Is Fear Stemming From Dividend Cuts Overblown? Stocks to Gain

This article was originally posted here

Coronavirus-induced economic mayhem has flared up investors’ concerns about companies’ ability to maximize shareholder value going forward. The fears do have reasons. There have been rampant cuts in share repurchases, one of the popular tools to have charged up Wall Street time and again for all these years.

Even promised dividends have not been safe lately. Liquidity crisis at corporations called for prudent cash management and led to such a step. Per the S&P Dow Jones Indices, March 2020 dividend announcements were negative. There were 13 cuts, with 10 being suspensions, making for a total forward impact of $13.9 billion. Last time it turned negative was in second-quarter 2009.

As of May 4, about 25% in the S&P 500 had suspended guidance for future quarters, with at least 30 cutting or pausing dividend payouts in order to fight the economic-fallout caused by the novel coronavirus.

All Is Not Lost

Michael Wilson, chief U.S. equity strategist at Morgan Stanley indicated that bullishness has been noticed in the dividend futures market, which reflects investor views about future dividend payments by the S&P 500 companies.

Per Morgan Stanley, prices in the dividend futures market have shown better correlation with stock prices than actual earnings forecasts. Dividend futures market currently shows the market expecting company dividends to fall 15% this year versus a 23% decline during the Great Financial Crisis.

Most dividend hikes came from the financial sector in recent times. Of the 19 companies to hike dividends in the second quarter, six belonged to the financial sector. Nineteen S&P 500 companies increased their dividends during April.

Morgan Stanley believes that implied 15% haircut in S&P 500 dividends “may overstate the likely dividend cuts this year.” “Dividend futures have already bottomed and rebounded sharply, which is in sharp contrast to the [the next 12 months’] EPS forecasts,” according to the note.

Which Dividend Stock to Bet On?

Overall, the S&P 500 investors should expect a 4% to 5% cut in dividends this year, per a S&P Dow Jones Indices’ strategist. So, it is better not to fall for the yield trap as high returns are always involved with high risks. It is better to go for quality picks or for those stocks that have strong financials which can continue to support dividend payments over the long term. Dividend growth stocks are good bets in this regard.

Against this backdrop, below we highlight a few stocks that have announced or raised dividends amid the COVID-19 pandemic.

Apple (AAPL– Dividend Yield 0.99%

iPhone maker hiked dividends by 6.49% to $0.82 on Apr 30.

Johnson& Johnson (JNJ– Dividend Yield 2.56%

The pharma giant hiked dividends by 6% to $1.01 on Apr 14.

Costco (COST– Dividend Yield 0.92%

On Apr 15, the seller of high volumes of foods and general merchandise (including household products and appliances) raised 7.69% to $0.70 per share.

Procter & Gamble (PG– Dividend Yield 2.73%

The consumer products company raised its dividends by 6% to $0.7907 per share on Apr 14.

Newmont Corporation (NEM– Dividend Yield 0.87%

One of the world's largest producers of gold with several active mines in Nevada, Peru, Australia and Ghana declared a quarterly dividend of $0.25 a share, in line with its January announcement that talked about boosting its dividend to about $1 a share annually.

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