Dividends are down but not out. 8 stocks for the Covid recession.

  • By Lawrence C. Strauss,
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Dividend stocks have long been a foundation for steady income to live on and a reliable pathway to accumulating wealth for retirement. Even in times of market stress, companies could be counted on to do everything possible to maintain their payouts.

The coronavirus pandemic, however, has clouded the dividend picture considerably for investors and companies alike. Companies faced an unprecedented loss of revenue, as nonessential businesses temporarily were shut in many states and social-distancing guidelines depressed consumer activity, forcing many businesses to take steps to conserve cash.

“I’ve seen a lot of crises, but never one that looked like this, where all of a sudden you basically had your revenue and cash flow disappear,” says Lee Spelman, head of U.S. equity at J.P. Morgan Asset Management. “Even companies that we would identify as blue chips have all of a sudden had to really worry about liquidity.”

Since March, when coronavirus-mitigation efforts began in the U.S., there have been scores of dividend cuts and suspensions in businesses from energy to retail to airlines. Among the high-profile S&P 500 (.SPX) companies cutting or suspending dividends: Walt Disney (DIS), Halliburton (HAL), and Southwest Airlines (LUV).

Reductions have been even more widespread at smaller companies lacking the financial wherewithal that larger ones have. For instance, 21% of the Russell 2000’s (.RUT) 820 dividend payers have trimmed or suspended their payouts this year, including Texas Roadhouse (TXRH) and Office Depot (ODP).

Dividends aren’t dead, however. While there has been widespread pressure on corporate cash flow, as well as regulatory restrictions on payouts from companies that received government aid, many companies have maintained or raised their dividends. Since the start of the year, about 155 S&P 500 members have raised their disbursements, though over half of those actions occurred in January and February, before officials took action to stem the Covid-19 outbreak.

More than three months into the pandemic, U.S. investors should step back, take a deep breath, and assess their dividend stocks, because the picture is mixed. The sky isn’t falling, but neither is the horizon clear. Dividends should continue to have a prominent seat at the asset-allocation table, even as the coronavirus threat remains.

“It is still a valid and important point [that] people are trying not just to find an income stream today, but also to grow the income over time,” says Michael Fredericks, head of income investing for the multi-asset strategies team at BlackRock.

Up, down, or way down?

The dividend outlook runs the gamut. Estimates for this year’s S&P 500 dividends versus last year’s level include a small increase forecast by J.P. Morgan Asset Management, a 10% decrease (BofA Securities), and possibly a 25% to 30% drop (Citi). Last year, S&P 500 companies paid out $485.4 billion of dividends.

The picture is complicated—as it is with so many other economic and financial forecasts at the moment—because of the uneven toll of the virus’ outbreak, the uncertainty of a second wave, and how quickly business will rebound as states reopen.

As of June 4, about 60 S&P 500 companies had suspended or cut their dividends in 2020, according to S&P Dow Jones Indices—with suspensions accounting for about two-thirds of those actions. That’s about 14% of the dividend-paying firms in the index, suggesting that the vast majority haven’t cut or suspended their payouts.

Some firms have even declared increases, including Dividend Aristocrats that have paid out higher sums for at least 25 straight years, such as Johnson & Johnson (JNJ) and Procter & Gamble (PG). Baxter International (BAX), which makes a variety of medical products, last month put through a double-digit boost.

Many companies have maintained their dividends, a victory of sorts. For instance, while Exxon Mobil (XOM) didn’t raise its payout, as it had in April in recent years, it did keep it in place, even as the energy sector grappled with a bruising drop in demand and an international price war.

“If we’re going up more in a V-shape [economic recovery], dividends are going to get restored a lot sooner, and you will have fewer dividend cuts,” says Mike Liss, a senior portfolio manager at American Century Investments. If the virus surges, “you will have a lot more cuts from where we are right now.”

American exceptionalism

One thing is clear: The domestic dividend carnage is more contained, compared with what has happened in continental Europe and the United Kingdom. Overseas dividends are typically paid annually or semiannually, versus quarterly in the U.S., and a number of companies have voluntarily suspended their distributions. In addition, European regulators have forced some others, banks in particular, to suspend their payouts to preserve capital.

“It gets fairly complicated because you have a political factor, not just a business factor,” says Daniel Peris, co-manager of the Federated Strategic Value Dividend fund.

That mostly hasn’t been the case in the U.S. While there have been some calls for broad dividend suspensions, especially in the financial sector, there has been no regulatory effort to prevent the top banks from continuing their capital-distribution plans. Early in the coronavirus crisis, eight large banks suspended stock buybacks as a means to preserve capital.

One of the traditional attractions of European equities has been their higher yields, compared with those in the U.S., but that income play has been undermined by numerous dividend reductions and suspensions.

