U.S. dividend stocks and related exchange traded funds have been a great source of steady income for investors over the years as companies steadily raised payouts to shareholders. However, dividend ETF investors should pare expectations ahead as the era of dividend growth stalls.
The record dividend payouts, which hit $351 billion last year, is beginning to slow, with S&P projecting U.S. dividend growth to run behind the 10% pace of the previous three years, reports Eric Rosenbaum for CNBC.
“Ten percent will be difficult to hit. We’re at a record level, but growth has trimmed down, partly due to energy and nervousness over the economy,” Howard Silverblatt, senior index analyst at S&P, told CNBC. “Outside of Google or Warren [Buffett] deciding to spend, who can get us there? If I had to bet, I think we will come up short of 10 percent.
Silverblatt attributes the slowdown in dividend growth to seasonal trends and waning exuberance. Major annual dividend events typically occur in the first half, and a number of stocks raising dividends are slowing down. The analyst also added that the dividend rally has run its course after doubling from the recessionary bottom.
“If you are looking for strong growth, it’s over,” Silverblatt said. “The big jump we got—we won’t get it again—but you don’t want to get it the same way you did. … Dividends have doubled from the bottom … Should they be growing at 10 percent? The priority of companies is to maintain profitability.”
Dividend growth ETF investors have already grounded their expectations, pulling assets out of the investment category. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), which tracks U.S. stocks that have increased dividends for at least 10 consecutive years, has seen $901.0 million in outflows year-to-date, according to ETF.com. Additionally, the SPDR S&P Dividend ETF (NYSEArca: SDY), which holds firms that have a minimum dividend increase streak of 20 years, saw $786.5 million in outflows so far this year. VIG has a 2.18% 12-month yield and SDY has a 2.34% 12-month yield. [Dividend Investors Should Look for ETFs with Steady Yields]
Silverblatt also argues companies that have raised dividends for at least five to six consecutive years are still a good place for stable dividends since the action typically suggests the dividends are part of the companies’ “culture” or long-term plan.
On the other hand, the S&P analyst issued a warning on the highest-yielding dividend stocks. He also suggested focusing on large-cap companies, which have a greater chance of paying a steady yield – according to S&P data, 84% of large-cap stocks offered dividends, compared to 46% of small-cap stocks. Smaller stocks have increased dividends recently, but these same companies were at greater risk of declining.
“A high yield is not a good sign,” Silverblatt added. “Remember the dogs of the Dow? Just because it’s paying today doesn’t mean it will continue to pay tomorrow.”
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.