysts are projecting that seven out of the 10 sectors will see slower DPS growth over the next 12 months (NTM) relative to the TTM period ending in Q1. The Materials, Industrials, and Consumer Discretionary sectors are the only groups predicted to experience accelerated dividend growth. On an absolute basis, the Financials and Health Care sectors, which led all groups in terms of TTM DPS growth, are expected to also lead all sectors in dividend growth moving forward. Analysts estimate the Financials sector will maintain a double-digit growth rate and increase DPS by 10% over the NTM, while the Health Care sector is expected to grow dividends per share by 7.1%. The DPS growth for these sectors still represents a deceleration from the growth experienced in the TTM period. The Energy sector is the only group that analysts are forecasting to see a decline in dividends per share growth over the NTM (-5.8%).
Related: Bottom-Up EPS Values Dip to Lowest Levels since 2009
S&P 500 Dividend Yield Crosses Above US 10-Year Yield
With low interest rates and US Treasury yields falling, some investors are looking to dividend paying stocks for yield. The TTM dividend yield for the S&P 500 index at the end of Q1 was 2.1%, which represented a 9.1% increase from the same time period a year ago. At the start of the year, the yield on the S&P 500 crossed above the US 10-Yr Treasury yield. It has continued to exceed the government yield, which stands at around 1.6%. On a year-to-date basis, the ProShares S&P 500 Dividend Aristocrats ETF gained 8.4% and outperformed the S&P 500, which only gained 1.3%.
Related: The Hunt for Alpha in Fixed Income
Beware of Unsustainable Payout Ratios
With earnings still slumping, companies with extreme payout ratios are worth keeping an eye on. Companies that are paying more in dividends than they generate in earnings may face problems if earnings continue their downtrend and growth prospects become limited. Maintaining these payout ratios may be unsustainable for some companies, and the stock prices of these firms could be negatively impacted if they decide to cut dividends down the road. In the TTM ending in Q1, 44 companies in the S&P 500 had payout ratios exceeding 100%, which was the highest number in at least 10 years. This number excludes firms with negative earnings per share and firms that do not pay out a dividend. Of the 44 companies, 19 are in the Financials sector, six from the Energy sector, and six from the Information Technology sector. The majority of firms that paid out dividends per share exceeding earnings per share in the Financials sector were real estate investment trusts.
Keep in mind that real estate investment trusts are required to pay out a majority of their taxable income as dividends in order to maintain tax-advantaged status. Some of the names with payout ratios larger than 100% include Chevron, Helmerich & Payne, Microsoft, Xerox, Caterpillar, Kellogg, and Merck.
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