How bad is the dividend situation in Europe? On a dividend-weighted basis, nearly 40% of the Stoxx Europe 600 index (.SX7P) has canceled or cut dividends by at least 10% this year, versus 8% for the S&P 500, according to BlackRock.

Size and sector

Still, while the U.S. dividend landscape is much better than Europe’s, there are plenty of minefields—notably a concentration of cuts and suspensions in cyclical sectors like consumer discretionary, energy, and industrials.

Savita Subramanian, head of U.S. equity strategy at BofA Securities, says that investors should be selective amid the various crosscurrents. “Maybe the worst is over in terms of the [dividend] cuts at the big companies, unless we get a second wave and a much longer recession than what our economists are forecasting,” she says. Pointing to large companies’ balance sheets, Subramanian adds that “the safety of the dividends for the overall large-cap market is arguably better than it has been in prior downturns.”

Still, she cites sectors in which U.S. dividend cuts have been concentrated, such as consumer discretionary and energy, as wild cards for investors. “The question is: Do we go back to full run-rate levels of economic activity within those areas of the market, or are they permanently impaired by Covid-19?” Subramanian asks, pointing to real estate and travel as especially challenged by the pandemic.

…but the sector’s yield remains relatively low.

At the same time, dividends in certain U.S. sectors have remained largely unscathed. Technology and health care, for example, have for the most part escaped cuts. In fact, these two sectors have become increasingly important sources of income. Tech stocks account for 17.3% of the S&P 500’s dividends, more than any other group and up from 5.5% at the end of 2005. Health care chips in 14% of the index’s dividends.

The financial sector, which generated nearly 30% of the benchmark’s dividends in 2005, is still important, ranking second behind technology. But its contribution has slid to 15%, as other sectors have ascended.

A downside of tech, however, is that it recently yielded just 1.2%—one of the puniest showings among the S&P 500’s 11 sectors. For example, tech stalwart Microsoft (MSFT), which began paying a dividend in 2003 and has raised it regularly, still yields only 1.1%.

Dave King, who heads Columbia Threadneedle’s U.S. Income and Growth Strategies team, says that some companies in certain sectors appreciate the role of income for investors, and so consider more than balance sheets and cash flows in setting dividend policy. One such group includes “mature, cyclical companies where the managements understand the dividend is very important to the shareholders,” he says. “There’s a bit of a human element” to their decision-making.

This group includes energy producers, such as Chevron (CVX), whose CEO Michael Wirth has stressed the importance of protecting the dividend, even as revenue remains under pressure. In late April, Chevron, which yields 5.1%, declared a quarterly payout of $1.29 a share, in line with its previous disbursement.

King’s holdings include Chevron, which recently traded around $100. “You’re not owning a $100 stock thinking that it’s a $200 stock anytime soon,” he says, adding that the dividend is an important part of the shares’ total return.

To cut or to suspend?

During the pandemic, &P 500 dividend suspensions have outnumbered cuts by about 2-to-1. In the aftermath of the 2008-09 financial crisis, that ratio was nearly 7-to-1 in favor of cuts.

The pendulum has swung toward suspensions this time because of the uncertainties wrought by the pandemic. “Most of the time as a dividend manager, you are trying to avoid cuts, as opposed to suspensions,” says Peris, of the Federated Strategic Value Dividend fund. “That is not traditionally part of the formula.”

Many companies have pulled their financial guidance, and they just don’t know what their revenues, much less their earnings, will be in a few months. Hence, the preponderance of dividend suspensions.

Investors need to treat cuts and suspensions differently.

“One leaves me with no income for the foreseeable future; the other leaves me with some,” says Jenny Van Leeuwen Harrington, CEO and portfolio manager at Gilman Hill Asset Management.

When a company cuts its dividend to zero, that’s a big worry. “The time that it will take to return to paying a dividend again is likely to be so long that it doesn’t make sense to hold the position, assuming you are in it for the consistent income that the dividend previously offered,” she says. “At that point, I think about how to get out of the investment at the best possible price. The sale does not need to be immediate.”

For companies that trim their dividends, she adds, it’s important to assess how well covered the disbursement is—whether it’s by looking at earnings, cash flow, or another metric, depending on the situation.

Seeking dividend stability

Chris Senyek, chief investment strategist at Wolfe Research, suggests focusing “on the larger-cap companies in more stable sectors like tech, health care, staples, and utilities.”

One potential silver lining: Dividend-paying stocks that come out of the crisis in good shape could be in greater demand, including the eight that are recommended later in this article.

