By Todd Rosenbluth, CFRA
Aided by strong earnings and corporate management’s confidence in the future, more than 40% of the S&P 500 constituents raised their dividends in the first half of 2018. Dividend hikes occurred in various sectors, highlighting the benefits of using diversified funds to gain equity income exposure.
According to Howard Silverblatt, Senior Index Analyst of S&P Dow Jones Indices, there have been 216 dividend increases by S&P 500 companies, with 84 occurring in the second quarter. The average second quarter increase was 14%, up from 12% a year earlier, indicating greater optimism. Overall, 82% of companies in the S&P 500 pay a dividend; the majority of mid-caps in the S&P 400 and small-caps in the S&P 600 index also offer an income component.
Consumer staples have long offered above-average dividend yields – 2.8% average yield over 10 years – and some leading companies in the sector have continued to increase cash payouts. In May 2018, PepsiCo (PEP 108 *****) declared a quarterly dividend of $0.93 per share, a 15% increase. PEP has raised dividends for 46 consecutive years, but the soft drink company has capacity. The dividend payout ratio is just 65% and 60% of CFRA’s 2018 and 2019 earnings per share estimates.
While the health care sector has recently yielded less than the S&P 500 index, with a 1.8% yield at the end of the second quarter, some constituents continue to reward shareholders with higher dividend payments. In June 2018, Medtronic (MDT 87 ****) raised its quarterly dividend 9% to $0.50. The increase marked the 41st consecutive year of dividend increases and here too CFRA sees room for growth. The dividend payout for both 2018 and 2019 is below 40% according to our EPS estimates.
Meanwhile, International Business Machines (IBM 144 ****) is a rare technology stock with a long record of increasing dividends. Indeed, in April 2018, the company raised its dividend by 4.7% to $1.57, extending its streak of increases to 23 years. While CFRA projects a modest EPS decline in 2019, from 2018, we see strong free cash flow generation.
PEP, MDT and IBM are considered attractively valued to CFRA equity analysts and their strong dividend records contribute to their above-average S&P Global Market Intelligence Quality Rankings.
These two metrics are key drivers of CFRA’s forward-looking rating of ETFs including Invesco Dividend Achievers (PFM 26 Overweight), SPDR S&P Dividend Aristocrats (SDY 94 Overweight) and Vanguard Dividend Appreciation Index (VIG 104 Overweight). All three hold MDT, IBM and PEP and other stocks with long records of dividend increases, but there are differences between the funds.
For example, VIG has 18% stakes in consumer staples stocks, higher than the 15% for both PFM and SDY, respectively. Yet, SDY has just a 3% stake in technology, considerably less the 13% and 12% of PFM and VIG, respectively. Meanwhile, though energy companies have cut dividends in the past, Exxon Mobil (XOM 83 ***) and Chevron (CVX 126 ****) are constituents in PFM and SDY that raised dividends in the first half of 2018. Yet, PFM has 11% in energy, but the equally weighted SDY has just 3%; VIG has no energy exposure.
These three dividend ETFs have ten-year performance records, but the asset management industry continues to launch new and often interesting products. For example, AAM S&P 500 High Dividend Value (SPDV 27 Marketweight), JPMorgan US Dividend (JDIV 26 Marketweight) and Oppenheimer Russell 1000 Yield Factor (OYLD 25 Marketweight) all launched in November 2017 and are rated by CFRA based on holdings analysis, expense ratio and other metrics.
The Stocks and ETF screening tool on MarketScope Advisor can help identify other equity income candidates.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.