Advisors seeking stocks with growing dividends may be facing tougher times ahead if current trends continue.

According to S&P Dow Jones Indices, there were 1,558 positive dividend actions (increases, initiations, resumptions and extras) taken during the first half of this year, down 12.2% from the same period in 2014.

Meanwhile, negative dividend actions (decreases and discontinuations) stood at 257, up 61% from the total during the first half of last year. The data are for all domestic common stocks or roughly 10,000 issues.

These numbers could indicate a deteriorating trend, although they are somewhat better than they first appear when viewed in context. Last year's first half saw the greatest number of positive dividend actions since 1979, and the positive actions in the first half of 2015 were actually better than the 1,535 posted during the same period of 2013.


For the first half of 2015, extra dividends accounted for much of the difference. They fell from 459 during the January-through-June time frame last year to 267 this year, or almost 42%. The number of increases, meanwhile, only fell from 1,290 to 1,271, a very modest 1.5%.decline.

Many companies are partial to extra dividends, because these one-time payments don't carry a regular dividend increase's implicit commitment to maintain the higher rate on an on-going basis (for more on this see Don't Fall for 'Special' Dividends). Moreover, when managers hold a large chunk of stock, a special dividend allows them to award themselves the equivalent of a bonus that's taxed at a lower rate.

But if corporations like special dividends so much, why did they decline this year? Available cash is one reason. Companies in the S&P 500 index* had $1.225 trillion in cash and short-term securities on their balance sheets at the end of the first quarter of 2015 (the most recent data available) down 8.1% from what they had on hand at year-end 2014. According to Howard Silverblatt, senior index analyst at S&P Dow Jones, that's the biggest decline in cash since he began tracking the number back in the fourth quarter of 1999.


Still, $1.225 trillion is not exactly chump change. But if it isn't being spent on dividends, where is the money going? Share buybacks are one piece of the puzzle. During the first quarter of 2015, preliminary numbers indicate that all companies in the S&P 500 spent $144.1 billion to buy back their shares. That's up 8.7% from the fourth quarter of 2014. In contrast, S&P 500 companies spent $93.6 billion on dividends. In other words, shareholders received only 65 cents in cash for every dollar companies spent buying back their shares.

Advocates of buybacks note that reducing the share count boosts per-share earnings and that the stock price often follows earnings higher. That can be true, but buybacks also benefit management whose bonuses frequently are tied to per-share earnings increases, which share reductions inflate.

Another portion of the cash hoard is going to merger and acquisition activities. During the first half of 2015, announced M&A deals in the U.S. amounted to more than $1 trillion. Not all of them will be completed; they are not all for cash and some of the cash employed will be borrowed. Even so, the M&A activity reduces the cash available for dividends.

More alarming is the increase in negative dividend actions, which could be a sign of slowing corporate profits. On the other hand, most of the steady dividend increasers have sufficiently low payout ratios to continue boosting their payments.

*The cash tally for the "500" excludes financials, utilities and transportation companies, all of which maintain considerable cash as part of their normal operations. The cash reported for the remaining companies in the index is for what used to be called the S&P Industrials. We've used the S&P 500 and what was once known as the S&P Industrials because more data are available for these benchmarks.

Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook. 

Read more:

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access