November Dividend Update | Nasdaq


HHistory doesn’t repeat itself, but it rhymes often.

This is what a recent Bank of America research note[1] implies on the current environment of the US stock market compared to 1999.

The BofA valuation framework suggests an annualized price return of -0.5% for the S&P 500 over the next 10 years. The last time this executive forecast negative performance? 1999.

Isolate dividend yields

Robust earnings growth has reduced valuations this year, but the S&P 500 futures price-to-earnings (P / E) ratio of 21.2x is still about one standard deviation above its historic median.

S&P 500: P / E forward ratio on the index

In the decade immediately following the global financial crisis, the initial price-to-earnings ratio was less than 16x. This has allowed several expansions to contribute to price returns on the index of more than 11% annualized for the next decade. The dividend yield provided an additional 2%.

S&P 500 returns: 12/31/09 to 12/31/19

Recency bias tends to cause us to extrapolate recent experiences into the future. But a better benchmark for the current environment might be the 2000s period, when the price return on the index was -2.72%.

The 1.82% annualized dividend return helped cushion some of the negative price return, resulting in a not-so-impressive total return of -0.95%.

S&P 500 returns: 12/31/1999 – 12/31/2009

As BofA puts it: “The total return is the number to be optimized, and we see preservation and growth of dividends as the most important criterion for stock selection, which could potentially mean the difference between a stable to negative and positive return over the next 10 years in the S&P 500. ”1

Dividend growth

Share buybacks have become an increasingly popular form of cash payment versus dividends. In 1995, dividends represented over 80% of cash payments. Today, the payouts are roughly equal between share buybacks and dividends.

S&P 500: Percentage of payment by source

There are a few key factors supporting dividend growth versus buybacks that investors should keep in mind:

  1. Dividends are less volatile—In 2020, the S&P 500’s earnings were down 13%. In the face of a recession, dividend growth was slightly positive, while buybacks were down 28%. Buyouts are procyclical, as US companies tend to avoid dividend cuts at all costs.
  2. Taxes– The latest tax plan proposed by the Democrats includes a 1% tax on business takeovers. Although small, this may signal a larger tax bill on future redemptions.
  3. Reviews“With valuations at historically high levels, buybacks may not represent the largest use of companies’ cash, which instead favors dividends.

S&P 500: growth in dividends and redemptions

WisdomTree American Grade Dividend Growth Index

Preserving and growing dividends is at the heart of building the WisdomTree US Quality Dividend Growth Index.
Dividend payers with sustainable dividend payout ratios (dividend yield

The 300 companies with the highest combined return on equity / return on assets and earnings growth estimates are then selected, in order to target profitable companies that are more likely to maintain / increase their dividends.

With the dividend yield component of total returns highlighted in this high valuation environment, this basket has a dividend yield premium of over 80 basis points (bps). Its combined shareholder yield (dividend yield plus net buyback yield) represents an improvement of around 100 basis points.

Fundamentals of indices

[1] “US Equity Strategy in Pictures: Investing for the Fourth Quarter and Beyond,” Bank of America Global Research, 10/26/21.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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