U.S. investors are anxious about their dividends.
The effort to fight coronavirus is choking the economy, and many companies are scrambling to shore up cash as sales vanish, which most likely will include a temporary decrease or deferral of dividends. The government might even ask companies who want assistance to suspend all distributions to shareholders, as Germany is doing to prevent bailout money from landing in shareholders’ pockets.
It couldn’t have come at a worse time. A growing number of investors have turned to dividends for income in recent years as bond yields have sunk to once-unimaginable lows. Many of them now fear a one-two blow to their income and savings — that dividends will be cut and that those cuts will cause stock prices to decline further.
A look at recent downturns, however, suggests that those fears are overdone. The historical data on dividends per share for S&P 500 companies stretches back to 1871, thanks to numbers compiled by Yale professor Robert Shiller. But the latter half of the data is most relevant because distributions to shareholders, as measured by dividends as a percentage of earnings, have fallen sharply since World War II, which has given companies more room to navigate the occasional shocks.
Cash Hoard
The numbers show that dividends were often cut during downturns, although not always and not by much. There have been 10 bear markets since 1948, excluding the current one, as defined by a 20% or greater decline in the S&P 500 Index. In five of them, dividends continued to grow. In four of the remaining five, dividends declined but the cuts were hardly earth-shattering. The average peak-to-trough decline was just 4%, and it didn’t take long for dividends to recover. The average number of years from peak to recovery, or the time it took for dividends to climb back to their previous high, was 2.5 years.
The one outlier is the freshest in investors’ minds, which may explain their anxiety. Dividends declined 24% during the 2008 financial crisis, by far the worst slide since 1948, and it took them four years to recover to their pre-crisis peak. But this isn’t the financial crisis, which was an outlier in other important ways. For one, earnings per share for the S&P 500 tumbled 92% from June 2007 to March 2009, the worst earnings recession since formal accounting rules were adopted in 1939 and much worse than the Great Depression. The financial crisis also squeezed the dividends of an entire sector, which has among the highest percentage of dividend payers of S&P 500 sectors. Sure, it’s possible that this earnings recession will rival the last one, but not even the wariest Wall Street analysts are that bearish.
It’s also a mistake to assume that lower dividends will cause stock prices to decline further. A feature of stock markets is that they tend to augur declines in earnings and dividends rather than the other way around. During the five bear markets since 1948 in which dividends declined, stock prices fell first, so it’s more likely that investors have already paid the price for expected dividend declines.