3 Reasons to Expect Bigger Dividends

By Demitri Kalogeropoulos - August 13, 2012 | Tickers: AAPL, XOM, F, GOOG, TSN | 0 Comments

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Dividends are finally getting some respect. The S&P 500 now counts 402 of its members as regular dividend payers. That marks the highest number of companies tossing cash at their shareholders since December 1999. New stocks on the list include longtime holdouts Dell and GameStop, who both waded into the dividend pool for the first time this summer. Apple (NASDAQ: AAPL) cannonballs onto the list this week, as its first dividend payment -- of $2.5 billion -- hits millions of shareholders' accounts on Thursday. When that happens one of the most widely held stocks in the market will become one of the most widely held dividend stocks in the market.

And there are solid reasons to expect that dividends have some room to run, that even bigger payouts will be headed towards shareholders' accounts.

Reason 1: Profits are at all-time highs

Source: Federal Reserve Economic Data

The fuel for dividend growth, U.S. corporate profits, are at an all-time high. Thanks to that backdrop, more companies are having trouble explaining industry-lagging dividends to their shareholders. ExxonMobil (NYSE: XOM) is a perfect example. The company has been reporting record earnings for some time leading to louder calls for a dividend boost. And in April, Exxon obliged by raising its dividend 20% and becoming the market's biggest dividend payer. Despite the extra dividend commitment, the company still had room to plow over $9 billion into investments while purchasing $5 billion worth of its own shares last quarter. If Exxon can manage it, there's no reason other profitable enterprises can't.

Reason 2: Investment grades are improving

One of the stubborn hangovers of the great recession has been the poor debt investment status of many formally strong dividend payers. These companies' dividend policies were impacted by the credit ratings agencies who downgraded their ratings to below investment grade. A downgrade like that brings higher borrowing costs but often triggers increased collateral obligations that force the offending company to hold extra cash that it might have paid out to shareholders instead.

Now, as sales have bounced back and companies are making progress paying down their debt, ratings agencies have responded with big upgrades, clearing the way for future dividends. For example, Tyson Foods (NYSE: TSN) and Ford (NYSE: F) both received the all-important "investment grade" debt upgrades this past quarter. While neither company has announced plans for a dividend boost, each has booked cash flow growth rates that are among the highest in the market over the past 5 years. As the cash continues to pile up a dividend boost starts to look more and more likely.   

Reason 3: Tech industry joins in

Even before Apple joined the party, dividends from tech companies have been growing into a major force in the market's yield. The tech sector now accounts for more of the S&P 500's total dividend yield than the financials sector. Listed below are the top three industry contributors to the market's yield: 

Source: S&P

With new entrants Dell, Apple, and SAIC this quarter, the tech sector is within striking distance of overtaking consumer staples to become the lead dividend paying industry in the market. Given how high cash balances are at some major tech firms, a moderate payout from just one new dividend payer would easily do the job. There's even a company that's sitting on over $44 billion in cash and is now alone among mega-cap tech peers Microsoft, IBM, and Apple in offering no dividend to shareholders: Google (NASDAQ: GOOG), we're looking at you.

Obstacles remain

Despite these strong trends dividend investors have their share of concerns. The S&P 500's dividend yield, at a stingy 2%, is stuck close to its historical low as companies hoard cash and favor share buybacks for what little cash they do choose to return to shareholders. There's also grumbling of a potential bubble in dividend stocks that may be setting investors up for years of underperformance. Then there's the fact that taxes on dividends are slated to skyrocket from the 15% rate they've enjoyed for years. If you're looking for reasons to worry about dividends, you won't have to look far.

Still, with corporate profits rising, balance sheets improving, and the tech sector aiming to take the lead, my view is that bigger dividends are on the way.

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