Dividends are on the rise when investors have fewer reasons to buy the stocks that pay them out.
More than a fifth of the companies in the S&P 500 (.SPX) have boosted their dividends to shareholders so far this year, while no firms have slashed their payouts, a first since 2011, according to S&P Dow Jones Indices. The increases—from an array of companies including cable-giant Comcast Corp. (CMCSA), asset-management firm T. Rowe Price Group and consumer-products company Kimberly-Clark Corp. (KMB)—are getting bigger too, with companies on average raising their payouts by 14%, the biggest jump since 2014.
The dividend boosts, which come as companies report some of their best earnings and sales in years, are partly the result of last year's $1.5 trillion tax cut that spurred corporations to put their extra cash to work. But they also coincide with a rise in bond yields that threatens to diminish the allure of stocks.
Bond yields have flirted with multiyear highs this month amid signs that long-dormant inflation could be picking up enough to force the Federal Reserve to speed up its pace of interest-rate increases. Those jitters sent stocks sputtering in early February, pushing the S&P 500 into correction territory for the first time in two years. Although stocks have regained much of their footing since then, with the broad index off just 4.5% from its all-time highs, increased volatility has kept investors on edge.
Bonds are relatively more attractive than they have been in years, and high-dividend stocks like utilities and real-estate companies are among the worst performers in the S&P 500 this year.
The yield on the two-year U.S. Treasury note surpassed the income investors could earn from dividends on the S&P 500 in December for the first time since the throes of the financial crisis in September 2008. The spread between the two has continued to widen this year with two-year bonds touching a high of 2.27% in February, nearly half a percentage point greater than what the S&P 500 had been yielding.
But bond yields are still relatively low and would have to move higher, with the benchmark 10-year U.S. Treasury yield at least above 3%, to spark a bigger rotation out of equities and into bonds, money managers say.
"Now that rates are higher, bonds are more attractive enough to start some sort of shift," said Jay Jacobs, director of research at exchange-traded-funds provider Global Management Co. "But the case for keeping equity payers in a portfolio is still very strong."
Utilities and real-estate companies in the S&P 500 tend to pay bigger dividends relative to their share price than most other sectors and continue to offer better yields than short-term bonds, as well as the 10-year Treasury note, which rose Tuesday to 2.910%.
But those stocks have been struggling since November as bond yields ticked higher, drawing investors on the hunt for yield. About $2.1 billion has flowed out of dividend-heavy exchange-traded funds over the five weeks ended Feb. 14, up from the $648.6 million in redemptions for the prior five-week period, according to data provider EPFR Global. The pace of those redemptions appeared to be slowing, however. About $118 million flowed into those funds in the most recent week, according to EPFR's data.
"Now that rates are going higher, it's going to make bonds a lot more attractive," said Mr. Jacobs. "What's probably at the most risk right now is those lower yielding stocks."
Eight of the 11 major S&P 500 sectors are generating a higher dividend yield than last year, including energy firms, consumer staples and health-care companies. Energy firms are seeing some of the biggest dividend increases, with three companies— Anadarko Petroleum Corp. (APC), Pioneer Natural Resources Co. (PXD) and Cimarex Energy (XEC)—at least doubling their payouts this month.
In total, four companies in the S&P 500 have at least doubled their dividends to shareholders this year, matching the number for all of last year.
February is typically the busiest month for dividends as companies roll out their annual results and reward shareholders ahead of their annual meetings. Historically, more than half of the companies in the S&P 500 increase their dividends each year, and in recent years, 60% or more of the index boosted their payouts, according to S&P Dow Jones Indices.
"It's a function of the strong economic backdrop coupled with the changes to the tax code," said Mike Allison, a portfolio manager with Eaton Vance . "A healthy earnings backdrop and lack of anything better to do with capital other than to return it to shareholders is something we like."
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