Interest rates, now around zero, are expected to remain low for a long time; Federal Reserve Chairman Jerome Powell indicated this past week that they’d probably stay down for at least two years. Dividends thus have an edge over many bond yields. The Bloomberg Barclays U.S. Aggregate index, a proxy for investment-grade dollar-denominated bonds, recently was yielding about 1.4%, versus 1.8% for S&P 500 dividends.

“Investors are going to have to look at other asset classes, including equities, where you get a big yield pickup, relative to what you can earn in the Barclays Ag,” says Fredericks of BlackRock.

Another factor that could support dividends: They’re not facing the same headwinds that stock buybacks are. The latter form of returning capital to shareholders, though popular with companies in recent decades, has come under pressure during the pandemic.

Many companies have already suspended their buybacks during the crisis, some in lieu of changing dividend policy, and others might need to consider the same if the pandemic persists. “Dividends will actually probably be more in demand, and the buyback era might be behind us for a couple of reasons,” says Tobias Levkovich, chief U.S. equity strategist at Citi.

Many companies, he says, have piled on debt to help them make it through the pandemic. “There may be a greater call on paying down that debt,” Levkovich says. “That would also restrict the amount of money available for buybacks.”

There’s a political aspect of the buyback story, as well.

“Share buybacks have been under much more political scrutiny and have been targeted by policy makers as kind of a flimsy way to return cash and a bad use of capital,” says Subramanian of BofA Securities. “More and more companies may shift from doing buybacks to paying a dividend.”

Given this uncertainty and the dividend moves that have already been taken since March, income investors should seize the moment to re-evaluate their stock portfolio. Here are eight consistent dividend-paying companies that financial pros say should be able to ride out the crisis with their payouts intact, if not higher.

PPP for income investors: Payout protection picks

These eight companies should have the financial strength to keep their dividends intact -- and raise them in some cases -- during the coronavirus crisis.


Company/Ticker Recent Price Dividend Yield YTD Total Return Market Value (bil) Latest Dividend Increase Announcement Date of Increase
Home Depot/HD $254.45 2.4% 18.0% $274 10% February 2020
Johnson & Johnson/JNJ 147.80 2.7 2.7 389 6 April 2020
Lam Research/LRCX 301.30 1.5 3.6 44 5 August 2019
McDonald's/MCD 195.80 2.6 0.4 146 8 September 2019
NextEra Energy/NEE 256.79 2.2 7.2 130 12 February 2020
Procter & Gamble/PG 119.23 2.7 -3.3 295 6 April 2020
Roche Holdings/RHHBY CHF330.05 2.7 8.8 302 3 January 2020
Texas Instruments/TXN 131.40 2.7 4.0 121 17 September 2019

Data as of June 10

Sources: FactSet; Bloomberg


Texas Instruments

Tech companies have become increasingly important to equity-income investors, though many sport pretty low yields. Not Texas Instruments (TXN), the analog chip maker whose shares yield 2.7%. The stock has returned about 4% this year, compared with a flattish result for the S&P 500.

“Look no further than the steadiness of the earnings growth and the steadiness of the dividend growth,” says King of Columbia Threadneedle.

In April, Texas Instruments declared a quarterly dividend of 90 cents a share, in line with its previous recent payouts. It has raised its dividend every year going back to 2004.

“It’s an exceptionally well-run company,” says Mark Freeman, chief investment officer at Socorro Asset Management. “They’ve shown a very strong commitment to the dividend, and have been very aggressive about raising it.”

Johnson & Johnson

The health-care conglomerate in mid-April announced a 6% quarterly dividend increase, to $1.01 a share from 95 cents, keeping it among the 66 S&P 500 Dividend Aristocrats.

J&J is well-diversified, with products that include pharmaceuticals, medical devices, and consumer items, such as Listerine mouthwash and Johnson’s baby shampoo.

“Strong cash generation has enabled the firm to increase its dividend for over the past half-century, and we expect this to continue,” observes Damien Conover, a Morningstar analyst, in a May 21 research note.

Still, the company hasn’t been immune from the effects of the pandemic. CEO Alex Gorsky said during a conference call in April, for example, that “we expect Covid-19 to impact our full-year 2020 performance in medical devices.”

But even in tough economic times, J&J looks as if it has enough cash flow to support its dividend.

McDonald’s

In this era of social distancing, McDonald’s (MCD) has been able to keep its business running, thanks to drive-through and other pickup options. Many restaurant companies suspended their payouts early in the crisis. “A nice thing about McDonald’s is that it still has revenue coming in,” says Bill McMahon, chief investment officer of active equity strategies at Charles Schwab Investment Management.

To preserve some of its capital, the global fast-food company has suspended stock buybacks—but not its dividend. In May, it declared a quarterly dividend of $1.25 a share, the same amount it had paid previously.

