InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

Does the government owe you an extra $1,003 a month?

Boring, Predictable, No-Surprises Strategy Safely Generates $67,548Last year, a little-known loophole allowed a small group of regular Americans collect over $122,366,000 in bonus government cash. And you can join them. It doesn’t matter how old you are, your relationship status, or even how much money you make. There’s simply no way you can be denied from taking part in this plan, too. I’ll show you how here.

 

Don’t Sweat the Drooping Dividend Yields

By Igor Greenwald on July 12, 2017

Be careful what you wish for is great advice in life and even more so for investors. Case in point: the recently anemic stock dividend yields, during a time when low interest rates have many retirees (and younger Americans as well) scrambling for reliable sources of investment income.

The aggregate dividend yield of the S&P 500 – the benchmark U.S. large-cap index – is down to 1.9%. That’s a far cry from the 5% dividend yield of the same index in 1981 and 7% in 1951. More recently, the yield topped out at 3.6% in March 2009 at the end of the last bear market.

As that last data point suggests, a high composite dividend yield is usually not a sign of market health, though it can signal an attractive long-term buying opportunity. The S&P 500 dividend yield topped 12% in 1932 and 8% at the end of 1941, but you wouldn’t have enjoyed owning stocks in the run-up to those milestones. They obviously reflected massive market price declines rather than a dividend cornucopia.

By the same token, today’s relatively modest yield is the product of rising share prices rather than diminished payouts. In absolute terms, S&P 500 companies paid out a record $104 billion in dividends for the second quarter of 2017. S&P dividends are on pace to increase 7% this year, according to Howard Silverblatt of S&P Dow Jones Indices.

Here’s how that shrinking S&P dividend yield looks over the last two decades in absolute dollar terms, via Yardeni Research:

What’s more, the rate of dividend increases could accelerate somewhat in the coming months. Banks, constrained until recently from delivering bigger yields by the Federal Reserve’s focus on their capital ratios, received approval for larger hikes as a result of the most recent annual stress tests carried out by the Fed. For example, Citigroup (C) promptly doubled its dividend.

Passage of tax reform that would give U.S. companies an incentive to bring home cash held overseas could serve as another catalyst. Hopes for such relief have faded some of late amid continuing legislative gridlock in Washington, but corporate tax breaks remain a top priority of the Republican majority in Congress as well as the Trump Administration.

Of course, to focus solely on dividends is to miss another, even larger stream of corporate returns to shareholders from share repurchases. While buybacks have slowed over the last year, they’re still set to return more than $500 billion to S&P 500 shareholders in 2017. The combined yield of S&P 500 dividends and buybacks is still a tempting 4.5%, supported those companies’ projected 5.8% forward earnings yield based on analysts’ estimates.

Of course, buybacks are not as valuable as dividends on the whole: for one thing, studies show that companies tend to be terrible timers of the fluctuations in their share price, buying high more often than low. But that general tendency conceals a lot of variation, and companies that do manage to repurchase their stock at a discount create value for present and future shareholders as well as those who sold. Many public companies disclose the amounts of their repurchases and their average price in quarterly and annual earnings filings with the Securities and Exchange Commission.

Ultimately, as I’ve argued before, recurring free cash flow is the best guide to how much income companies can return to the shareholders via dividends and buybacks. Free cash flow is simply cash from operations less capital expenditures. It’s what informs us, for example, that Vodafone (VOD) is fully covering its dividend yielding 5.6%, while ExxonMobil (XOM) is still borrowing to some of the cash it’s doling out as dividends with a current annualized yield of 3.8%.

We’re not yield hogs at Income Millionaire; our recommendations typically have attractive cash flow with strong potential for capital appreciation based on business fundamentals and macroeconomic trends. I hope you can join us.


You might also enjoy…

 

Obscure Tax Law Forces This Company to Pay Out 90% of its Profits

A 50-year-old loophole is forcing one company to pay out $9 of every $10 it makes from ironclad contracts with the U.S. Government.

In fact, over the past seven years, it’s made payments ranging from a few dollars… to tens of thousands of dollars… 30 times. Without a single cut! 

Most folks don’t even know this company exists, but the ones that do are making a mint.

Like Ted B., who’s set to receive a check for $1,096 just a few days from now.

Merrill H., a 58-year-old from New York, has collected over $3,385 so far. 

And retirees Beth and Terry P. have raked in $16,555.

I’ve put together a special report that will give you all the details, including simple instructions on how to get your name on the payout list before the next cutoff date.

You can get your copy here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.