Dividend Growth Continues to Impress

The S&P 500 posted a very solid price appreciation of 5.14% (total return of 5.18%) for the month of January which marks its best January since logging a total return of 6.25% in January 1997 (16 years). However, it does pale in comparison to the best January of the last 50 years which saw the S&P 500 return 13.47% in January 1987. Perhaps equally noteworthy, but clearly not garnering as many headlines, is the continued impressive growth of dividends.

Over the last 40-plus years we show yearly dividends paid by the S&P 500 have averaged a year-over-year gain of 5.89%. Currently, that level stands at 18.69%, which is a maximum over this period eclipsing the level of 18.09% from October 1989. The quick response might be this record growth was driven entirely by the fact that some companies moved up the payment of dividends and/or paid special dividends in December 2012, trying to front-run a potential increase in the tax on dividends. This was clearly a factor but not the whole story. Specifically, if we compare November 2011 dividends paid to November 2012 dividends paid, we show an increase of 15.92%. Comparing December 2011 dividends paid to December 2012 dividends paid we show an increase of 38.56%; and lastly, if we compare January 2012 dividends paid to January 2013 we show a gain of 25.43%. Thus, there was a noted increase in December 2012, but the gains outside of this have also been very good. We predict this will continue throughout the remainder of 2013, though we would expect the gains to moderate and head toward the 10% level over the next 12 to 18 months. However, even at those levels, investors should achieve income gains well in excess of inflation, which should help them maintain their buying power.

As an example, let’s assume an investor had purchased the S&P 500 10 years ago (1/31/03) at a level of 855.7 with a trailing 12-month dividend of 16.06 and a trailing yield of 1.88%. Currently the S&P 500 sits at 1498.11 (1/31/13) with a trailing 12-month dividend of 31.63. This equates to a trailing yield of 3.70% based on the original investment and dividend growth of 96.92% (7.01% on an annualized basis) over this period. Over this period inflation, as measured by the U.S. Consumer Price Index for Urban Consumers Year-over-Year (CPI), has averaged 2.5% (peak was 5.6% in July of 2008). It is our thesis that dividend growth will continue to outpace CPI over the near term and this is one of the reasons we believe dividend-paying stocks should be a component of an income-orientated investors’ allocation especially if they are concerned with future buying power and the effects of rising rates on their current bond holdings.

That being said, we don’t expect the S&P 500 to post monthly returns every month like it did in January, but we do expect higher levels by year-end. We continue to encourage investors to dollar cost into the equity markets and dividend-paying stocks becoming more aggressive on pullbacks and weakness as there will clearly be a couple of corrections in 2013 just like there has been every year of this bull market.

© Advisors Asset Management


© Advisors Asset Management

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