7 Facts You Didn't Know About Dividends

By Dan Caplinger Markets Fool.com

Investors like dividends because they provide income from their stock portfolios. When interest rates are low, dividend stocks get even more popular. But it's important to look at the trends among dividend stocks in order to understand current market conditions and make more informed investment decisions. With that in mind, the following seven facts about dividends have flown under the radar of many dividend investors.

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1. Dividend payments are near record levels

The past two quarters have been historic for dividend payments in the stock market. When you look at S&P 500 companies, investors received dividends at an annualized rate of more than $400 billion per year in each of the two most recent periods, with the fourth quarter of 2016 setting a new record high, according to the latest figures from Yardeni Research. That figure is more than double what the S&P 500 paid to its shareholders in dividends during the aftermath of the financial crisis in 2009. The pace of growth has slowed somewhat in the past couple of years, but even so, the uptrend remains intact.

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2. Dividends are more reliable than other methods of returning shareholder capital

Many companies that pay dividends also look to repurchase their shares as another way to return capital to shareholders. But dividends have been a far more dependable source of capital for shareholders, and buyback activity has grown more turbulent. For instance, in the third quarter of 2016, the amount that S&P 500 companies spent on buybacks fell to its lowest level since early 2013. As the market climbs, fewer companies are comfortable with stock repurchases, and that has made dividends more important for those seeking reliable income from their investments.

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3. The market's dividend yield hasn't moved much

Even though total dividends paid have risen, the boom in the stock market has largely tracked those increases. As a result, dividend yields have remained relatively stable. Currently, the S&P 500 has a dividend yield of just 1.97%, a bit below the 2% mark that has served as an approximate benchmark for much of the 21st century. Until the stock market stops posting such healthy advances, it'll be tough for dividend yields to climb.

4. Payout ratios are relatively healthy

The good thing about the stock market rally is that it has largely resulted from fundamental improvement in business conditions. In particular, operating earnings have rebounded from their weakest levels in 2016, and that has helped to support dividend payments more fully. As of the first quarter of 2017, S&P 500 companies were paying out about 42% of their operating earnings to shareholders as dividends. That's still higher than the metric's best levels back in 2014, but it at least provides some assurance that earnings are moving in the right direction.

5. Large-cap stocks are still where to find dividends

Having a diversified portfolio is important for investors, but on the dividend front, it's hard to get the same bang for your buck from smaller stocks. The Russell 2000 index of small-cap stocks currently has a yield of just 1.46% according to figures from Birinyi Associates, and that's less than three-quarters what you can get from the S&P 500. Smaller companies typically need more of their capital to reinvest into their operations and foster growth. Moreover, solid performance from small-cap indexes have helped send their yields down nearly a fifth of a percentage point since last year.

6. The Nasdaq continues to lag on the dividend front

For a long time, technology stocks resisted dividends. Even though that trend has largely changed, the tech-heavy Nasdaq is still a fairly unfriendly environment for income investors. The current dividend yield on the Nasdaq 100 is just 1.12%, down from 1.32% last year. That could all change if tax reform allows companies to repatriate overseas capital at a preferential tax rate, but for now, dividend investors will have to put up with subpar performance from the Nasdaq.

7. Many stocks have been boosting their dividends

Dividend increases are always popular with investors, and companies have generally been obliging. Nearly 2,600 companies gave their shareholders dividend raises between March 2016 and March 2017, according to figures from S&P Dow Jones Indices, compared to only 573 dividend decreases. That number of increases was down slightly from year-ago levels, but it still points to the strength of the economy and the willingness of companies to reward investors with dividends.

Dividends are important for investors, but it's important to understand the current state of dividends in the stock market. That way, you can make smarter investing decisions without getting blindsided by unexpected surprises.

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