Sign of the times... even dividend-paying companies declining

I have recently covered the story on the declining number of AAA-rated companies. Well, we are also seeing the number of companies with elite dividend histories falling by the wayside. Bloomberg has a story on how the S&P Dividend Aristocrats Index, an index that tracks S&P 500 companies that have raised dividends for 25 years, is dwindling with, now, less than 40 eligible companies.

Standard & Poor’s annual list of companies that increased payouts for at least 25 years is in danger of falling below 40 for the first time since 1992 after slumping profits forced executives to conserve cash. General Electric Co., Gannett Co., Pfizer Inc., State Street Corp. and U.S. Bancorp, all in S&P’s Dividend Aristocrats Index, cut payouts this year.

S&P may be forced to loosen the criteria for joining the measure, which investors use to gauge the performance of stocks with the best dividend history, according to David Blitzer, chairman of the index committee at the New York-based credit rating company. The shortfall highlights the challenge faced by investors in the worst recession since 1982.

...


The Dividend Aristocrats Index returned an annualized 9.1 percent a year since 1989, compared with 6.6 percent for the S&P 500 Index, the main benchmark for American equities. It lost as much as 49 percent from its 2007 peak, while investors in the S&P 500 retreated as much as 57 percent.


It looks like S&P is going to loosen the criteria and count companies that have raised dividends for 20 years, rather than 25 years. If corporate profit growth is going to be as weak as I imagine, I have a feeling they will be loosening their criteria even further in an year's time. My guess is that dividend increases are going to be a rare thing.

I have to think more about this but I have a feeling that the future will be more like the pre-1958 period, when dividend increases were rare but prevailing dividend yields were higher than bond yields.

If anyone shares my opinion (i.e. consistent dividend increases rare in the future) then investors should probably downplay rosy expectations built on high growth in dividends. At a minimum, one should lower the return on equity derived purely from higher leverage since the early 80's.

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