New Bloomberg Analysis Gives Income Investors Reason to Cheer

After some very tough years, income investors may finally rejoice. An analysis conducted by Bloomberg predicts that the current quarter will be the first time in years that no S&P 500 companies will cut or suspend their dividends. If true, it would mark the first such quarter since the second quarter of 2004, and it is certainly a bullish statement by US corporations. Earnings have steadily improved over the last year, and according to our data trailing twelve month reported earnings on the S&P 500 have increased 89% over the past year. Having heavily cut costs companies are flush with cash, and very few S&P 500 stocks are distressed or in need of a dividend cut to conserve capital. As a comparison, S&P 500 companies decreased dividend payouts by a record $52 billion in 2009.

After the dividend slashing of last year and the price appreciation since March 2009, the index’s dividend yield dropped to a multiyear low last week to 1.75%. A reversion to a more normal level would be expected, and in addition the Bloomberg dividend projection analysis has also been fairly successful of late. The techniques used by Bloomberg to estimate changes in dividend payments have been 85% successful in identifying companies that will soon initiate or raise their dividend in 2009 with a recent success in calling the initiation of a dividend by Starbucks (SBUX). Looking forward, their top picks for expected dividend increases (by percentage of expected increase) are McKesson (MCK), Safeway (SWY), and Assurant (AIZ).

Billions in Cash

As the economy rebounded, cash balances rose to a record $831.2 billion at the end of the fourth quarter, according to S&P data. One company cut its dividend and another suspended it during the first three months of 2010, the fewest since 2006, according to S&P.

“Dividends are emblematic of corporate strength,” Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, who oversees $55 million, said in a Bloomberg Television interview. “It is remarkable to me the level of cash on corporate balance sheets. It’s certainly a strong vote of confidence for corporate America right now.” – 4/28/2010

Dividends are paid at the discretion of corporate boards and managers, so the fact that zero or at least very few companies are expected to cut their dividend is a show of confidence in the future. This seems to contrast the bearish signals that can be gleaned from extremely weak insider trading data. However, according to insider trading data, corporate insiders have been hesitant to accept the bull market for the better part of the last year. Either way you see the market, the improving dividend yields of US companies is good for investors.

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