Dividend stocks and funds have always been the darlings of investors. While these products were out of favor for some time as taper talks prompted rates to move north, they are again returning to the limelight.
These securities being in fashion these days makes sense considering the fact that the Fed has been keeping interest rates near rock-bottom levels and assuring investors at its recent policy meet that it has no intention to hike interest rates at least for this year.
Besides paying out dividends, the five-year long bull market was marked by another trend from corporations; buying back their own shares. Buybacks have been a great contributor to this Bull Run as well.
In the absence of robust revenue growth options, U.S. companies seem to prefer buybacks and dividend payouts to boost shareholder returns. 2013 was the fourth consecutive year of double-digit dividend growth as well, suggesting that both routes are extremely popular with corporate managers.
Dividends & Buybacks Grow at Record Pace
U.S. companies have spent a record amount of money for buybacks and dividends during the first quarter of 2014. Per S&P Dow Jones Indices, U.S. companies have returned $241 billion to shareholders through share buybacks and dividend payouts in the first quarter, surpassing the previous record of $233 billion set in the third quarter of 2007.
What’s in it for investors?
Dividends provide a steady stream of income and have accounted for more than 40% of total market returns over the past eight decades. Not only do they provide safety in the form of payouts, dividend paying companies are also comparatively less volatile and more mature with solid cash flows. Thus they provide investors with the best of both worlds (read: 3 Excellent Dividend ETFs for Growth and Income).
These companies also return cash to investors by way of share buybacks. The amount spent by companies to buy back their own shares has even exceeded the amount they pay for dividends.
While S&P 500 companies have paid $1.3 trillion in dividends, they have spent a whopping $1.9 trillion to repurchase their own shares, from the first quarter of 2009 through the first quarter of 2014.
For example, the tech giant Apple was the biggest repurchaser of shares, shelling out $18 billion on buybacks in Q1 2014, breaking past its previous record of $16 billion in Q2 2013. Albeit they were under pressure from activist shareholders who pointed out that the company was foolishly sitting on a gigantic pile of cash that was providing investors with no return.
Though the increased level of buybacks and dividends has certainly made the cash on S&P 500 companies’ balance sheets to come off their record highs, they still have 90 weeks of net income sitting on their books, as per a Financial Times report.
“I expect this trend of greater shareholder return to continue throughout 2014, as activists remain strong, interest rates low and companies awash in cash,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.