Dividend health, which took a major turn for the worse last year due to the pandemic, continued to improve in the first quarter. As John Tobin, a portfolio manager at Epoch Investment Partners, says, “The earnings outlook is brightening, so the dividend outlook is brightening.”
During the first three months of 2021, 120 S&P 500 index (.SPX) companies announced dividend increases, compared with 91 in the fourth quarter, according to S&P Dow Jones Indices.
The number of increases was not far below last year’s first-quarter result of 126, and the average S&P 500 company dividend hike in the quarter was 11.1%, versus 9% in the same period a year earlier.
Another sign of improvement: In the first quarter, just two companies cut or suspended their dividends, down from 13 a year earlier. In addition, two companies— Freeport-McMoRan (FCX) and HCA Healthcare (HCA)—reinstated dividends in the first quarter at higher levels than where they were at the time of their suspensions last year. Other firms, including Ross Stores (ROST) and Universal Health Services (UHS), reinstated their dividends at prepandemic levels.
As the pandemic began to take hold in the U.S. during last year’s first quarter, plenty of household names slashed or suspended dividends to preserve capital. Boeing (BA), Ford Motor (F), and Marriott International (MAR) suspended their payouts, to name a few. And many dividend stocks lagged behind the broader market, at least through the summer.
Tobin points out that the MSCI World Index (.MIWO00000PUS) returned about 55% in U.S. dollars from the pandemic-induced trough in March through Aug. 31 of last year, ahead of the MSCI High Dividend Yield Index’s result of about 37%.
“A narrow set of stocks led the major market indexes higher, and dividend stocks lagged,” says Tobin.
Growth stocks such as Facebook (FB) and Amazon.com (AMZN) substantially outperformed the broader market. Until recently, many equity income strategies also faced a headwind because value stocks were out of favor, though that has changed.
For the last four months of 2020, Tobin adds, the world index returned about 10%, versus nearly 9% for the dividend index. “We started to see more of a convergence” of the broader index and the high-dividend benchmark, he says. “We’ve seen a continuation of that through March.”
Tobin views last year’s wave of dividend cuts within a larger historical pattern, notably recessions. “It always seems to be the case in recessions that dividends go down less than earnings. That’s a pretty well-established pattern,” he says, adding that often “earnings and dividend pressure are concentrated in a few sectors.”
Last year, energy stocks bore the brunt of dividend cuts, along with travel-related companies, retailers, and more-cyclical firms, among others.
The pandemic took a bite from dividends in 2020. S&P dividends totaled $58.28 a share, up fractionally from $58.24 in 2019. But that’s “mostly because the first quarter of 2020 was a record amount,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Looking ahead, Silverblatt sees a 5% rise in dividends this year on a per share basis versus 2020—respectable considering last year’s damage.
In a recent press release, Silverblatt said that he expects “additional [dividend] initiations from issues that previously suspended, and increases from some that reduced their rate, dependent on how the economy reacts to the vaccine progress, any new developments with respect to the virus spread and mutants, and any consumer spending reactions.”
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