The dividend looks safe, but McDonald’s hasn’t escaped the economic pressures wrought by the downturn. During its annual meeting last month, CEO Christopher Kempczinski said in part that “there were some questions about whether McDonald’s will continue to pay dividends amid the current crisis.”

The top capital-allocation priority, he said, was to invest in the business for growth “and then secondly, prioritizing dividends to our shareholders.”

Lam Research

The company, which makes semiconductor-manufacturing equipment, doesn’t have the most attractive yield at 1.5%. And the stock has had a big run since mid-March, appreciating more than 50%. But the industry “has very strong secular trends,” says Socorro’s Freeman.

Lam Research (LRCX) last month declared a quarterly dividend of $1.15 a share, in line with what it paid in its previous three quarters, and has been raising its payout annually in recent years.

The company should be able to continue that trend, helped by growing earnings and free cash flow. The mean fiscal-2020 earnings estimate of analysts polled by FactSet is $15.19 a share, up from the $14.54 that it reported last year. The company’s fiscal year ends at the end of this month.

Lam Research has said that it plans to return 75% to 100% of its free cash flow to investors via share repurchases and dividends. The company’s chief financial officer said recently that “in the current environment, we will be slowing our buyback activity” and that “it is likely we won’t buy back any stock in the third quarter.”

Home Depot

Many retailers have struggled in recent months as in-store business shut down due to quarantines and other pandemic safety protocols.

But Home Depot (HD)—which was deemed an essential retailer and allowed to keep its stores open during the pandemic—continues to plug away with its dividend intact. In mid-May, the retailer declared a quarterly disbursement of $1.50 a share, the same as its previous payout.

Compared with department stores and other industry segments, the world’s largest home-improvement merchant is better positioned to weather this storm. “While the coronavirus pandemic has wreaked havoc on small business and homeowners, we forecast home-improvement retailers will benefit into 2021 from a stay-at-home lifestyle,” observed a recent CFRA research note.

The mean FactSet earnings estimate for the current fiscal year, which ends in January, is $9.95 a share, 3% below last year’s $10.25.

Home Depot CEO Craig Menear said during an investment conference in late May that “we are committed to the dividend” and that “we want to continue to grow the dividend as we grow earnings.”

At a minimum, given its strong free cash flow, the company should be able to maintain its payout.

Procter & Gamble

With brands that include Tide laundry detergent and Charmin toilet paper, Procter & Gamble has been handling the crisis pretty well. In April, it announced that it was boosting its quarterly dividend by 6%, to 79.07 cents a share.

The average earnings estimate for its current fiscal year, which ends on June 30, is $4.97 a share, versus $4.52 last year, according to FactSet. And that forecast has barely budged since January, evidence of P&G’s profit power.

While pandemic-related buying for items such as toilet paper won’t last indefinitely, Erin Lash of Morningstar forecasts that the manufacturer can have mid-single-digit sales growth through the rest of this decade. The company, she wrote in a note, has become more efficient and has put “more resources behind its core brands.”

That bodes well for P&G to continue raising its dividend in coming years.

Roche Holding

Many European payouts have been cut or suspended, with sectors such as banking and retailing hit especially hard. But Old World pharmaceutical firms have incurred much less damage.

Consider Roche (RHHBY), which has a large diagnostic business, in addition to its prescription-drug portfolio. The company’s big-selling cancer biologics include Avastin, Herceptin, and Rituxan.

Roche in late January announced an annual dividend of nine Swiss francs a share, up a little more than 3%. The stock yields 2.7%.

“We feel very good about the dividend’s stability and the company’s ability to grow it,” Schwab’s McMahon says.

Morningstar’s Karen Andersen wrote in a note updated on June 1 that the company’s CEO, Severin Schwan, “has done an excellent job of juggling the often competing demands of investing in the pipeline, paying down debt, and increasing the dividend.”

NextEra Energy

Utilities can offer some insulation from the downturn because some or all of their businesses are regulated—meaning they are often allowed by regulators to earn a reasonable return on their investments. NextEra Energy (NEE) operates two regulated utilities in the Sunshine State, Florida Power & Light and Gulf Power.

NextEra’s regulated business “is positioned well, given its strong residential customer base, which has seen strength during shelter-in-place orders,” says Andrew Bischof, a Morningstar analyst. “Most utilities have higher representation from commercial/industrial customers, which have seen significant load declines.”

NextEra is also a major player in renewable power, notably wind and solar. That segment isn’t regulated, but the unit relies on long-term contracts from power customers, helping to stabilize revenues. Last year, it contributed about 40% of the company’s consolidated operating revenue.

The stock isn’t cheap, trading at 28 times the average 2020 FactSet earnings estimate of $9.09 a share.

But the dividend looks solid. Last month, NextEra Energy said that it would maintain its quarterly dividend at $1.40 a share.

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