A Dicey Year for Dividends (and 4 Stocks for Solid Payouts)

Whether you’re a retiree or a brand-new, long-term investor in the stock market, dividends matter. From the beginning of 1930 through 2019, the compound growth of reinvested dividends accounted for 42% of the total return of Standard & Poor’s 500-stock index, according to Hartford Funds. For those investors who do live on the income generated from their portfolios, a major shake-up among corporate payouts, which tend to increase steadily during the market’s more placid times, means a major loss of income at a time when it’s hard to come by elsewhere. At last check, 10-year Treasuries yielded 0.64%.

<h3 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="See Also: 13 Dividend Stocks That Have Paid Investors for 100+ Years” data-reactid=”20″>See Also: 13 Dividend Stocks That Have Paid Investors for 100+ Years

When the COVID-19 shutdown brought revenues in some industries to an abrupt halt, many firms had little choice but to retain money they otherwise would have paid out. So far this year, 53 firms in the S&P 500 have suspended or cut their dividends.

The industries that have seen the most cuts are the ones directly affected by local stay-at-home orders. Hotel chains Marriott and Hilton, cruise line Carnival, retailers Nordstrom and Macy’s, automakers Ford and General Motors, and restaurant operator Darden are among firms that have cut or suspended dividends. Stocks in major airlines have suspended dividends as a stipulation of their $50 billion government aid package. Energy companies, such as Apache Corp. and Occidental Petroleum, have trimmed payouts amid plummeting oil prices and fuel demand.

How low can they go? BofA Securities strategist Savita Subramanian expects a 10% drop in S&P 500 dividend payouts this year. That’s a more bullish outlook than some strategists forecast, and such a drop would be a far cry from the 23% trim in dividends during the 2008-09 financial crisis. It’s reasonable for investors to expect a dividend yield of 1.8% to 1.9% on the S&P 500 this year, a slight decrease from the current yield of 2.0%.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Investors looking for safe and rising dividend payouts are likely to find them among technology and health care firms, as well as those that make essential consumer goods that people continue to buy amid the pandemic, says Tom Huber, manager of T. Rowe Price Dividend Growth fund, a member of the Kiplinger 25, the roster of our favorite no-load funds. Even in those promising sectors, you should look under the hood to assess the sustainability of a stock’s payout.” data-reactid=”24″>Investors looking for safe and rising dividend payouts are likely to find them among technology and health care firms, as well as those that make essential consumer goods that people continue to buy amid the pandemic, says Tom Huber, manager of T. Rowe Price Dividend Growth fund, a member of the Kiplinger 25, the roster of our favorite no-load funds. Even in those promising sectors, you should look under the hood to assess the sustainability of a stock’s payout.

Companies with the safest dividends will have ample cash and little to no debt. Look for firms with a history of steady earnings growth that generate lots of free cash flow (cash profits left after spending to maintain and expand the business) and sport low payout ratios (dividends as a percentage of earnings). The average S&P 500 firm currently distributes 44% of earnings via dividends–lower than the historical average of 57% (though what is considered in the range of normal varies by sector). A firm’s payout as a proportion of free cash flow indicates whether a dividend is “covered.” Distributing more than 50% to 70% of free cash flow in dividends should raise an eyebrow, Huber says.

<h3 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="See Also: FAANGs + 1: Higher Tech, Lower Risk” data-reactid=”26″>See Also: FAANGs + 1: Higher Tech, Lower Risk

Of the following companies, some provide a modest yield but have prospects for dividend growth; others deliver high current income. All of their payouts look safe. Stocks are ordered from the lowest to highest yield; prices and other data are through May 15.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Microsoft (symbol MSFT, price $183, yield 1.1%). The tech giant should continue to enjoy robust growth in its cloud-based business (including, among other things, its cloud platform Azure, subscription-based versions of Office and online gaming service Xbox Live), which analysts at investment firm CFRA estimate now accounts for more than half of the firm’s revenues. The firm has a "spectacular balance sheet and free cash flow," says T. Rowe Price’s Huber. Over the past five years, Microsoft has boosted its dividend by an average of 10.5% per year.” data-reactid=”28″>Microsoft (symbol MSFT, price $183, yield 1.1%). The tech giant should continue to enjoy robust growth in its cloud-based business (including, among other things, its cloud platform Azure, subscription-based versions of Office and online gaming service Xbox Live), which analysts at investment firm CFRA estimate now accounts for more than half of the firm’s revenues. The firm has a “spectacular balance sheet and free cash flow,” says T. Rowe Price’s Huber. Over the past five years, Microsoft has boosted its dividend by an average of 10.5% per year.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="United Healthcare (UNH, $291, 1.5%) has hiked its payout by an average of 24% per year over the past decade, and it affirmed its payout in March. The insurer has taken a cautious approach to the coronavirus outbreak, boosting cash reserves from $14 billion at the end of 2019 to $24 billion at the end of March. Wall Street analysts expect the firm to increase earnings by nearly 8% in 2020.” data-reactid=”29″>United Healthcare (UNH, $291, 1.5%) has hiked its payout by an average of 24% per year over the past decade, and it affirmed its payout in March. The insurer has taken a cautious approach to the coronavirus outbreak, boosting cash reserves from $14 billion at the end of 2019 to $24 billion at the end of March. Wall Street analysts expect the firm to increase earnings by nearly 8% in 2020.