Wednesday, July 20, 2016

Dividends...Investors' Search for Value

Dividends. They are one of the first figures investors look for when they believe there is not enough value opportunities in the equities market. 

At the moment, we are currently seeing dividend levels that have not been reached in a very long time. The S&P indicated that the quarterly dividend amount in 4Q15 represented the second largest dividend total in at least ten years. 

On the other hand, the dividend growth rate actually fell to its lowest point since 2011.

"Dividends. They are one of the first figures investors look for when they believe there is not enough value opportunities in the equities market. "

When valuations are uncertain and investors find it too risky to bet on a company’s growth alone, dividends are usually sought in order to ensure a safer return. Many companies even continue disbursing dividends, regardless of how the company is doing financially; simply to maintain investors’ faith in the company. For instance, even though commodities took a big hit in 1Q16, only 12 S&P 500 companies cut or suspended their dividends. However, 919 companies in the U.S. equities market increased their dividend in 1Q16, which was actually 8% lower than during 1Q15.

Though dividend growth is not increasing at the same rate it was just a few years ago, they are still very attractive, especially among more conservative investors or investors who would like to hedge away some of the risk from other investments. 

With interest rates remaining at low levels and thought to remain as such for the time being, dividend rates are providing better returns than government bonds. Though this has become somewhat of a norm, it was not so almost a decade ago. Back then only 5% of stocks in the S&P had higher dividend yields than the 10-year Treasury yield. In the last few years this number has jumped to 65%. At the moment, the S&P dividend yield has about a 20% higher return than the 10-year Treasury. And with dividend yields predicted to stay at current levels for the next couple of years, dividend paying stocks should continue to remain popular among investors; so long as interest rates remain near their current lows as well.


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